Berkshire's Housing Bet: Did Greg Abel Make a Costly Mistake?

Mortgage rates are rising, making it harder for people to afford a home. The housing market has been stalled for quite some time, as affordability issues existed even before mortgage rates began rising. This is a terrible backdrop for homebuilders like Lennar (LEN), whose stock is down 40% from its 52-week high.

And yet, Berkshire Hathaway (BRK.A)(BRK.B), under new CEO Greg Abel, has been buying that stock, building its position to 10%, and it recently completed its $6.8 billion acquisition of Taylor Morrison Home. Is this a costly early misstep?

Greg Abel is doing things his way. Housing has long been a part of conglomerate Berkshire Hathaway's business. The company has a deep knowledge of the sector, which tends to be cyclical. The company's housing exposure was originally built under former CEO Warren Buffett. So Greg Abel isn't exactly charting his own course with his investments in home builders.

Greg Abel's big departure from Buffett is that he has explicitly stated that Taylor Morrison Home will eventually be integrated with other Berkshire Hathaway businesses to create a larger division. Buffett usually allowed companies under the Berkshire umbrella to operate independently. But there's a similarity between Buffett and Abel that's important when it comes to housing: Buffett often bought stocks and entire companies when they were unloved. The housing market is deeply unloved today.

If you were looking to buy housing companies on the cheap, now might be a good time since the rest of Wall Street appears to hate them. There are good reasons for that investor concern, but you often find the best values in an industry when it is facing hard times.

Right now, with mortgage rates rising and housing stocks falling, it is easy to see why investors would consider Abel's housing investments an early misstep. But that's a short-term view, while Berkshire Hathaway has long viewed investing as a long-term endeavor. That was Buffett's approach, and Abel's housing push suggests it is his approach, as well.

Buy when others are fearful, as the old saying goes, and then hold for the long term. Basically, it is too soon to tell if Abel has made a mistake. But before you pass judgment, you may want to ask yourself a simple question: Are people going to stop living in houses? The logical answer is no, which suggests that there will eventually be a housing recovery in what is a traditionally cyclical industry.

And Berkshire Hathaway clearly plans to be there to benefit when the current downturn ends. For investors, this signals that Berkshire under Abel remains committed to value investing and is willing to endure short-term pain for long-term gain. It also highlights the potential opportunity in beaten-down housing stocks for those with a long time horizon.

The market's reaction to Berkshire's moves has been muted, with BRK.B shares up slightly. This suggests that investors are not overly concerned about the housing bet yet, but they are watching closely. If the housing market recovers, Berkshire could reap substantial rewards. If it doesn't, the conglomerate's diversified earnings stream should cushion the blow.

For now, the key takeaway is that Abel is putting his stamp on Berkshire by doubling down on a sector that is out of favor. Only time will tell if it's a stroke of genius or a rare misstep.