Cutting Edge Real Estate, Is the Bubble Ready To Burst?

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. Tim Phelan's Blog More Real Estate Info