It’s official… Warren Buffett is bullish on real-estate.

Last March, in his annual address to shareholders, Buffett advised affluent investors to invest big in residential real estate. In fact, he went on record saying it would be wise to load up on “a couple hundred thousand” single-family homes.

#-ad_banner-#His logic was incontrovertible. According to Buffett, more than 600,000 new family households are being created each year. Yet, new home construction had dipped below 500,000 annually. That means buyers are sopping up the excess inventory from prior years.

Those supply and demand dynamics can’t last forever… And as soon as the excess is whittled down, new home construction will need to rise just to accommodate the number of new families being created, Buffett reasoned.

In other words, it was only a matter of time before homebuilders began sawing and hammering again.

And he is putting his money where his mouth is… Buffett’s Berkshire-Hathaway (NYSE: BRK-A) recently won a bid to buy bankrupt real estate finance company Residential capital, or ResCap, for about $1.5 billion.

Buffett’s thinking was spot on… First, there were a few “green shoots” that indicated signs of life. But over the past six months, we’ve been presented with convincing evidence that the housing market is in full recovery mode.

Construction of single-family homes is now running at an annual rate of 535,000, the busiest pace since April 2010. Overall housing starts (including apartments) have risen to 750,000, up from 571,000 in August 2011.

Building permits, a reliable indicator of future construction, stand at 803,000, near a four-year high.

New home sales have climbed to an annual pace of 373,000, a powerful 28% increase from the same month last year. Median new home prices jumped 11.2% from July to hit $257,000. That’s the sharpest one-month increase on record and the highest level in five years.

There is currently just a 4.5-month supply of new homes on the market, the thinnest inventory on record.

This is what a sustained recovery looks like. In 2011, housing starts spiked above 700,000 just one time (in November). But they’ve held above 700,000 every single month thus far in 2012.

Of course, buying into this rally can be tough if you’re a retail investor. Most of us lack the idle cash to buy up entire neighborhoods or invest in new developments.

But there is still one investment that allows investors like you and me to play the housing rebound… and I think it has a lot more upside.

I’m talking about trees, or timber to be exact.

During the past ten to twelve months, homebuilders have been reporting a surge in buying traffic and new orders. And that is translating into healthier bottom lines.

The chart shows that there is a powerful rally underway in the homebuilding sector. However, timber companies — as represented by iShares S&P Global Timber & Forestry Idx (Nasdaq: WOOD) — have been slower to respond.

This disconnect can’t last forever… After all, you can’t build a new home without stacks of lumber and sheets of plywood. So with construction activity heating up, forest products companies can’t be too far behind.

One of my favorites in this group — Weyerhaeuser (NYSE: WY) — has already bounced to $26 from $20 per share since the summer. But I think it’s on track to rise to $40 and beyond.

Weyerhaeuser is sitting on two million acres of prime timber land in Oregon and Washington — the timber industries sweet spot. The cool, damp climate and fertile terrain are perfect for the high-value Douglas fir.

Additionally, the trees in this region not only feed the U.S. housing market, but are also shipped to China, which has outgrown its own domestic timber supply.

But timberland is just one area of Weyerhaeuser’s business. The company also owns several real estate subsidiaries engaged in the sale of residential lots and custom-built homes. In fact, Weyerhaeuser is among the nation’s top-20 homebuilders under brands such as Trendmaker and Winchester.

Weyerhaeuser’s homebuilding segment (which enjoys some of the highest margins in the industry) is reporting an 80% surge in traffic since the fourth quarter of last year. And those customers aren’t just window shopping — the company closed on 764 new homes last quarter at an average price of $396,000 per home.

As a real estate investment trust (REIT), the company aims to distribute at least 75% of its pre-debt cash flow. Shareholders can currently look forward to $0.60 per share in annual dividends, for a respectable yield of 2.3%.

That’s more than triple what you’d get from a 5-year Treasury bond — but I’m not buying WY for its yield. I expect the stock to handily outrun the market as U.S. housing wakes from its slumber and construction picks up.

In the meantime, demand from overseas remains brisk — the company exported $370 million in logs last year to Japan, China and South Korea.

Risks to Consider: Of course with investing, nothing is 100% certain. With three of its four divisions linked to the housing market, Weyerhaeuser could suffer if this proves to be a false recovery and construction slows.

Action to Take –> But if you’re looking for an easy to way to follow Warren Buffett’s lead… then I suggest a timber company like Weyerhaeuser. If Buffett continues to be right about the housing market, then this will be a stock you’ll want to own.

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