Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Sunday, May 07, 2006

Buffett & Munger Tilt the Bubble

( "Buffett and Berkshire Hathaway (Research) vice chairman Charles Munger threw Saturday's entire morning open to a question and answer session with shareholders just as they do every year. With no major scandal or news event in the foreground, Buffett and Munger struck a more reserved tone than they have at past meetings."

"But their views on housing prices and the energy and commodity markets may ruffle some feathers."

"Buffett played his usual role of the talkative, cheery extrovert, speaking in perfect paragraphs, while Munger took the role of the laconic, crotchety critic whose favorite sentence is
"I have nothing further to add."'

"These are not just their stage personas, but how they normally think and speak. What follows is an edited and approximate transcript of their remarks."

On the real estate bubble

Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."

On mortgage financing

"There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."

"It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant."

"Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end."

"It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."'


At 5/08/2006 10:00:00 AM , Anonymous tom stone said...

banks usually do dumb lending in my experience,i worked for a go-go bank in the early 80's that sent people a $1000 check and a credit card,you had to cash the check to open the grace period 21.9% interest,45 year repayment term,low low payments.they sent $30,000,000 of these checks to texas just when things started going bad there,i think they wrote off $29m of i expect lenders to make more bad loans,then tighten up too much and kill the market.....they measure the risk over a period of years,usually about 5 years then figure a margin that gives them a good return,borrow at 3,loan at 5 what happens when they first get a run of 5 years with unusually low writeoffs?.....and then historically high ones? my guess is much higher risk margins,required downpayments,and bye bye to some kinds of loan programs...further in a rather varied life i found bankers to be the lowest class of people,as a group,that i ever associated with.and not anywhere near as smart or ethical as realtors.ick.


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