Warning: Why Warren Buffett is Dumping his Real Estate Co [Berkshire]

wow Warden Buffett rarely sells any

business in fact the last time he sold a

business it was a newspaper business in

2020 and a workers comp business in 2019

that's it he rarely sells a business

well recently he's starting to consider

selling her talks reported by The Wall

Street Journal Berkshire hathway Home

Services the real estate brokerage yeah

that actually used to be called

Prudential realy and then Berkshire

haway acquired them and then real estate

agents across the country had to start

instead of typing in Prudential typing

in Berkshire haway Home Services

California properties as an example is

the craziest naming convention that they

had for this business but anyway so

Burkshire haway bought the brokerage

business which was a brilliant move

because we've seen volumes for real

estate sales explode especially after

the pandemic zero interest rate policies

really contributed to this speculative

boom in airbnbs vacation rentals and

prop property ownership without regard

for

valuation especially market dynamics and

how easy it is to build in some areas

versus other areas we'll talk about that

in just a moment but this is a very

interesting shift for Buffett because he

does not like selling propert or

companies he generally doesn't sell he's

a buy and hodler Buffett being 94 years

old it's got a lot of experience in the

business world and a lot of people are

wondering why would he be selling uh in

fact so much so that you've got uh

Barren suggesting Buffett hates selling

selling anything the sale of berkshire's

real estate unit would be

unusual so what I found with Buffett is

he usually doesn't like companies that

are expensive now but have a declining

trajectory and of course this leads a

lot of folks looking for cheaper home

prices to say oh my gosh does this mean

a real estate crashes comp we'll talk

about that in a moment but there is a

type of real estate crash that has

already been happening and it is a crash

in something that's very very important

for real estate agents volumes this is

by the way the same thing that happened

in the early 1980s I wish this chart

would go back further I really do but

what happened in the 1980s and I'll show

you this in just a moment what happened

in the 1980s is you had this really uh

uh you know High inflation going into

the 80s and then you had the double

recession of 80 and 82 as the Federal

Reserve tried to fight to get inflation

down and it took until 1985 for

inflation to finally be under control

and we were able to Boom for about four

to six years uh depending on if you want

to count uh the stock market crash that

happened in ' 89 briefly or the overall

recession that we had in 91 uh and then

of course you had another N9 plus year

boom until the dotc bubble so ups and

downs in markets are very very typical

but what happened in the early 80s was

actually not a real estate

crash that is in sales prices you did

have a savings and loan crisis at the

end of the decade but not at the

beginning of the decade which is most

similar to the high interest rates we're

facing right now take a look at this

chart you had a volume collapse and

again you could really only see here I

really wish I could show you the 70s

because I'm convinced it would be higher

but anyway you had some of the lowest

turnover of real estate ever on this

chart uh just under 2 million homes

turned of existing homes in the United

States uh you could see here during the

pandemic era we were sitting at about 6

million homes of turnover which was the

highest we had seen since the

2005 speculative you know home buying

frenzy of of um you know ninja no income

no job no asset loans speculative uh

negative interest rate loans uh oh don't

worry you know buy the marry the house

date the mortgage you could always

refinance all of that all of those were

just sleazy sales lines to get you to

sucker up to debt and suffer through a

crash which ended up in you know massive

foreclosures and short sales and

complete

disaster

2007 has the opposite of characteristics

that we have today today we have high

interest rates just like we did in the

80s so history tells us that this time

is not different that we don't that we

have similar loans like quality lending

like we had in the 70s and early 80s

just like we do today with qualified

mortgages uh and we have a high interest

rate environment depressing sales

volumes which is literally the opposite

of what we had over over here in 2005 or

you could even say in 2021 but not as

bad because we still had qualified

mortgages here but in 2004 and 5 anybody

could get a mortgage with a pulse there

were no underwriting standards Fanny

Freddy May Jenny may you know FHA Loans

they got pushed aside in favor of

convention or I should say commercial

loans that anybody could get their hands

on private loans basically you know

corporate loans uh what what I'm making

a difference here before between is

today most people when they get a

30-year fix trade Mor AG they're getting

a conventional style loan that's to some

degree backed by the United States

government via Fanny May Freddy Mac

whatever in 2004 and five if you study a

history of this cycle you find that they

actually got pushed out of the way in

favor of just companies saying ah we'll

lend you with whatever terms you want

well that led to obviously an insane

bubble and a crash no

surprise so really history here shows us

that volumes plummeted during the 8082

era and that same real estate crash is

actually taking place right now it is a

volume crash it is not a price crash now

a lot of folks are like oh well it's

just a matter of time for uh home prices

to fall well home prices have already

corrected in some areas if you look at

the nation overall you'll actually see

that home prices are up 3%

year-over-year compared to 24 and

they're higher than they were in 23 and

24 and many of you who've been following

me for a while you already know this

there's certain markets like Tampa uh

different parts of Florida Austin Texas

is a great example where they actually

had such a big bubble in 2022 that home

prices are negative for each of the last

three years year-over-year now we've

been talking about that on this channel

we saw this coming as early as 20122

because we were visiting these markets

and we were seeing what was happening on

the ground the exact opposite is

happening in areas like San Diego where

our company has a lot of exposure to

real estate uh but you can see you've

got this increasing value of Real Estate

over year after year now one of the

reasons for this is California has crazy

policies that make it impossible to

build homes which does the opposite of

create affordable housing whereas Austin

Texas you know more Republican more

freedom you can build as much as you

want basically okay well that led to an

over supply of

housing so let's get to Buffett what is

this signal that Buffett is selling us

well I think Buffett is reacting to this

real estate agents and therefore real

estate broker is make money off of what

they make money off

of volume so real estate brokerages get

really really popular when volumes are

popping off in fact we just saw redin

enter into a tentative agreement to get

acquired by rocket mortgage which mind

you I think is an absolutely brilliant

move uh these right here the financials

that we have right here uh this is the

red finin Corporation right here red fin

has incredible market share when it

comes to app app data like people

wanting to go on to red fin to look at

homes to view Homes they're really

really good they're not people's

favorite in the real estate Community

because people see red fin agents is

undercutting traditional real estate

agents so think of agents who work for

let's say uh Berkshire Hathaway

California Home Services or or whatever

state as getting undercut by red red fin

often salaried agents who uh you know

work with a totally different business

model than the traditional business

model of of a real estate agent who's an

independent

contractor so redin has sort of been the

bane of real estate agents as a

competitor but a lot of real estate

agents also have had a hard time

establishing relationships with a

company like rocket mortgage because

rocket mortgage doesn't typically give

you one traditional lender you work with

instead you kind of get this assembly

line of many different operators within

the company and and you know they argue

they have a very effici process but you

don't have that relationship real estate

agents are very relationship based so

they like their lender they like their

escro company their title company redins

come in and turn this upside down by

saying nowah we're just going to pay a

salary to our agents and a bonus and oh

on the other side we're going to you

know then you've got rocket mortgage

who's like nah you don't need a

relationship with a lender this person's

really good at pre-qualifications

letters this person's really good at the

first 17 days getting the appraisal and

condo service this person's really good

at closing

and they've kind of specialized their

lenders so this idea of Rocket mortgage

and red finin combining is kind of

brilliant and I think it's going to be a

massive Powerhouse and I think there's a

huge opportunity in owning rocket

mortgage stock that In fairness I have

some exposure to it but I have exposure

because I think this is an incredibly

smart acquisition and I actually think

that this sort of does well as the

market slows down and interest rates

potentially come down because you'll see

more refinancing in both rocket mortgage

and redin uh or have lending businesses

except now you're merging those lending

businesses with the power of the redin

app which is almost ubiquitous for home

hunting and I would imagine you could

make it really easy to just use the redf

fin app to apply for a mortgage in the

future do it all through the app to me

it's a brilliant acquisition but

birkshire Hathaway you know going back

to this birkshire Hathaway is operating

a traditional model they're operating a

a traditional real estate brokerage

model that's been getting disrupted in

part by companies like red finin or

rocket morage but also by companies uh

that offer real estate agents like exp

realy a 100% commission after a certain

you know cap out essentially that

they've paid to the broker and so

margins at real estate brokerages have

been coming under pressure from some of

these more finchy real estate companies

Redan expi whatever maybe some would

even say Compass though Compass is a

little different as well uh and so

Compass is is now interested in

potentially buying and acquiring

Berkshire Hathaway because this

traditional model of selling real estate

I think is not only getting disrupted by

the expi and the red fins and the

rockets of the world but also by this

volumes plummeting and as these volumes

continue to plummet it becomes more

difficult for these traditional

businesses to make money and I think

that's why you're seeing a potential

acquisition of compass to buy real

estate the real estate brokerage Berk

Your haway Home Services of America so

to me this is a signal of Buffett saying

we have a legacy business that's being

innovated and we're just not capable of

catching with that Innovation and we're

also on a timing basis potentially

getting into a a worse environment

because see people argue that home sales

are going to rebound as interest rates

come down but that's not necessarily the

case because if interest rates plummet

to zero it probably means we're in a

deep dooo recession well look what

happened after 2005 home value or or not

home values I mean home values did get

hit in ' 05 because this was a real

estate L crisis whereas now we might

have a more political and Wall Street

style crisis you know stock valuations

but either way in a recession volumes

tend to go down so volumes might

actually just be at the beginning of

their Trend we might actually see home

Val home volumes go from this 3.4

million level down to two again just

like we saw in the 80s I always like to

say this time is not different now I do

think that some areas are still going to

come under price pressure but I actually

think areas like Austin or parts of

Florida might end up having a buy the

dip opportunity in this next recession

at crisis so it's going to be something

to pay attention to and I love the idea

of buying a good deal I actually think

Buffett is trying to get out closer to

the top on private Equity valuations I

think rocket mortgage is getting a

scream of a deal on red fin because red

fin stock has been absolutely getting

destroyed and I actually think Rocket's

getting a steal over here I mean rocket

mortgage is getting destroyed as well

but I mean look at this chart you know

red finin stock went all the way to $96

during the peak of the home boom and now

it's at $10 and the only reason it's at

$10 is because we bumped up from

$582 because of the acquisition news you

know these this was like a $700 million

company is trending towards BK I mean it

wasn't actually going to go bankrupt the

the earnings of the company yes they

were losing money they had plenty of

assets to offset this uh but yeah I mean

red fin was a money losing business and

at the moment rocket mortgage is also

losing a little bit of money they

usually do quite well uh in in recovery

so just watch that you know this real

estate sector is full of hot potatoes

right now uh and so you want to be

cautious in in your investments in terms

of what you're looking for uh if you're

looking at mortgage companies understand

they're a little funky to really

fundamentally analyze that's because

they have two things they have mortgages

that they hold and mortgage servicing

rights

okay usually mortgages when rates come

down go up in value but you risk losing

some of those mortgages to refinances

which mean your mortgage servicing

rights go down which is your ability to

earn a fee for collecting that payment

every

month the upside of a company like redin

or rock and mortgage is that they hope

to capture that refinancing activity

currently Rockets got about a 12% market

share I think through this acquisition

they could probably increase that so

just understand the Dynamics that right

now really unpopular to own real estate

companies because volumes are low it's

hard to do loans so a lot of these

companies are trading at a discount and

that's why I think Compass is coming in

buying this company or trying to buy

Burk share at a discount from more and

Buffett and Buffett's looking at the

trajectory going we can't innovate with

this and volumes are likely to plummet

more let's just get out we're just

burning money at this point kind of

smart and it lets Buffett raise even

more cash for I think what he sees as

more opportunities in the industry

coming to really buy the dip in a lot of

companies over time especially if we do

end up walking into a recession

basically time selling a good chunk of

Apple at the peak so we'll see where he

goes but uh when when Warren does

something I like to pay attention and I

like to understand what's going on so

anyway thanks for watching if you like

this Insight uh feel free to subscribe

I'll keep you updated with more real

estate insights and do my best to give

you a realistic analysis of what's going

on I know I could be walking around

Texas or Florida right now and just

saying the whole real estate economy is

crashing but we're Niche to those

particular overbuilt markets and areas

that are now to some extent actually

seeing population decline uh which is

quite interesting for Texas or Florida

it's almost the opposite of what you saw

during Co but that's a normalizing it's

not uncommon anyway thanks so much for

watching see you in the next one goodbye

good Lu why not advertise these things

that you told us here I feel like nobody

else knows about this we'll we'll try a

little advertising and see how go

congratulations man you have done so

much people love you people look up to

you Kevin PA there financial analist and

YouTuber meet Kevin always great to get

your take