Warren Buffett anticipates a recovery in the housing market to begin within one year and the investment guru said in his biennial letter to investors that mortgages written by his subsidiaries performed better than most of the competition through the financial crisis.

Buffett said the recovery hinges on durable, common sense underwriting based on affordability for mortgage borrowers.

Berkshire Hathaway (BRK-A) stock was up more than 2% Monday following the letter’s release over the weekend that also indicated Buffett’s readiness to spend $38 billion the company has in reserves. More specifically on the housing front, Buffett said mortgages written by his Clayton Homes company, a producer and financer of manufactured homes, were provided to stronger and savvier borrowers than those who made up the bulk of the housing bubble.

“If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did,” said Buffett, chairman of Berkshire Hathaway. “Our approach was simply to get a meaningful down payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.”

In 2010, Buffett reported 1.72% in losses as a percentage of originated mortgages. Clayton produced 23,243 homes in 2010 for a 47% market share of 50,000 for the entire industry. That figure has plummeted from the more than 372,000 homes produced during the peak in 1998.

Clayton currently owns more than 200,000 mortgages with an average FICO score of 648. Buffett said these homeowners borrowed sensible amounts in relation to their income, and Clayton kept the loans on their accounts instead of selling them through securities on the secondary market.

“If we were stupid in our lending, we were going to pay the price,” Buffett wrote. “That concentrates the mind.”

He added that as the housing market pushes toward a recovery, home ownership can still make sense for many Americans with lower prices and interest rates. Future housing policy, he said, should be sculpted from lessons learned during the downturn.

“But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy,” Buffett said. “Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

Write to Jon Prior.

Follow him on Twitter: @JonAPrior

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