Orman vs. Buffett (Warren not Jimmy): Who’s real estate advice would you take?
But you might also have heard of Warren Buffett. He just so happens to be the third richest human being on the planet. In Buffett’smost recent letter to his company’s shareholders, he, too, made a striking declaration of his feelings about owning a home: “[h]ome ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates.” And the Oracle of Omaha didn’t stop there – he literally raved about home ownership, saying that “the third best investment I ever made was the purchase of my home.” Now, that’s a big statement from a guy whose investment decisions have earned him a net worth over $50 billion!
Suze says the American financial dream is dead. But Buffett says buy, and buy now. Who’s right? (And who’s wrong?!)
Orman is right that one extreme version of the American Dream is dead. But not the traditional American Dream of owning an affordable home that appreciates over time. That basic premise of the value of homeownership is valid. But it may be valid for a smaller segment than ever before. Orman believes that renters should save, save, save up every penny and they may never be a candidate to own a home.
Buffett believes now is the time to purchase as affordability has never been better. Buffet wins here; he’s right that a home is a very strong investment, with abundant yields, both financial and emotional. And according to our latest survey, the American Dream of homeownership lives on in the hearts of the 72 percent of Americans who say owning the place they live is a part of their personal American Dream.
How can you make sure your exercise in owning a home is set up to be like Buffett’s 3rd best investment (#s 1 and 2 were wedding rings, btw), rather than Orman’s image of the American nightmare? Here are 3 basic steps Buffett urges every American who owns a home – or wants to – to include in their approach to home ownership.
1. Ditch your “dream home” for a practical pad. When it comes to homes and mortgages, bigger is not always better. What is better is to buy a home that makes sense for your family’s future and its finances. In Buffettt’s own words, “a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender . . . facilitates his fantasy.” Instead of buying dream homes, Buffett went on, the goal should be to buy a home you can afford.
2. When you buy, plan to hold. Warren Buffett is worth $50 billion, and he still lives in the home he bought 52 years ago – for $31,500. Many Americans got caught in the housing crash when they took on mortgages they could only sustain for a short period of time, then weren’t able to refinance as expected. Buffett’s stock investing advice has long been to avoid making investments you can’t hold for at least 10 years. Likewise, buying a home should be done with a long-term plan to avoid catastrophe when home values fluctuate in the short term.
3. Mortgages should have fixed, affordable payments. In his shareholder letter, Buffett points out that a housing company he holds has done vastly better than other real estate and mortgage industry players and attributes their success to the fact that “our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income.” Buffett believes these two mortgage musts are the key to avoiding foreclosure, opining that “[i]f home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. . .. This policy kept [the company] solvent and also kept buyers in their homes.”
Unless you are one of those rare buyers who know their income will increase by a predictable amount at a predictable point in time, like a lawyer prepping for partnership, a good rule of thumb is to stick with a fixed mortgage payment (including taxes and insurance) that’s under 30 percent of your take home income.