Buffett's Berkshire Is True Test of Housing Recovery

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NEW YORK (TheStreet) -- Amid nascent signs of a housing recovery Warren Buffett-run Berkshire Hathaway's second quarter earnings stand as a key barometer of a true rebound, after many previous false starts.

Recent earnings and economic reports give housing optimists some clear -- albeit selective -- data to crow that a recovery is underway, after years of lukewarm results kept the market near post-boom lows. But Berkshire Hathaway -- Buffett's conglomerate spanning from railroads to industrials, utilities and even newspapers -- may actually be a worthy litmus test on what is a true housing recovery.

That's because Berkshire Hathaway owns a national grab bag of housing-related businesses that would be resilient to a one-off earnings boom, but also reflective of widespread and durable increases in housing related construction, home improvement and finance activity, were they to appear.

While the earnings of banks and homebuilders may be an early read on a true housing rebound, their volatile earnings also can also misleading. More important in talk of a housing rebound is whether they can sustain widespread gains to the economy, which could be a tailwind for everything from consumer spending to small business hiring and travel.

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Berkshire owns paint retailer Benjamin Moore, Clayton Homes, the largest producer of homes in the country, in addition to other housing-focused businesses like Acme Brick, Shaw in carpets, Johns Manville in insulation and MiTek in roofing.

In 2011, Buffett's housing related companies -- excluding Benjamin Moore and correlated housing businesses like Borsheims furniture -- reported a profit of $513 million. But housing remained a drag on Berkshire's overall earnings and was likely one of the reasons for the conglomerate's flat 2011 stock performance.

It has been the biggest laggard through the recovery as other Berkshire subsidiaries have grown, no surprise, and Buffett was early in calling a rebound in housing, something he apologized for in his most recent Berkshire Hathaway annual letter.

"I was dead wrong," wrote Buffett. Berkshire's 2011 housing related earnings were over 70% below 2006 levels of $1.8 billion, reflecting just how big the housing bust may be dragging on Berkshire -- and by proxy, the U.S. economy.

Recently, Buffett's commentary on the housing market has been more cautious, acknowledging improvement but not willing to make the mistake twice of signalling an all-clear.

In July, headed into earnings, Goldman Sachs analysts upgraded their earnings estimates for homebuilders like KB Home and M.D.C. Holdings , citing a "strong US housing recovery."

After a surge in second quarter earnings from home-builders like Lennar and KB Home, some are calling a housing bottom.

"Evidence from the field suggests that the 'for sale' housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process," said Lennar CEO Stuart Miller, in a statement released with the company's second quarter earnings.

Housing remains one of eternal optimist Buffett's "bets on America," but his annual letter -- and more recent commentary -- have stressed when it comes housing improvement there is still a ways to go. It has likely been responsible for some of the recent gains in Berkshire shares, which are trading at a 52-week high and have gained 12% this year, slightly ahead of the S&P 500, which Berkshire has not been able to outpace in recent calendar years.

Of particular concern were housing starts, which recently hit their fastest pace since October 2008, growing at an annualized rate of 760,000 units. In his annual letter, Buffet estimated in the years of economic recovery from the Great Recession housing starts averaged just 600,000 units, creating headwinds for employment and growth.

"This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy," wrote Buffett.

In a July 12 CNBC interview, Buffett said that while economic growth has fallen to a standstill, he is seeing a pickup in residential housing.

"The general economy in the United States has been more or less flat, and so the growth has tempered down. But the residential housing, we're seeing a pickup. It's noticeable. It's from a very low base," said Buffett.

To underscore the point, the National Association of Home Builders reported that single and multi-family housing starts peaked at over 2 million units in 2005.

Buffett is certainly positioned for any durable rebound. It's that positioning and moderated optimism, which may best-serve do-it-yourself stock investors and Buffett acolytes. Linking the housing recovery to the economy also plays into another major ballast of Berkshire Hathaway performance, the company's stock portfolio focus on the U.S. banks.

For instance, top Berkshire bank investments like Wells Fargo , U.S. Bancorp , BB&T and M&T Bank reported earnings that augur well for the housing market.

Buffett's biggest bank holdings have performed strongly after a second quarter mortgage lending rebound.

Recently BusinessWeek detailed reasons to be skeptical of a full-fledged housing rebound, citing variable regional home price performance in the S&P Case Schiller home price indexes, which show that while areas like Phoenix are rising, other parts of the country hit by the bust like Atlanta continue to test new lows.

In the first half of 2012, the Case Schiller national index also hit new lows, underscoring how expectations of a V-shape recovery have been misguided. Other causes of concern are still historically high home inventories and current interest rates, which may not be sustainable.

Investors who are still uncertain whether homebuilders, banks and the wider U.S. economy is poised for a housing-recovery based tailwind may be well served parsing through Berkshire Hathaway's earnings, due later on Friday. If, when added up, Berkshire businesses like Clayton Homes, Benjamin Moore and Borsheims, among others, show earnings that rise materially, it may serve as a stronger confirmation of a housing recovery.

In second quarter earnings, Berkshire Hathaway is expected to earn $1,777 in earnings per share on revenue of $36.8 billion.

For more on Berkshire investments, see why Warren Buffet shuns investment banks.

-- Written by Antoine Gara in New York

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