Buffett's Berkshire Is True Test of Housing Recovery

"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(KBH) and M.D.C. Holdings(MDC,) , citing a "strong US housing recovery."

After a surge in second quarter earnings from home-builders like Lennar(LEN) 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.