A state permitting clear perception and understanding; the area that may be seen distinctly or resolved into a clear image.
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You know Suze Orman – she delivers hardcore financial gut checks to everyday Americans on a regular basis. In her latest book, The Money Class, she also recently delivered a pretty striking declaration: that the American Dream – which, for many, includes home ownership and upward economic mobility – is as dead as a doornail.
To back this up, she points to huge numbers of jobless and what she sees as the near impossibility of getting credit these days.
But you might also have heard of Warren Buffett. He just so happens to be the third richest human being on the planet.
In , he, too, made a striking declaration of his feelings about owning a home: “Home 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
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.
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.
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 “If 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.
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