Berkshire Bought the Whole Street

Happy Sunday.

The economy lost 23,000 jobs in July and the unemployment rate got better anyway, 4.2 down to 4.1. The rate only counts people working or looking for work, and 264,000 stopped looking last month on top of 720,000 in June. Smaller pool, better rate, not one extra job. Every desk had that by 9:15 and then filed it under Fed. Wrong question. Read Friday's report as a mortgage application instead.

Ten weeks earlier, Greg Abel paid $6.8 billion in cash for Taylor Morrison $TMHC, a 24 percent premium and his first real swing as Buffett's successor. It makes Berkshire $BRK.B the fourth largest homebuilder in America. So the labor data says the American paycheck is leaving the count, and the most patient capital on earth says buy the American house. Both are right, and that is the letter. Who buys these houses, and what happens to the person who never does.

The rate fell because the people left

Participation is 61.4 percent, down 0.7 points since January and the lowest in five years. Take covid out of the picture and you're back at 1976. The employment to population ratio is 58.9 percent.

Job growth has averaged 34,000 a month over the past year. And the numbers keep moving underneath you. May and June were revised down by a combined 103,000, the second straight summer of large negative revisions. Last August the same pattern showed up, the president fired the head of the statistics agency hours after the release, and the revisions kept coming anyway. The payroll survey depends on employers mailing back their answers, and more of them answer late or never.

So there are two separate problems here. The data is noisy. And the parts that are solid are being read wrong.

Here's the solid part. The number of adults not in the labor force hit 105.8 million in June, an all time record, higher than the Great Recession or the pandemic. About half of that bucket is retirees, and that half is fine. That's the boomer wave doing exactly what the actuaries said it would.

The other half is the story. Nicholas Eberstadt at AEI counts roughly 7 million prime age men who are neither working nor looking, plus a growing group of women in the same spot, no kids at home, no job search. By his count 23.3 million adults outside the labor force are collecting something for long term illness or disability, and he'll tell you nobody in Washington can give you the real number, because the programs are scattered across agencies that don't talk to each other. Before anyone waves this off as an old country doing old country things: Japan and Europe are older than we are, and their participation rates are going up. Ours is going down.

One note on the Fed before we leave it. Three officials dissented last month and all three wanted a hike. The hiking case rests on a labor market that looks healthy at 4.1 percent. The most quoted number in economics is measuring exits right now, and it's setting policy while it does it.

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A market with no bids

Here's what makes it easy to miss. Jobless claims came in at 199,000, the third straight week under 200,000, the longest run of sub-200,000 prints since 1969. Challenger counted 33,429 announced job cuts in July, the lowest month in two years. Nobody is getting fired.

Nobody is getting hired either. Employers point at tariffs, the Iran war and the AI question mark. Tech has led announced cuts all year and is still down almost 4 percent from its December 2022 peak. The Conference Board's share of consumers who say jobs are plentiful just hit its lowest level since February 2021. A quarter of the unemployed have been looking for more than six months, and that share fell in July, which is what the data looks like when people give up rather than get hired. Wages rose 3.2 percent over the year against inflation at 3.5 percent, so the median raise bought less than nothing.

Economists call this low hire, low fire. I'd call it something more familiar.

I wrote a few weeks back about existing home sales stuck at a 4.09 million annual pace while the median price hit a record $440,600. The long run normal is 5.2 million. Record prices, no volume.

Now look at the labor market. Record low firing, hiring at a crawl, a headline rate flattered by departures. Same picture. The two biggest markets in American life, work and shelter, have both stopped clearing. Prices say everything is fine. Volume says nobody can move.

That letter was about the asset. This one is about the paycheck that was supposed to buy it.

The most patient money in the room went shopping

Berkshire's cash peaked at $397.4 billion in March. Yesterday's report put it at $365.5 billion, the first real drawdown in years, and Abel was a net buyer of stocks in the second quarter for the first time since 2023. Ten billion of it went to Alphabet. Four and a half billion went to buybacks. And $6.8 billion in cash went to a homebuilder.

Understand what Taylor Morrison lands on top of. Berkshire already owns Clayton, the giant of manufactured and modular housing, plus fifteen regional site-built builders. Shaw makes the flooring. Johns Manville makes the insulation. MiTek makes the roof trusses. Benjamin Moore makes the paint, Acme makes the brick, and HomeServices sells the finished product. Taylor Morrison brings its own mortgage, title, escrow and insurance desks. This is a supply chain that just bought its own factory floor and its own loan officer.

Then last month, much quieter, a Clayton unit called Mungo Homes bought McGuinn Homes in South Carolina. Build to rent has at times been the bulk of McGuinn's business. That deal landed days before the new housing law took effect. Hold that thought.

Berkshire has company. Sumitomo Forestry paid $4.5 billion for Tri Pointe in February and became the fifth largest builder in the country. Two Daiwa House subsidiaries did deals this spring, and an Iida Group affiliate took 51 percent of a Utah builder in March. Sekisui House already owns the number six builder. The Japanese are outbidding D.R. Horton and Lennar to get these companies, mostly because money is cheaper at home.

Sit with that for a second. These are builders from the one rich country that already lived through the demographic winter. Shrinking workforce, empty houses, a stock market that took 34 years to get back to even. They watched housing demand die of old age at home. Their read on America: buy. And Sumitomo bought Tri Pointe in a quarter when its deliveries were down 29 percent from a year earlier and its net income had fallen from $64 million to $6.8 million.

Part of what they're all buying is a production problem. Goldman figures American construction productivity fell 30 percent between 1970 and 2024 while productivity in the rest of the economy more than doubled. Prefabrication was about a third of new housing in the 1960s. It's 5 percent now. Berkshire has owned the American modular champion for two decades.

So the bull case writes itself. Fragmented industry, century old methods, a structural shortage, a cheap ticket in. Fine. But a factory still needs a customer at the end of the line.

Which brings us back to Friday.

Run the underwriting

A mortgage is underwritten on income. W-2, two years, verified. The whole machine of American homeownership sits on one input, the paycheck, and every table in Friday's report says that input is shrinking.

The saving side is worse. The personal savings rate hit 2.6 percent in April, down from 5.5 percent a year earlier and the lowest since June 2022. The median down payment last year was $78,831. First time buyers put down about 10 percent and most of them spend seven years getting there. A record share now use an inheritance. A quarter pull from a 401(k) or an IRA.

That last part is the tell, and here's the detail that stopped me this week. Ted Benna, 84 years old, the man who invented the 401(k), spent this summer pitching employers a new savings plan called Radish. It's funded entirely by the employer and tied to things like showing up on time and hitting safety targets, because in his view the workers who need it most have nothing left in the paycheck to deduct. The father of the American retirement account is now designing around the assumption that the American worker cannot save at all. No large employer has taken it yet.

So run the qualified buyer pool that's left. Households with two strong incomes. Move up buyers rolling equity out of the last house. Cash rich retirees. Inheritors.

Now look at what's actually transacting. In June, sales of homes over $1 million were up 18 percent from a year earlier. Homes between $750,000 and a million were up about 14 percent. Homes under $100,000 fell. The top of the market is moving. The bottom is frozen.

Then read the Taylor Morrison book with that in your hand. Average sale price last year, $597,000, in a country where the median existing home costs $440,600. A resort lifestyle brand called Esplanade. And Yardly, its build to rent arm, whole neighborhoods raised out of dirt with no intention of ever selling a single door.

Now that thought I asked you to hold. The 21st Century ROAD to Housing Act became law on July 11, without Trump's signature. It stops investors who own 350 or more houses from buying more existing single family homes. The Senate version also would have forced build to rent owners to sell within seven years. The House stripped it out, the final bill confirmed it, and build to rent walked away with a clean, permanent exemption.

Read that plainly. Congress just made it harder for Wall Street to buy the house you live in and easier for Wall Street to build the house you'll rent.

The deal is calibrated for the only two customers Friday's data still supports. The affluent employed, who buy the nice house. And everyone else, who rents it from a balance sheet that can wait forever. Berkshire didn't bet against the jobs report. It underwrote it.

Fewer buyers being born

The buyer pool has a pipeline behind it, and the pipeline is thinning at the intake. The fertility rate printed 1.57 this spring, down from 1.63 the year before and 2.12 in 2007. The Journal ran the numbers on big cities last month and found the population under 18 down 6 percent over the decade. In El Paso the total population is flat, the number of kids is down 9 percent, and the number under five is down 30 percent. The school district is closing elementary schools to save money.

Ask families why and they point at the ledger. New York's comptroller did the arithmetic: center based care for a two year old runs $23,400 a year, and by the federal affordability standard a family needs to make $334,000 to carry that. Four times the median family income in the city. Ten full time minimum wage jobs. Between 2020 and 2023 the number of New York children three and under fell 19.3 percent, and most of the families who left were middle income.

So the loop closes on itself. The cost of shelter is one of the main reasons young families give for leaving cities or skipping kids, which means the rental machine is pricing out its own future tenants. Fewer kids now means fewer workers in twenty years means fewer buyers in thirty. The build to rent tenant was supposed to age out into a family that buys. Increasingly, there is no family.

And for the person who never crosses over, look at what old age in this country actually rests on. American seniors are sitting on trillions in home equity, and that equity does the work. It pays the assisted living bill. It covers the medical surprise. It becomes the inheritance that a record share of first time buyers now use for their own down payment. Take the house out and what's left is Social Security, a thin 401(k), and the 23.3 million adults already leaning on illness and disability programs.

That's the cohort being assembled right now, the one set to rent from the student dorm through build to rent through senior housing. No equity at the end. Thin savings in the middle. A government ledger picking up the difference. For a tenant with no wage and no asset, the landlord's ultimate counterparty was always going to be the state.

The honest ugly

Every letter gets one, and this one needs a big one, because the argument cuts in every direction, including mine.

Start with the strongest counter. The St. Louis Fed pulled this year's participation drop apart last week and found that more than half of it came from a statistical correction to the population estimate in January plus the ordinary math of an aging country, not from workers walking out the door. Retirement is real. Boomers are leaving on schedule.

Second, July's weakness is partly a calendar. Local government education lost 50,000 jobs on school scheduling and leisure and hospitality lost 40,000 as the World Cup rolled off. July carries the biggest seasonal adjustments of the year. And if the surveys are as shaky as I've implied, the ugly numbers deserve the same skepticism as the pretty ones. You can't call the data broken only when it disagrees with you.

Third, claims at 199,000 are genuinely low, and Challenger's hiring announcements are up 25 percent this year, the strongest January through July run since 2023. Andy Challenger's read is that AI is shifting the labor market, not dismantling it. There's a live case that this is a pause that breaks the moment rate policy and the Iran war clear up.

Fourth, Berkshire's deal doesn't need my thesis. UBS called it a strong vote of confidence and put the housing shortage at 7 million homes. Zillow says 4.7 million. The homebuilders' own association says 1.2 million. Nobody agrees, which should tell you something, but even the small number is a shortage. Taylor Morrison traded around ten times forward earnings and under book value before the deal. Cheap and can wait explains this purchase without a single word about labor force participation.

Fifth, and this is the one that stings. Taylor Morrison's CEO Sheryl Palmer says the entire point of her book is that it spans price points and buyer types so it doesn't break when the cycle turns. Forty five percent of sales are spec homes skewed toward entry level buyers who want speed and certainty. That's a company built to survive my thesis, not to profit from it.

And the one clean bright spot in Friday's report was construction, up 22,000 on data centers and infrastructure, the best month since March, with construction pay up 5.2 percent against 3.2 percent for private workers generally. The AI buildout I keep writing about is a physical jobs machine, and it hires exactly the trades homebuilding needs. If that capex wave keeps landing, the labor story could bend before the housing story does.

I don't have a tidy rebuttal to any of that. What I have is the shape of the bet. Every one of those counters lands on the same two customers: patient capital on one side, and on the other a household that either has assets or doesn't. None of them puts the median paycheck back into the fraction.

So what

Three things I'm watching instead of the unemployment rate.

The denominator. Participation and full time employment tell you whether this labor market is healing or just shrinking gracefully. The headline rate falls either way. Only one of those is good news. The specific tell is prime age participation, ages 25 to 54, which dropped to 83.3 percent in June. Retirement does not explain that number.

The Fed's reading of it. The hiking camp inside Warsh's Fed leans on a labor market that looks fine at 4.1 percent. Wednesday's CPI print decides September. If policy tightens into a workforce that's thinning underneath the headline, the broken number stops being a statistics seminar and starts costing people jobs.

Where the new build money goes now that the law is settled. Build to rent has its permanent exemption. The tell is whether Berkshire and the Japanese keep buying builders with rental arms attached, the way Berkshire just did with McGuinn. Every one of those deals is a vote on whether the next generation of American shelter gets owned or leased.

One last thing. Everyone hunting for the housing bottom keeps asking when the buyers come back. Berkshire already answered. It didn't buy a bet on the buyer coming back. It bought the builder, the insulation, the paint, the brick, the brokerage, the mortgage desk and the rental option, so it collects whichever way the American family ends up living.

The fraction can say whatever it wants. A rate with a shrinking denominator always looks fine. But a house, at the end of everything, needs one thing under it that no conglomerate can manufacture and no statistic can flatter. A person who can pay.

We are very good at building the house. Nobody has figured out how to build the buyer. Buyers get built the old way. A job. A raise. A kid on the way. A reason to stop moving.

Every one of those inputs printed lower this year.

Stay curious 😎

- John

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