Warren Buffett, Real Estate and Contrarianism

Warren Buffett has dispensed invaluable investing advice over his remarkable career. While Buffett is not focused on real estate investing, his advice holds true regardless of asset class.

“Be fearful when others are greedy, and greedy when others are fearful.”

– Warren Buffett

The above quote is a hallmark of the contrarian approach to investing. Not following the herd, to use the Wall St analogy, but instead going against conventional investor sentiment. Studying what everyone else is doing, and finding opportunity to do the opposite.

A perfect example in our sector, real estate, would be the herd’s attraction to suburban homes. People are fleeing dense urban settings and opting for more living space and less population density in the suburbs.

Unsurprisingly, home prices in these areas are up near double digits year-over-year driven not just by the spike in demand, and record low mortgage rates, but by a record low shortage of housing inventory.

In cities, however, the inverse is happening. Demand is low, inventory is high and prices are depressed. Unless you believe the affects of COVID-19 will cause demand for urban homes, lifestyle and home prices to remain depressed for years to come, this asset class is now objectively attractive relative to suburban homes.

If you’re a contrarian real estate investor, or even a homebuyer looking to make a move, your best bet from an investment perspective may very well be in the areas where others are fearful. It’s no surprise hedge funds are now initiating and increasing positions in companies like Sam Zell’s Equity Residential ($EQR).

One final thought: what will likely happen when suburban inventory inevitably increases? When more people feel safe listing their homes, and near term demand and high valuation compels more people to sell opportunistically. Our guess is that prices will decline or stagnate for a prolonged period of time.

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