Channeling Buffett for Homebuyers

Ever since the Great Recession, there’s been a frenzied near-obsession with real estate prices. There are some lessons from Warren Buffett’s famed investment strategies that I think can bring calm and sanity back to the still-over-frenzied market.

In part, our generation’s view on real estate is understandable. The financial voodoo that inflated the industry took out 43% of the securities market in a matter of months. (Sure there were other legs that came out from under that chair, but this was the biggest one).

Since before the market “crashlette,” would-be homebuyers began developing an investor-mentality that’s still driving real estate interest and speculation. The trend has nearly institutionalized bidding wars and price volatility to the market.

Real Estate—and one could argue investments on balance—are a practice of zen. Warren Buffett, famous for his “value investment” technique, focuses on identifying undervalued assets. The idea is generally to hold the asset for a good deal of time until it realizes what you deem to be their true market value—or longer if it serves your portfolio’s needs.

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This transfers over to real estate quite well. Homebuyers shouldn’t be looking to make a quick buck on a neighborhood or a property, but to be making a stable long-term choice. As Buffett has famously said, “price is what you pay; value is what you get.” So if the neighborhood looks good—the schools, the aesthetics, the amenities, etc.—then think about its value to you. What is it going to be worth to you and your family over your lifetime?

That channels another great Buffettism: “it’s far better to buy a wonderful company at a fair price, than to buy a fair company at a wonderful price.”

Warren Buffett, chairman of Berkshire Hathaway Inc., speaks during an event marking Business Wire's expansion into Canada in Toronto, Ontario, Canada, on Wednesday, Feb. 6, 2008. Buffett said a credit crunch isn't under way and he forecast that the dollar's value is likely to decline. Photographer: Norm Betts/Bloomberg News

Warren Buffett, chairman of Berkshire Hathaway Inc., on Feb. 6, 2008

In contrast, buying in marginal neighborhoods, there is a large element of risk involved. If you can shoulder the risk (i.e. aren’t dependent on immediate safety, public transportation, schools, etc.), then you may be better off getting “more bang for your buck” in a less appealing locale. But if you’re buying thinking that you’re going to get rich, there are other investments and other tactics that would serve you better.

When you buy a house, you’re buying a home—not an investment. Unless you’re actually quantifying risk and going to compete against real estate firms, real estate investment trusts, and agents, buy for value.

Buy a place to live in, not just as a store of wealth. If you realize it wasn’t for you or life changes for you, those are serious reasons to move. But buying to flip, I hope, has been dashed by the financial crisis. (Many homeowners that were left with negative equity—homes that lost value despite the homeowner owing more money than the new market value).

Which reminds me of another great Buffett adage: “only when the tide goes out do you discover who’s been swimming naked.” This is INCREDIBLY true of real estate. It was hardly the fault of the buyers, or even the sellers, but of the market regulators and financial derivative-designers that left so many homeowners under water.

But when the real estate markets tank don’t get your panties in too much of a bunch. If you’ve invested for the long haul, the “market value” of your home doesn’t matter all that much in the short term.

What matters more greatly is it’s utility to you. Does it serve you and your family? Does it put a roof over your head? Keep you from paying rent that someone else is using to purchase equity in real estate or other assets? More importantly, does it give you and/or your family a place to call home? Will that be the home you watch your kids take their first steps in?

The sense of permanence that drove America to be a uniquely homeowner-focused society (for better or for worse) reminds me, yet again, of Buffett’s sage advice. “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” If you are the outstanding manager of You Inc., and your main asset is Home Base, then you’re holding an undervalued asset—one you should be proud to hold for a long, long time.

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.” —Warren Buffett

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