Warren Buffett: Buy Affordable Home, Not Your Dream Home

warren buffett"Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford," says investor Warren Buffett, the third-richest man in the U.S., who still happens to reside in the 6,000-square-foot stucco house he bought in 1958 for $31,500.

"Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates,"; he wrote in a February 26 released letter he wrote to shareholders. But, "[a] house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy."

In fact, the Berkshire Hathaway CEO's 5-bedroom Omaha, Neb., residence on the corner of Farnham and S 55th Street is the third-best investment he ever made, after wedding rings, he stated in the annual letter to shareholders from the company.

"For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come," wrote Buffett, who purchased the home (pictured below) when he was 29 years-old. "...though I would have made far more money had I instead rented and used the purchase money to buy stocks."
Other than his own purchase, Buffet knows a thing or two about real estate, Bloomberg News reported. Under his wing is Minneapolis, Minn.-based HomeServices of America, Inc., the second-largest homeownership service provider in the United States after Cendant Corp.'s NRT Inc., which owns the Coldwell Banker and ERA chains.

HomeServices of America, which is owned by MidAmerican Energy Holdings Company, an affiliate of Berkshire Hathaway Inc., offers integrated real estate services, including brokerage services, mortgage originations, title and closing services, property and casualty insurance, home warranties and other homeownership services.

You may think you haven't heard of HomeServices, but you might know it by one of its 20-plus regional names: Prudential First Realty, Prudential California Realty, Koenig & Strey, Iowa Realty, Edina Realty, RealtySouth or even Esslinger Wooten Maxwell Realtors.

But also his company owns Clayton Homes, the largest company in the manufacturered housing industry, and creator of the environmentally friendly factory-built i-house, as seen in this YouTube presentation.


Last year Clayton, produced 23,343 homes, 47 percent of the industry's total of 50,046. Contrast this to its peak year of 1998, when 372,843 homes were manufactured and the company had only an industry share of 8 percent.

"Sales would have been terrible last year under any circumstances, but the financing problems I commented upon in the 2009 report continue to exacerbate the distress," wrote Buffet, who on Feb. 15 was presented with the 2010 Medal of Freedom (the highest honor awarded to a civilian) by U.S. President Barack Obama during an East Room event at the White House.

Warren Buffett on the Economy
Only a man as gutsy as Buffett can accept such an honor and less than two weeks later criticize the U.S. government in a corporate letter.


"To explain: Home-financing policies of our government, expressed through the loans found acceptable by FHA, Freddie Mac and Fannie Mae, favor site-built homes and work to negate the price advantage that manufactured homes offer. We finance more manufactured-home buyers than any other company. Our experience, therefore, should be instructive to those parties preparing to overhaul our country's home-loan practices."


According to Buffett's release, Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of its borrowers was 648, and 47 percent were 640 or below.

"Your banker will tell you that people with such scores are generally regarded as questionable credits. Nevertheless, our portfolio has performed well during conditions of stress," he wrote in the 26-page letter.

The loss Clayton has experienced on loan originations during the last five years, does seem to be negligible compared to some other companies:

Year Net Losses as a Percentage of Average Loans
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.53%
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27%
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17%
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86%
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.72%


"Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc." he said in his shareholder's letter, which has been edited for years by Fortune's Carol Loomis.

"The recession has hit them hard. But they want to stay in their homes, and generally they Search Homes for Sale See photos of homes for sale in your area and across the country on AOL Real Estate borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes."

"Although [Buffett's] home isn't shabby, the Happy Hollow neighborhood where he lives isn't even the ritziest in Omaha," real estate agent Christie Brandt told Forbes in 2003. "It's a pricey area, but it's not the most expensive. Buffett's house is a lot like Warren--it's very conservative and it's impeccably maintained."

Although this wealthy man lives rather modestly that he doesn't even have a privacy fence around his home, and he'd like to see others live modestly, not even some who are suspected to be on the short list to succeed him at his company have quite that same outlook on life.

Ajit Jain, who the Wall Street Journal reports is a leading contender to succeed him as head of Berkshire Hathaway can't resist a little Manhattan glitz.

Jain, who runs Berkshire's highly profitable specialty reinsurance business, in February bought a 34th-floor four-bedroom apartment at One Beacon Court for $14.65 million, down from the $16.5 million list price, according to the financial paper.

Jain already owned a neighboring apartment in the East 58th Street building, which he purchased at a bankruptcy auction in 2009 for $8.3 million after outbidding about 50 others vying for that unit, whose previous owner had paid $10.4 million for in 2007.

Brokers expect Jain to combine his two apartments to create a 6,000-square-foot residence, which will be larger than Buffett's, as well as larger than ones he grew up in. (See video tour of three of Buffett's childhood homes)

But at least Jain's building is rather secure.

The Omaha World-Herald once reported in 2007 that a man wearing a dark stocking cap and a dark baseball cap rang the doorbell at Buffett's house about 10 p.m. one day when Buffet was home. His wife, Astrid had their security guard, who was outside the house, to check on things. On the front porch the guard encountered the man, who pulled what appeared to be a gun. The two struggled, and the man struck the security guard on the head with an object, police said, but the guard disarmed the man, who then fled.

There is a price one pays for being the one of the top wealthiest people living on a mundane residential street, even in a modestly pricey neighborhood. But at least he can afford his house.

Warren Buffett's Childhood Homes




The iHouse





Sheree R. Curry
, who has owned three homes and thinks any home can be your dream home, is a three-time award-winning journalist who has covered real estate for six years. During her 20-year career, her articles have appeared regularly in the
Wall Street Journal, TV Week, and Fortune. She's been writing for AOL Real Estate since 2009 from a Minneapolis-area rental. She seeks a book publisher -- or at least a lender who'll give a reasonable mortgage rate to a self-employed mom.

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23 Comments

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LadyKalaoa

I've no intention of investing in a new home right now because I'm going to wait till the market drops further down to make my purchase a slam-dunk and comfy living.
Obviously one person's loss is anther person's gain, same as one person's junk is another person's treasure.
Luck and Timing is everything so relax and enjoy life and please stop worrying about what you can't change & just enjoy the good that is all around you at this very minute of time

March 06 2011 at 1:09 PM Report abuse rate up rate down Reply
Connie T

I can tell you this Mr Buffett I purchased a mobile home from u in Comway Arkansas I paid $2o,ooo for it cash i have live in it for 1 year and the floors are rotting out the sales man said if you have any plumming problem just let me know never was avaiable his boss got even smarter when i told him the house was unlevel and needed a new front door the fireplace had no doors wanted doors paid cash thought that was the least they could do wouldn't do it even down to a microwave plate was promised that too never happened my spouse and I are on disablity thought i was getting a good that didn't happen either and it is a 2002 home have had it now for 3 years thought i had it made to land paid for and a decent home that had no diswasher icebox cook stove cost me to replace them so i will never buy another home from you and will not reccomend you to any one else. a very unhappy customer Connie T

March 03 2011 at 10:02 PM Report abuse rate up rate down Reply
Tom

Mr Buffet is being a little disengenuous here.
$31,800 was a LOT to pay for a house in 1958 when he bought it and you couldn't buy a similar house today for three to four times that amount.

March 03 2011 at 9:31 PM Report abuse rate up rate down Reply
liguy

I agree 100%. Part of the reason the real estate market is down is because buyers are afraid of buying a home that will be worth 10-20% less a year from now, thereby eliminating any equity they had in the house. Combine this with an uncertain job market, and the real estate market will remain down for years.

March 03 2011 at 7:44 PM Report abuse rate up rate down Reply
liguy

Easy for him to give advice, but what about the millions of Americans who are out of work and despite never living beyond their means, are now facing losing their homes? Or all the people who have seen their home equity disappear, including the original down payment?

March 03 2011 at 7:39 PM Report abuse rate up rate down Reply
Basse

Actually,, f******** warren buffet table.

March 03 2011 at 6:45 PM Report abuse rate up rate down Reply
Elkate

Mr. Buffet's home price value did not collapse a year or two after he took out a mortgage. People thought they could afford the high priced asset that they purchased because they could always sell or refinance if payments became difficult. But, these options were taken away from homeowners -- they could neither sell nor refinance because their home value had been artificially "inflated" and financial crisis -- left them "stuck" in foreclosure. Not about "buying too much house" - Mr. Buffett -- it is about how people were defrauded. This fraud was not happening when Mr. Buffett purchased his 6000 sq.ft. home for $31,500.00

March 03 2011 at 5:41 PM Report abuse rate up rate down Reply
grubber basher

The landscape for home ownership has changed but the rules for playing on the field have not. Who really expects to stay in a home for the old-time 30-year bank mortgage term?? Are there alternatives, other than expensive (doubled) 15-year morgtages?

What incentives are in place to reasure potential buyers that the traditional single-family home ownership is a solid investment in the market today. Buying a house today is much like buying a new car: you stand to lose 10-20 percent as soon as you drive (get mortgage) it off the lot.

March 03 2011 at 5:31 PM Report abuse rate up rate down Reply
DD

muffbeever - Thank you. Someone else who knows Buffett for what he really is.

Copy and paste this link into Google to get an idea:
http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/

March 03 2011 at 5:20 PM Report abuse rate up rate down Reply
Steve B

31,500.00 in 1958 is about 5,000,000.00 today

March 03 2011 at 3:36 PM Report abuse rate up rate down Reply
1 reply to Steve B's comment
Steve B

Ya Jeff and the world is flat, and ther is no worl hunger right ?? what planet u live on ??? And if I told you to smok crack--would you ??=----ooops you already do

March 03 2011 at 8:12 PM Report abuse rate up rate down Reply