Warren Buffett, Suze Orman Disagree on Whether to Own?

Warren Buffett knows best when it comes to financial matters, or does he? When it comes to understanding the housing crisis we often rely on the advice of financial experts, and wading through it all can be as hard as rowing upstream. And why not when you consider that experts like personal finance guru Suze Orman, and billionaire investor Warren Buffet appear to be at odds.

Orman says the American financial dream is dead, but Buffett says buy now, but buy an affordable home. "Who's right?," asks California real estate broker Tara-Nicholle Nelson, in a recent blog post.

As a former homeowner who now rents, but also who has a 20-year journalism career covering business topics (mostly personal finance and real estate), I say put your faith in Orman, even though Buffett's premise of "don't overspend" is one Orman would also agree with -- as would I, your mother, and probably even your old fourth-grade teacher.


Warren Buffett's True Motive?

Basically, when it comes to taking advice, sometimes you need to look more deeply into the source. Although Warren Buffet has made billions investing money and buying companies, he didn't get there just by guessing the market. It was also in part through positioning.

Buffett has several real estate holdings under his control through his investment firm, Berkshire Hathaway Inc. As we reported earlier in "Warren Buffett: Buy Affordable Home, Not Your Dream Home," his company owns Clayton Homes, the largest company in the manufactured housing Search Homes for Sale See photos of homes for sale in your area and across the country on AOL Real Estate industry. He brags about Clayton's dominance in the market in his recently released letter to shareholders. 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.

Although sheer unit volumes are down drastically, his share of the market is way up. But like any business man, of course it's easy to presume he'd also want more buyers buying more housing units, so why wouldn't he dish out advice that says "buy homes" and mind you, not just any home, but an "affordable" home. After all, Clayton Homes was built on the affordable concept.

On the "Frequently Asked Questions" page of the Clayton Homes website it discusses how its manufactured housing built essentially in factories compares to site-built homes. It says "[W]e utilize labor-saving techniques not practical for the average site builder... we are able to purchase materials at a more favorable price than most contractors due to volume. These savings are significant and are passed on to you in the form of affordable housing."

In his letter Buffett also mentions that he paid $31,500 for his primary family home in Omaha that he purchased when he was 29 years old. Though the shareholder letter from this 80-year-old third richest man in the world failed to mention that this home he purchased more than half-a-century ago is 6,000 square feet and was considered rather pricey for its day. It would seem that at age 29 Buffett didn't buy "affordable" housing, but bought his dream home. When most people buy their dream home, they really don't intend to ever move. Sometimes circumstances (medical expenses, divorce, job layoff, etc.) just throw a wrench in their plans.

By the way, Buffett also owns a $4 million vacation home in Laguna Beach, Calif. Although he purchased it in 1971 for $150,000, he also in 2004 sold another one he owned next door for $3.5 million. And in 1989 he purchased a private jet for $9.7 million, reportedly with Berkshire funds.

But hey, enough about his personal life, because clearly the man can afford to buy pretty much whatever he wants and he has lived rather modestly all these years despite his wealth. The real issue is how much of his housing advice, albeit very sound, (see WalletPop's "Five Real Estate Tips from Warren Buffett") is also about advancing his corporate goals?

Buffett Controls Home Services

In addition to Clayton Homes, Buffett's Berkshire Hathaway also controls mortgage financing companies, title companies, real estate brokerages, property insurance and home warranty companies, mortgage origination outfits, and other entities that the average consumer would need to access if they are looking to buy a home.

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., operates under nearly two dozen regional names, such as Prudential First Realty, Prudential California Realty, Koenig & Strey, Iowa Realty, Edina Realty, RealtySouth and Esslinger Wooten Maxwell Realtors.

When you consider Buffett's business dealings, coupled with a statement he told shareholders last year in his 2010 letter, which was, "Within a year or so, residential housing problems should largely be behind us," you have to admit he just seems like any other regular guy taking guesses at the economy in a light most favorable to his shareholders. After all, here we sit today with some pundits saying expect another year or two of declining home values (See "Housing Market Data Doesn't Tell the Whole Story.") Buffett may be called "the Oracle of Omaha," but Buffett does not have a crystal ball that lets him see into the future.

Homeownership Dream is Dead

Now that brings us back to Suze Orman. How much can we trust her advice that homeownership is out the window? Well, although I haven't read her latest book, The Money Class, Nelson, who has authored two books, including The Savvy Woman's Homebuying Handbook: 150 Insider Secrets, apparently has. In her blog post, Nelson says that in the book Orman delivers "a pretty striking declaration: that the American Dream - which, for many, includes home ownership and upward economic mobility - is as dead as a doornail." (See Orman video below about renting may be the new dream.)

Several real estate industry experts agree with Orman that we are definitely headed that direction when it comes to certain segments of the market, as I covered earlier this week in "New Downpayment Rules May Be Discriminatory."

Essentially, a very high down payment requirement or high FICO cut-off would limit residential mortgage eligibility to a narrow segment of the market, creating a perhaps unintended impact on minority and traditionally under-served consumers.

Since the housing crisis began, mortgages made to Latinos and African Americans decreased 63 percent and 59 percent respectively. But it is not just people of color who are being affected. Nearly half of all current homeowners may be pushed out of new purchases if the down payment requirements shift to 20 percent or higher minimums, according to a March-released study by CoreLogic, which researches the mortgage industry.

In the U.S., 54 percent of current homeowners with a mortgage would qualify to put 20 percent down from the sale of their present home if they were trying to go out and purchase a new home, whether it is to upgrade or downsize, according to CoreLogic data.

Sellers will not qualify to make new purchases since many homeowners lack equity in their homes to make a sufficient down payment under the new guidelines that some banks and mortgage lending institutions are requiring.

Sure we can always say that if your home sale proceeds do not equal enough for a 20 percent downpayment on your next home, be prepared to pull money from your savings. But given how little Americans tend to save on average, the percentage of people who will be prepared financially to do this will be minuscule.

In fact, many sellers are upside down on their mortgages as it is that if they are not walking away or doing short sales, they are coming to the table with extra money to pay off the bank, even in some refinance situations.

The CoreLogic data shows that 23 percent of borrowers are underwater with $750 billion in negative equity. If these mortgage holders were to sell, they are not likely to have even more funds to purchase a new home, especially not in the hardest hit states of Florida, Nevada and California. Other adversely affected states on the CoreLogic list include Georgia, Colorado, Arizona and Nevada, which are also among the 15 states targeted by the Obama administration's Hardest Hit Fund to aid those mortgage holders who are at risk of losing their homes to foreclosure.

So I don't know how much Suze Orman is saying "don't buy," versus "chances are, given this economy and your finances you will not be able to buy." In her "Money Class" video excerpt, linked below, she says if you can afford to buy, still buy less than what you can afford. But for some of us, I say, the hard true reality is you will not be able to buy, even if you wanted.

A Wrench in My Own Plans

I personally still believe in the American dream of homeownership, and like Warren Buffet I believe that you buy real estate as a long-term investment to hold on to, however, divorce, job changes, medical bills can affect those plans. (See "Divorced Divas Dwell in Dallas Mansion")

In my case, I had to sell a house after my 2008 divorce (See "Five Tips for Selling a Home, Fast.") It sold for $410,000, nearly $40,000 less than we bought it for, however, we were not upside down on our mortgage because we had put more than 20 percent down thanks to the growth we had seen in our previous home, which had sold near the height of the market for about $80,000 more than we had purchased it for only three years prior. That growth (minus Realtor commission and other fees), plus the equity we already had with our 20 percent down on the first home, was rolled into the new purchase. We had moved from our first home in another state due to a job change (his, not mine), the second time was due to divorce (and lawyers and court costs pretty much ate up all of the home sale proceeds).

So now I rent, dreaming for the day that I can save enough to make a down payment on a new home. But as a single mom of two children (pictured above), if I have to look at 20 percent down on my self-employed income, my dream of homeownership in an "affordable" home with at least three bedrooms -- giving up my "want" for a separate room for a home office -- seems out of reach. So I agree with Suze Orman. You just might have to change your way of thinking when it comes to the American Dream. But if you can afford a 20 percent down payment, go buy now -- without stretching your pocketbook. Maybe one day it will help pay for your next house, or even lawyers, should, heaven forbid, you need a divorce.



Sheree R. Curry
, who has owned three homes (two of which were bought with at least 20 percent down), 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.


Suze Orman: Renting May Be the New Dream




Suze Orman on the New American Dream



Suze Orman on When Not to Own a Home



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Mya P.

When all cash flows are considered, renting costs less, which means you'll have more money to save & invest. Over the long run, the stock market averages +10%/yr.

So the 20% downpayment, 3-5% closing costs, 5-6% selling costs every time you move (average US home borrower moves every 7 years), property taxes, maintenance, insurance, is all money that could have been invested.

If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you're spending a lot of money that could be invested instead. What's wrong with renting??

Learn from the past people! (Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from 4AutoInsuranceQuote. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).)

Nobel Prize winning economist Robert Shiller was one of the few people who accurately called both the stock market crash of 2000, AND the real estate crash of the late 2000s.

And he says that owning a home is a terrible investment.

Friday at 11:27 AM Report abuse rate up rate down Reply
kriles

WAKE UP PEOPLE! Owning a home is not dead and it is completely insane and ridiculous to say that. Haha we live in AMERICA not Russia. Get your head out of the mud. Things are not great right now but when have they ever been perfect? The world is not ending. In ten years we will look back and realize what a great buying opportunity the market presents Q2 of 2011. Prices are coming back to historical mean and in some cases over shooting it to the downside. Rates are very low and only going lower in the near term. BUY.

June 04 2011 at 2:49 AM Report abuse rate up rate down Reply
chalk

In my opinion I believe Orman is right. It is nice to think Real Estate will recover, but, it will never be like it was. I don't think the market is going to bear the cost of those who have already bought. I think at some point you'll be able to flip real estate once housing prices bottom out at 1970 prices. i have no faith in real estate and I am not sure if inventory will ever be filled for the next 100 years.

May 09 2011 at 9:40 PM Report abuse rate up rate down Reply
Margaret Opine

SUZE ORMAN IS AN INTELLIGENT PERSON BUT SHE DOES NOT GIVE PRACTICAL ADVICE (NOW!). AT FIRST, (BACK IN THE DAY WHEN SHE WAS A WAITRESS WHO FOUND WALL STREET), SUZE SEEMED SO PRACTICAL AND PERFECT FOR THE AVERAGE AMERICAN....TEACHING THEM THE SENSE TO "RISE." BUT NOW SUZE APPEARS TO BE ON THE OTHER SIDE OF THE FENCE TRYING TO HOLD THE AVERAGE AMERICAN DOWN.

Let me tell you a story: I met a young woman oh more than forty years ago. She was a Viet Nam veteran and she was alone with a child and lived in an apartment. She got a job here and there and was laid off. Then she landed a good job with a great company with great benefits. She landed the great job in 1969 in April and bought her first home as a single mother with two children in September of 1970. She bought that home for $19,000 and it sold during the boom for $295,000. In the meanwhle she got married in 1972 and the family moved to a new real estate market. They bought in that market for $33,000 in 1973. During the boom that home appraised for $680,000. She did not sell her dream home, she has lived in it for 40 years. In the meanwhile there has been all kind of tragedies and deaths and a heartwrenching divorce. The newer home could stand some brick work and such for upkeep but this woman is now disabled ridden with all kind of heath problems. She retired from the great company with the great benefits and some health care. In the meanwhile, this woman got involved with investing and raised her 401K holdings from her meager savings of $35K to $333K.

NOW THIS IS AN AMERICAN STORY....our world is not perfect but there is a lot of right in it to go along with the wrongs but there are a lot of Americans out there who just want to know how to grab the bull by the horns and wrestle it down for a good beef dinner. I thought Suze was the woman for that role in our society but it appears to me that our dear Suze, a former waitress like so many of us, who found her way to higher financial grow, has changed streams of consciousness and basically preaching a sermon that holds the middle-class down. The story I told you was about a young woman who told me that she kept hearing messages about what she couldn't do back in 1965 because she was a single mother. (Oh, by the way, when she got married, they sent the children to private school and the chilren grew up to become business people.) DON'T LISTEN TO THE VOICES THAT TELL YOU WHAT YOU CAN'T DO IN THE LAND OF OPPORTUNITY...but I personally do advice you to LEARN something about what you intend to do before you jump out there, and make a plan, keep the vision in mind and go for it. Don't spend too much time trying to read before you act, you may never act, but check out the information on the way. Some of the riches people in our country made huge mistakes, at our expenses, before they got the right formula for their ideas.

MAKE YOUR DREAM A REALITY, JUST INTEND IT WITH ALL YOUR MIGHT, AND YOU PROBABLY WILL MAKE IT.---MO

May 01 2011 at 10:37 AM Report abuse rate up rate down Reply
livingsimply9999

How many times did this author say "DREAM"? Wake up, everyone.

March 17 2011 at 9:37 PM Report abuse rate up rate down Reply
walidmrealtor

Think I'll go with Mr. Buffet on this one. While he may have a vested interest, he also has access to a ton of information those interests specialize in.

March 17 2011 at 9:19 PM Report abuse rate up rate down Reply