Protect Your Home From
A Bursting Real Estate Bubble

The fact that many of those who predicted a dramatic bursting of the so-called real estate bubble have thus far been wrong has led many homeowners to a false sense of security. Even though home prices have not fallen out of bed, home values have begun to moderate, and those who bet their future on ever rising home prices may well be disappointed.

Fortunately, there are concrete steps that both current and prospective homeowners can take to protect themselves when the bursting of the bubble does happen. It is important to keep these tips in mind anytime you venture into the real estate market, whether as a first time home buyer or an investor.

1. Be Sure You Can Afford Your Mortgage

This step may seem like common sense, but there are an amazing number of home buyers who seem to have forgotten the basic lesson of buying only as much home as you can afford.

Unfortunately, banks and other mortgage lenders have been more than willing to create ever more exotic mortgages, including negative amortization loans, in which the amount owed on the home each month goes up instead of down.

Those holding interest only mortgages may soon find themselves on the receiving end of a ticking time bomb. As the interest only period expires and interest rates adjust upward, these mortgage holders could quickly find themselves with an unaffordable mortgage payment.

The best thing to do, of course, is avoid these exotic mortgages, and buy only as much home as can be financed through a traditional fixed rate 15 or 30-year mortgage. Those who hold exotic interest only and negative amortization loans should be looking for an exit, either through refinancing or through selling the home and downsizing.

2. Focus on the Local Market

If you live in Arizona, a red hot real estate market in California means nothing to you. It is important to focus on what is happening in your local market. Many prospective home buyers have gotten spooked into buying now, thinking that they would not be able to afford a home tomorrow. While there are some very hot markets out there, the fact is the real estate bubble, and bubble risk, is more of a local phenomenon. It is important to research price history in your own market to determine how hot or cold the local market is. If you are lucky enough to live in a buyer’s market you may be able to strike a bargain and not have to worry about the bursting of the bubble at all.

There are a number of ways to keep on top of the local real estate market, but one of the easiest is simply to read the local real estate section in your newspaper each week. This will give you a good idea of what homes in your area are going for, and how long they are remaining on the market. The longer homes are staying on the market in your area, the better your chances of getting a better deal.

Simply driving around your neighborhood and looking for those for sale signs is a good way to gauge the local market. In addition, attending a few open houses each month can give you a good feel for the market. Are the open houses standing room only events? Or does the real estate agent seem lonely? These simple observations can give you a good idea of what kind of local market you have.

3. Gather the Information

While driving around the neighborhood and attending open houses will give you a feel for the market, at some point you will want some hard, cold facts and figures about the market. Knowing things like the inventory of unsold houses, the average time it takes a home to sell, and the average percent of asking price the homes sell for are all important statistics to help you gauge the local real estate market. A qualified real estate agent with expertise in the area should quickly be able to provide these facts and figures. Whether you are thinking of buying or selling, these facts will come in handy.

4. Beware of House Flipping

To many people who remember the late 1990s and early 2000s, the house flipping craze looks frighteningly similar to the frantic buying and selling of internet stocks. We all know how that frenzy ended, so take a lesson from history and avoid the temptation to seek a quick buck in the real estate market. The truth is most of the easy money has already been made, and those sitting with unsold homes when prices stagnate or turn down will be very sorry.

Many would be house flippers assume that they can simply rent out an unsold home, but the truth is the rental market fluctuates just as much as the sales market, and if a downturn comes, rent prices may come down right along with home prices. Also remember that the rent roll on the property will have to cover the mortgage payments, real estate taxes, broker fees, maintenance costs, etc. before breaking even.

5. Be Prepared to Wait Out a Downturn

Unlike Pets.com and other darlings of the stock market bubble, the price of real estate will never drop to zero. If you do find yourself owning a home in a declining market, the best strategy may be to simply wait it out. If you have followed the other steps in this article, such as taking out a reasonable mortgage with affordable payments and avoiding house flipping, you will be in a good position to ride out a market downturn.

In past real estate downturns, the real estate market did eventually come back. While the downturn itself can be quite painful, when the market does recover, those holding quality real estate stand to make a tidy profit. If you can hold on in a down market and not sell into it, you will be better off in the long run.

Real estate can be an excellent way to build wealth over a lifetime, but it is not a get rich quick scheme. Just like prudent investments in the stock and bond market, it takes time to build real estate wealth. Most of those who try to get rich quick end up losing their money. On the other hand, it is those who build up wealth over time who find themselves the real long term winners.

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