When it comes to value investing, the "Oracle of Omaha," Warren Buffett, is often at the top of the guru list. Guiding former textile manufacturer Berkshire Hathaway (NYSE:BRK.A, BRK.B) into an investment powerhouse, Buffett is widely considered the most successful investor of the 20th century, as well as one of the richest. So when the bespectacled sage speaks, both institutional and retail investors often take notice. His latest bet could be seen as an endorsement of a sector that continues to struggle in the new normal. For investors with long-term timelines, the housing sector could be one of the deepest values, yet.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Big Bet on Housing
Through his shareholder letters and recent interviews over the last year, Warren Buffett has been saying that the housing market is bound to turn higher and he has continued to put his money where his mouth is. Since the real estate and credit crash, Berkshire Hathaway has added exposure to the sector by buying a construction aggregate maker, a real estate brokerage and partnering with fellow value investors at Leucadia National (NYSE:LUK), in order to bet on commercial property. Overall, the Oracle's stance on real estate could be summed up from a recent interview on CNBC, in which Buffett said, "If I had a way of buying a couple hundred thousand single family homes and had a way to manage them ... I would load up on them."

Buffett has continued that bullish stance on housing and real estate with his latest move. Berkshire recently made a $3.85 billion bid for the mortgage business and loan portfolio from bankrupt Residential Capital LLC (ResCap), a subsidiary of Ally Financial. Berkshire also added that it would be willing to pay $1.45 billion for an additional Ally loan portfolio, outside the bankruptcy plan. Berkshire Hathaway is already a ResCap bondholder and will be competing with private equity group Fortress (NYSE:FIG) for the mortgage operations.

While Buffett has admitted he has been early on the real estate rebound, he anticipates it could be one of the best deals going forward, citing the fact that supply has dropped after builders retreated following the collapse. Data has shown that U.S. housing starts have dropped by about two-thirds since 2006. Additionally, national average property prices are more than 35% below their peaks.

SEE: The Value Investor's Handbook

Following Buffett's Lead
Given Buffett's bullishness on real estate, long-termed investors may want to follow the guru's lead and take a bet on housing and commercial real estate. A broad fund like the iShares Cohen & Steers Realty Majors (ARCA:ICF) can provide access to the theme of rebounding real estate. There are other ways to profit like Buffett, here are some picks:

Much of Warren Buffett's enthusiasm for housing stems from portfolios of mortgage loans. These bonds are essentially asset-backed securities that are secured by a mortgage or collection of mortgages. The 800 pound gorilla in the sector is the iShares Barclays MBS Bond (ARCA:MBB). The ETF tracks around 328 different Freddie, Fannie and Ginnie Mae MBS bonds and has roughly $5.2 billion in assets. The fund has very little exposure to adjustable-rate mortgage (ARM) style mortgages and has a 12-month yield of about 2.96%. Similarly, the Vanguard Mortgage-Backed ETF (Nasdaq:VMBS) features less interest rate risk than the iShares fund, but yields less at 1.42%.

For investors looking to follow Buffett's lead into non-agency mortgage backed securities, MREITs Chimera (NYSE:CIM) and INVESCO Mortgage Capital (NYSE:IVR) could be interesting plays. The ResCap portfolio that Berkshire is trying to buy is similar in structure to the non-agency backed subprime and alternative mortgages held by the MREITs. The firms yield a monster 15.1 and 13.8%, respectively.

Finally, the biggest, and perhaps deepest, value in the sector could be the home builders themselves. All are still trading for a fraction of what they were during the boom years. The SPDR S&P Homebuilders (ARCA:XHB) is still the easiest way to gain exposure those firms.

The Bottom Line
When it comes to finding value, Warren Buffett is generally right on the money. His latest big value bet is on the housing and real estate sector. For retail investors, the Oracle's bullish stance on housing could be a great long-term buy. The previous picks, along with PowerShares Dynamic Building & Construction ETF (ARCA:PKB), make ideal choices to play along with Buffett.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: United States Gasoline Fund

    Learn about the United States Gasoline Fund, the characteristics of the exchange-traded fund, and the suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: United States 12 Month Oil

    Find out more information about the United States 12 Month Oil ETF, and explore detailed analysis of the characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Nasdaq Biotechnology

    Find out information about the ProShares Ultra Nasdaq Biotechnology exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  4. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  6. Home & Auto

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Hunting Elephants

    The practice of targeting large companies or customers.
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
RELATED FAQS
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!