Warren Buffett sells off D.R. Horton stock less than a year after making his big housing market bet

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Back in August, Warren Buffett’s Berkshire Hathaway disclosed to the U.S. Securities and Exchange Commission that they made investments in three major U.S. homebuilders: D.R. Horton (No. 120 on the Fortune 500), Lennar (No. 119 on the Fortune 500), and NVR (No. 376 on the Fortune 500).

In total, Berkshire Hathaway bought 5,969,714 shares of D.R. Horton, 152,572 shares of Lennar, and 11,112 shares of NVR. At the time, these shares were collectively valued at over $800 million, with D.R. Horton shares accounting for more than $700 million of that total.

Fast-forward to 2024, and this month Berkshire Hathaway disclosed to the SEC that it had sold off its 5,969,714 shares of D.R. Horton—the vast majority of its homebuilder bet—by December 31, 2023.*

It’s interesting that Warren Buffett would so quickly sell off his D.R. Horton stake and exit the homebuilder bet. After all, the Oracle of Omaha wrote in his 1996 letter to shareholders that: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

While we don’t know why Berkshire Hathaway—which is notoriously tight-lipped through much of the year—sold off their D.R. Horton stock, we do know that homebuilder stocks had a huge run up in 2023. That’d be hard to repeat again.

Indeed, last year the share price of D.R. Horton (+70.5%), Lennar (+64.7%), and NVR (+51.8%) all outperformed the S&P 500 Index (+24.2%) by a large margin.

The upswing in homebuilder stocks in 2023 can, in part, be attributed to the fact that the mortgage rate shock did not have as severe an impact on single-family home construction as some analysts had anticipated in 2022.

In 2023, single-family homebuilders outperformed and maintained solid profit margins for several reasons. Firstly, they implemented innovative strategies to enhance affordability and attract buyers. Unlike the existing home market, where home prices remain sticky, homebuilders lowered their net effective house prices. These affordability adjustments included offering mortgage rate buydowns, money back at close, and price reductions on properties. Secondly, the homebuilding sector benefited from the lack of existing inventory available in the market. This scarcity, combined with the affordability strategies mentioned above, heightened the appeal of newly constructed homes last year. As a result, potential buyers were more inclined to consider new home options, boosting the sales figures for homebuilders.

Looking ahead, the most significant tailwind for homebuilders is the belief among most analysts that the U.S. housing market is underbuilt for single-family housing.

However, in the short term, it appears that existing resale supply will be less constrained in 2024 compared to the "peak" lock-in effect in 2023. This means builders in some markets could face greater competition this year.

Still, the most significant downside risk for homebuilding is the broader economy. If the fastest rate-hiking cycle ultimately leads to a recession and a surge in unemployment, builders could be vulnerable, at least in the short term.

*According to ResiClub’s review of public disclosures, Berkshire Hathaway didn’t specify the exact date or transaction price to the U.S. Securities and Exchange Commission. The August 14, 2023 filing simply told us how many NVR, D.R. Horton, and Lennar shares Berkshire Hathaway purchased in the quarter ending June 30, 2023. While this most recent filing on February 14, 2024, told us that Berkshire Hathaway sold off its D.R. Horton shares in the quarter ending December 31, 2023.

D.R. Horton's stock was +24.9% higher on December 31st, at $151.98, compared to June 30th, when it was $121.69.

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