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Jump. It’s Not as Wide as You Think

I consider Warren Buffet to be a wise, level headed, fair and reasonable person.  When he paid a premium to buy the Burlington Northern Santa Fe railroad (BNSF) a Wall Street Journal (11/3/09) reporter wrote, “For us near-term investors it may seem curious.  For him, the trajectory of the recovery over the next one or two years is irrelevant.”

I think Mr. Buffett was buying into unpredictability.  Unpredictability offers risk and reward.  Unless you are lucky (Wisconsin State Lottery?) very little reward comes without risk.  Because all real estate is local – in this case the four-county Milwaukee metropolitan area – determinations about the risk and reward of buying a home should be made based on local, not national information.   There is no risk in renting.   Without putting too fine a point on it, I also don’t see any long-term reward.

Home ownership is a good thing for many – not all – people.  If you think I say that because I work in real estate have a cup of coffee with me and we’ll go through the numbers.   We’ll look at data, not opinion.  Note, I don’t say everyone should own nor do I say everyone should own what they want to own, but in many cases, in this market with interest rates at 4%, it makes sense to investigate ownership.

Like Buffet and his BNSF purchase, I believe the long-term trajectory for housing recovery is good (although I don’t pretend to know if it will be 1, 3, 5 or more years) and the short term to be irrelevant.  This I believe because “ya gotta live somewhere” and eventually people will return to home buying.

Consider fictional buyers Mr. and Mrs. Dawge who purchased a $200,000 – 3 bedroom home one year ago.  They put 5% down with a $190,000 mortgage at 4.25%.  Their monthly payment is $1,435 and $1,220 net after tax deductions.  To rent a similar space would cost $1,600 a month or $380 more than their $1,220 after tax payment.  The risk: the home may go down in value.  The reward is that they may build equity and get the historical benefit of 3% appreciation.  I am reminded of a Native American saying:

“As you go the way of life, you will see a big chasm.  Jump.  It is not as wide as you think.

If a buyer knows she will live in an area for the long term (5 + years) and has the confidence she will keep a job, has a 5% down payment and can afford the monthly payment, I would “jump” on that train because the short-term trajectory is irrelevant.

To be fair, a homestead is not an investment in the sense the BNSF was an investment for Buffet, but given you must live somewhere it can be a personal investment in how you live.   With rates at 4% and home prices at an all-time low, buying now allows one to build equity over a period of time.

I know some who purchased from 2003 forward have lost equity but because all real estate is local – and the Milwaukee four-county metro area is nothing like Las Vegas or parts of Arizona –any loss is offset closely by what that owner would have paid in rent.  I return to my argument that you will pay rent or you will pay to own but you will not live for free.

Buffet once said “Time is the enemy of a bad investment and the friend of a good investment.”

On a buyer-by-buyer basis and when buyers regain their confidence, they will have to decide if home ownership is an enemy or a friend.  If you buy the right home at the right price with a low-interest mortgage, you probably have a new long-term  “friend.”

If you have a real estate or rehab-related question please contact me by phone, e-mail or for a cup of coffee and I’ll try to answer your question or point you in the right direction.  If you are a past client, thanks.  If I can be of assistance to you, your family or friends, Homebuyer Associates would welcome the referral.

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Homebuyer Associates
1835 N. Riverwalk Way
Milwaukee, WI 53212
Phone: 414-254-4129