Warren Buffett Is Investing in New Construction—Here’s Why You Might Want to as Well

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If you’ve been paying attention to news in the real estate sector, you will know that new construction has faced many challenges since the beginning of the COVID-19 pandemic. From rising prices of construction materials to labor shortages and, most recently, high mortgage interest rates, the homebuilding industry has had more than its fair share of hard knocks. Indeed, homebuilder confidence dropped for three consecutive months in 2023. 

And yet one of the most respected, successful investors out there invested in three big construction companies last year. Warren Buffett’s Berkshire Hathaway disclosed investments in D.R. Horton, Lennar, and NVR, with a total investment of $814 million. And that’s against Berkshire’s overall wait-and-see approach. 

When Buffett invests, it’s worth paying attention to what he’s doing. Smaller investors have long mimicked Buffett’s behavior, and his decisions have considerable sway over the stock market. Following the disclosure of Buffett’s construction investments, shares of D.R. Horton increased 2.8%, and Lennar’s went up 2%. 

Why Investing in Homebuilding in 2024 Is a Good Idea 

If you’re a real estate investor, what should you make of this move since it seems as if Buffett’s vote of confidence goes against the grain of an overall environment of low confidence in the sector? What does Buffett know that we don’t, and should investors consider copying his strategy? 

On its face, there’s nothing especially controversial about Berkshire’s investment strategy. All three construction companies that were picked for investment are long-standing players in the sector with reliable growth rates. They’re not risky investments. 

However, the fact that Buffett singled out the construction industry from other potential investment opportunities does stand out. Buffett’s decision is, in a sense, a shrewd prediction of where the real estate market is headed. 

The single most persistent factor shaping real estate over the past three years has been the extremely limited housing inventory across the U.S. This limited inventory is continuing to prop up housing markets even after they become largely unaffordable for buyers. Home prices keep going up despite massive interest rate hikes for one simple reason: There aren’t enough homes to go around. 

We are now at an important threshold. 2024 will show us what the longer-term trends for mortgage rates will be going forward. Rates may come down somewhat or stay at their current levels for a while. 

Whichever scenario unfolds, buyers who are holding back for now are likely to just take the plunge and go for it eventually because the need for a home is greater than the willingness to wait for a more auspicious time to buy.

And here’s where the construction industry comes in. Realistically, only increased new homebuilding can satisfy the current levels of demand. Even if and when existing home inventory improves, it won’t be enough to close the supply-demand gap. 

Many existing homeowners simply don’t want to sell because that would mean giving up their pre-2022 low mortgage rates. Buyers are increasingly buying newly built homes—a behavior that will grow in the coming years. The National Association of Realtors, for example, predicts that new home sales will rise 13.9% in 2024, up from 12.3% in 2023. 

 

It’s like a mutual confidence-building exercise: Once buyers—and investor buyers—get buying, whatever the interest rates, the construction sector will increase building because it will have more evidence of the profitability of doing so. And once new homebuilding picks up, buyers (and renters) will have more choices of affordable homes, which is exactly what they need.

So, How Can Real Estate Investors Get in on This Trend?

This has got to be the chain of events Buffett is anticipating with his investment strategy. His long-term thinking has paid off many times in the past, so real estate investors definitely should be paying attention to the construction sector. 

This doesn’t mean that you have to buy shares in the same companies Buffett has. You may well get a better return over time if you invest in smaller but promising homebuilders that have the right plan. Look for firms that are prudent with where and how much land they buy and how fast they build. You want to see reliable completion rates in housing markets that are hot (read: affordable and popular with buyers and renters). 

Park Street Homes is one such company. It offers an exclusive opportunity to invest in the future of urban housing and new construction homebuilding for as little as $500. With Park Street Homes, you can make a direct investment in a booming industry and diversify your portfolio. Sit back and watch your wealth grow while simultaneously supporting the growth of sustainable communities through new construction.

It is important to remember that this type of investing is definitely a long game. However, if you’re looking to diversify your portfolio, new construction is a pretty good bet. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.