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The dot-com bubble of nearly ten years ago cost many investors big
money. The more recent real estate bubble seems similar to some of us.
Leading up to the bursting of the dot-com bubble, investors had this
irrational belief that such investments were virtually guaranteed to
increase in value. Eventually, many dot-com company stocks collapsed,
as we all know.
More recently, similar irrational exuberance has run up prices on real
estate, especially in some "hot demand" markets. Now, prices are
cooling just about everywhere. Some are predicting a decade of soft
prices to come.
Critics will say that it cannot happen with real estate, but a more
insightful analysis suggests things could actually be worse for some
investors. Generally speaking, with a stock, a loss is limited to the
price paid for the stock, if and when it drops to zero value. Some real
estate investor gurus say this kind of crash can't happen because real
estate value will never drop to zero. However, real estate purchases
are leveraged, and ... if prices fall significantly ... an investor
could lose more than he has invested, which is the down payment, and
perhaps a number of installment payments. So, the truth is: every penny
of a real estate investment could be lost, and worse. If you paid
10-thousand dollars down on a 100-thousand dollar property ... and the
price fell 10%, you've lost it all, and you're still obligated for the
90-thousand-dollar balance plus selling or holding costs. The leverage
worked so well for investors when real estate prices were growing. The
leverage reverses itself against investors when prices drop. Leverage
is a double edged sword capable of cutting down investors who bought
when prices were at the peak. Saying that real estate prices will never
drop to zero is deceptively misleading, since the net effect is that
prices can fall below zero (more than the down payment) ... and you can
lose more than you have invested.
Some investors have incorporated or set up some shield for asset
protection. However, those investors acting as individuals, with little
or no shielding, are extremely vulnerable as the real estate market
continues to sour.
Mr Paul
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Real estate bubble could be worse than the dot-com bubble.
