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Of course, this is the big question in real estate now. . .

Will the so-called real estate bubble burst like the dot-com
bubble did a few years back?

There are some good arguments
on both sides of the issue. Whatever happens in the next few
years, it will affect millions of Americans, and therefore
also millions of people worldwide. If the bubble does
“burst” as some say, it is all but certain we could, or more
like would, go into a recession. A deep one. Right now the
real estate business has been a prime reason that the
economy has been decent the last few years. It has been one
of the few consistently bright areas of our economy.

First of all, to compare the real estate industry with the
dot-com industry is unreasonable. It’s comparing apples with
oranges. The real estate industry has been and will always
be a central part of the US economy. It will never disappear
and there will always be a need and demand for it. Investing
in real estate makes sense for the long term. On the other
hand, the dot-com bubble was not based on anything more than
speculation. Many businesses were trading on the stock
market for unreal amounts of money and never made a dime in
profit and ultimately never would.

So for me, some of this thinking is this: “Well, the stock
market had the dot-com boom and then it collapsed, so now we
have this real estate boom so surely it will collapse also.”
I just don’t go along with that comparison. Again, these are
totally different industries and markets. Heck, if we can
pay $20,000, $50,000 and even up to and over $100,000 on
automobiles, then spending $300,000, $1,000,000 and more on
homes seems very reasonable. Property will always be there
as long as the mortgage is paid and the taxes are paid, too.
That brings us to a good argument for believing the real
estate market will slow down and possibly have a downturn.

The reason there is a good argument for the belief that the
real estate industry will have a major downturn is because
some people, perhaps a good amount of people, won’t be able
to keep up with their mortgage payments if they start losing
their jobs and the economy slows down. The rise in gas
prices could have a major effect on the economy and if these
homeowners start defaulting on their mortgages then this
could turn the industry around.

Many home owners and speculative real estate investors are
using what some would call risky home mortgages, the
interest-only and no-income verification loans. These allow
more people to buy more homes and are part of the reason the
real estate industry has enjoyed such a boom the last
several years. Creative financing started decades ago and
has kept increasing more and more different ways for the
home buyer and speculator to get what they want. This is a
good thing overall in my opinion. However I can see the
dangers of this trend also. I don’t feel a burst is
inevitable but it is certainly very possible. Perhaps more
likely, unless a major event such as another war or
terrorist attack, is a slow down and evening off of the
growth of the real estate industry.

There are those on the side of the inevitable downturn
philosophy, who are preparing for the worst. Just as some
people can make money on the stock market even when it goes
down, there are those who are preparing for a possible –
inevitable in their minds – downturn in the real estate
market.

Here is one such way to capitalize on a real estate bubble
burst or at least a downturn: pre- foreclosure deals. There
are some investment clubs that are based solely on waiting
for this to happen and then buying into this market. People
will be foreclosing in record numbers if this downturn
comes. Perhaps it is more accurate to say when, because as
history shows there are always downturns in the market; and
with all the creative financing, no interest loans and no
income verification loans the probability of a downturn is
likely. However, this is different than a “burst.”

So here is what can happen:

1. The market will keep going the way it has the last few
years, which is up, up and up. Quickly is some areas. Not
likely.

2. The market will slow down and level off soon. Very
possible.

3. The market will have a slight downturn and many will lose
their homes and many will benefit from this. Very possible.

4. The market will “burst” the “bubble” and there will be a
major catastrophe in the industry. Possible, but not as
likely as 2 and 3.

Whatever happens, there will be some who are ready for it.

Tim Phelan makes his living now online and has been involved
in real estate as an investment for several years.
timphelansblog.blogspot.com/ Tim Phelan’s Blog
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