Warren Buffett’s Berkshire Hathaway Bought U.S. Housing Stocks. Should You?

Warren Buffett’s Berkshire Hathaway BRK.A/BRK.B has released its 13-F filing for the second quarter, revealing that the behemoth took a stake in three homebuilders: D.R. Horton DHI, Lennar LEN, and NVR NVR. Berkshire’s bet on the housing market comes on the heels of a better-than-expected spring selling season from Morningstar’s perspective. As a result, Morningstar currently forecasts total housing starts to decline 17% in 2023 to 1.295 million units, with single-family starts 18% lower to 0.825 million units and multifamily starts down 14.5% to 0.470 million units. We expect housing starts will begin to rebound in 2024 as lower mortgage rates and home prices improve affordability and entice more single-family buyers back into the market.

Should investors follow Buffett into housing stocks? Here’s what Morningstar analyst Brian Bernard thinks of the three housing stocks he covers—two of which Berkshire purchased last quarter and one it did not (Toll Brothers TOL). All three look fully valued according to our metrics today.

Key Morningstar Metrics for D.R. Horton

• Fair Value Estimate: $120
• Star Rating: 3 Stars
• Economic Moat Rating: None
• Uncertainty Rating: High

D.R. Horton, the largest U.S. homebuilder, has an extensive geographic footprint, wide product breadth, and affordable price points. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle. Recognizing the importance of the price-conscious first-time buyer in the continued recovery, D.R. Horton launched its entry-level Express Homes product in 2014; this line now accounts for about 30% of homes sold. With ample land supply and product offerings catering to entry-level, move-up, higher-end, and active adult homebuyers, D.R. Horton is well positioned to capitalize on favorable housing demographics. Its balance sheet is the strongest it has been in years, and we expect the company will use its improved financial flexibility to invest in attractive growth opportunities. We believe that an undersupplied U.S. housing market, D.R. Horton’s successful inventory-management initiatives, and improved financial flexibility will support more consistent revenue growth and cash flow generation.

Key Morningstar Metrics for Lennar

• Fair Value Estimate: $133
• Star Rating: 3 Stars
• Economic Moat Rating: None
• Uncertainty Rating: High

We expect first-time buyers will be a key driver of future housing demand, and Lennar is well positioned to capture these potential buyers with its increased mix of entry-level homes. Lennar controls an ample land supply, which affords it the ability to meet future demand while focusing on improving cash flows and maintaining a strong balance sheet. The company has shifted to a lighter land acquisition strategy, which seeks to reduce the amount of capital tied up in land by purchasing smaller land parcels and relying more on options to acquire land on a just-in-time basis. We think this strategy should help the company realize better returns on invested capital and cash flows over the housing cycle. Investments in ancillary businesses, such as multifamily and technology startups, distinguish Lennar from many other homebuilders. Management’s plan to spin off its multifamily, single-family for rent, and land businesses should damp the company’s earnings volatility.

Key Morningstar Metrics for Toll Brothers

• Fair Value Estimate: $76
• Star Rating: 3 Stars
• Economic Moat Rating: None
• Uncertainty Rating: High

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Its premier land inventory and luxurious, customizable designs allow the company to charge average selling prices that lead its publicly traded industry peers. We think Toll Brothers will capitalize on what we see as favorable long-term housing demand dynamics. However, given its luxury build-to-order focus and higher average selling prices, we don’t think the company is as well positioned to capture demand from first-time millennial buyers as lower-priced homebuilders like D.R. Horton. While we think Toll Brothers can achieve positive economic profits in a healthy market, we expect competition and the company’s comparatively more capital-intensive land acquisition strategy to restrain the amplitude of those profits. However, management is focused on moving to a lighter land strategy and has made substantial progress.