MidAmerican’s David Sokol on Housing Market: No “Green Shoots” Yet

Published on May 29, 2009

It appears that MidAmerican Energy Chairman David Sokol has taken on a higher media profile in recent weeks.  MidAmerican is a subsidiary of Berkshire Hathaway and David Sokol has often been mentioned as a front runner to take over the CEO position at Berkshire in the future.  Could this media exposure signal something about Berkshire succession plans?

It is probably best to avoid reading into Sokol’s recent media exposure in terms of Berkshire succession plans.  It would be entirely out of character for Warren Buffett to float trial balloons regarding management succession.  However, Sokol’s recent statements on the economy and housing should carry some weight given the fact that MidAmerican owns Home Services of America which is the second largest real estate brokerage in the United States.  Let’s take a brief look at Sokol’s recent comments on housing and the economy.

No Green Shoots Yet

Pronouncements of “green shoots” appearing in the economy have been common over the past two months since the stock market hit multi year lows in early March.  This optimism is obviously a factor in the broad market recovery.  But is the optimism justified, particularly in housing?  Sokol does not seem to think so:

“We’re not seeing the green shoots,” said Sokol, head of MidAmerican Energy Holdings Co., which owns HomeServices of America Inc. “We don’t see improvement.”

Homes in the process of foreclosure are creating a “shadow backlog” of unsold properties that will continue to hang over the market, Sokol, 52, said in a speech yesterday at the Ira W. Sohn Investment Research Conference in New York.

While official statistics show a 10- to 12-month supply of unsold homes, “we believe the backlog of homes for sale is twice that.”

It appears that Sokol is pointing out one of the worries that has often been cited by those with a bearish view on housing.  Given the large number of properties in foreclosure or near foreclosure,  a flood of new inventory may be waiting on the sidelines and could appear in the coming months.  This could snuff out any price improvement and lead to further declines.

Counterproductive Government Actions

In recent interviews, Sokol appears to be much more critical of government policy than either Warren Buffett or Charlie Munger.  This has been particularly true on the “cap and trade” policy that will impact MidAmerican’s public utilities and was a subject of a recent article related to MidAmerican’s partnership with BYD.   It appears that Sokol is equally unimpressed with government action in the housing arena:

Sokol suggested government efforts to ease the crisis are actually drawing out the recovery. “We really need to let the economics work through the system,” he said.

Many people who want or need to sell their homes haven’t put them on the market yet because the outlook for sales has been poor, he said. “It will be mid-2011 before we see the market in balance,” with no more than a six-month backlog, he said.

If Sokol’s predictions prove to be accurate, the economy is in for a much longer recession than the market consensus appears to reflect.  If depressed housing conditions persist for another two years prior to staging a recovery, it is difficult to see how a consumer led recovery will be possible.  With consumer spending representing around 70% of GDP, confidence is unlikely to return and any recovery will need to be led by other components of GDP if a recovery is to occur prior to 2011.

Bloomberg Video

Here is a video from Bloomberg with a report on Sokol’s recent comments that may be of interest to readers:

Whether Sokol’s predictions are accurate remains to be seen but his words should at least be carefully considered by those making investments that assume that a quick economic recovery will begin in the second half of this year.  If we are two years from a housing bottom, it is highly unlikely that any sustained economic recovery will begin this year.

I am a believer in Warren Buffett’s advice to not allow macroeconomic factors to be the predominant criteria for investment in well selected businesses.  Generally I make investments based on criteria specific to a business or industry rather than the overall economy.  However, it is still interesting to follow macro trends and the divergence of macro trends from “consensus” market expectations.

MidAmerican’s David Sokol on Housing Market: No “Green Shoots” Yet