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During the past few months I have had discussions with many people about the housing bubble in the Northeast, Southern Florida and Southern California. This idea has been getting a great deal of press lately. As a casual investor – and someone who once worked right in the thick of a hot real estate market – I certainly have my share of sources of information. I am also a strategist and researcher so I never take things at face value. I always dig a little deeper. 
There have been many reports in the media about the housing bubble and the impending real estate crash that most experts believe will occur. The experts have formed their opinions based upon solid logic and a set of reasonable assumptions. The bubble will burst at some point. It’s going to happen. There are some things you can do to prepare yourself for that day.
First, let’s think about what that day will probably look like. Unless there is a catastrophic event, the crash will resemble a slowdown in housing purchases. People will no longer pay asking prices for homes. Buyers will make offers but sellers will hold out for more money. Eventually, people will begin to take the lower offers. The lower offers then become the comparable sales that appraisers use in valuing homes. Home prices will not rise as quickly or they may not rise at all for a period of time.
Keep in mind that this just means that people are selling for less money but not necessarily at a loss. If the homeowners have equity in their homes, they are still making money. The only people who will lose money when the bubble bursts are people who do not have equity in the property when they sell. As long as you have a mortgage product that allows you to make payments against your principal along with interest, you should have built up some equity.
If you have an “interest-only” mortgage product you may have more exposure to risk. The interest-only products allow you to keep your monthly payments low, but the amount you owe never decreases. In a hot market, you win because you have lower payments and your property value increases faster than the interest can accrue. Once the market slows down, you could begin to slide backwards. This is where the fear of the crash really hits home.
Speaking of home, if you live in yours and you can afford the payments now, you will probably be fine if there is a slowdown or an outright crash. Just keep making payments and things will eventually turn around. If you do not need to sell your home, continue to sleep well.
What should you do if you’re one of the 11% of home buyers who purchased a house or condo as an investment? Well, even for the investor who has one or two properties, the crash is not that scary. If you have good tenants and you can afford the payments on your mortgage and the maintenance costs of the properties, just sit tight. Lock your tenants in for as long as you can, and pay your bills.
If you are a real estate speculator that has a highly leveraged portfolio, you may be in for a rough ride. This is especially true if you have negative cash flow on some of your properties. In that case, I would sell early and sell often. Get as many properties sold off as possible at the first sign of a slowdown. The people who sell first in these situations are the only ones who end up walking away without massive damage.
Will it happen? Yes. How bad will it be? That depends on how well you have planned. Set your strategy now and sleep well.
For more see today’s CNN Money.
Please visit my new blog: The Career Intensity Blog.
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