Saturday, February 28, 2009

Christie's Mom sent along Berkshire Hathaway's annual report, and Warren Buffett has a lot to say about the mortgage crisis, specifically about the need for home buyers to have a legitimate 10% down payment. What he doesn't say is that that's never going to happen in a world where most new homes cost $250,000. Very few Americans are going to be able to save $25,000, especially with the massive transfer of wealth from the middle class to the upper that's been going on for the last 10 years or so.

Christie and I bought our current house by rolling over the profits from my previous house, which I bought cheap. It appreciated, and I made improvements, and I gained equity from simply making payments. It was, essentially, the way buying a house has usually worked, historically. You start with a small house and work your way up. That's why they call them starter homes.

But that's a model that's increasingly rare, partly because we, as a nation, have an appetite for the trappings of wealth, and living in a small, rundown house doesn't appeal. It's also partly because most of us don't have the skills to fix up a rundown house. But even the people who bought that house from us will be able to do well because it was still, even with all its gains in value, still a sub-$100,000 house.

Unfortunately, nobody builds small houses anymore, because the profit margin is so slim. Of course, the sales are a lot more certain, at least right now, because there are so few houses for sale under $100k. That would change, though, if more people were building for that market, so the advantage would be to the early mover.

Frankly, the last time a sizable batch of small houses were built in this country was right after the last big Depression. Maybe history will repeat itself. One thing standing in the way, though, are developer fees and local government hoops to jump through created in the era of McMansion developments. Exceptions need to be written into those laws for people creating affordable housing.

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