Warren Buffett: Buy Affordable Home, Not Your Dream Home
"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 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.
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
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
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.
For more insight on mortgages and refinancing see these AOL Real Estate guides:
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- Four Ways to Benefit From a Cash-In Refinance
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