Real Estate Might Be Stronger Than You Think

With the recent difficulties in the real estate market, many investors are steering away from real estate, considering it to no longer be the “sure thing” it’s been considered in the past. However, real estate still can be an excellent investment. In some parts of the country, in fact, it’s still one of the best places to put your money.

The fact is, national trends in real estate  prices might not apply to your particular area. Some places in the US are actually seeing their real estate values hold steady, or even increase. Different market pressures exist in different areas, and these pressures can strongly affect the value and stability of real estate.

Video: This Month in Real Estate

The best way to find out if you’re in an area where real estate is still a strong investment is to take a close look at your local housing market. The Department of Housing and Urban Development (HUD) prepares reports for local markets, analyzing various factors that affect the value of real estate in specific areas. These reports can be very useful in determining the strength or weakness of your local housing market. Other companies supply similar reports. Do your research and homework, as you would with any major investment. You might be surprised by the results.

Housing Bubbles and Why They Happen

Housing bubbles, or real estate bubbles, occur when housing prices inflate rapidly in a certain area until the prices are no longer sustainable by the local economy. Several factors can contribute to the formation of a real estate bubble. One major factor can be supply and demand. If there aren’t enough houses to meet the current demand, prices will naturally increase. If supply increases and/or demand decreases, prices will diminish again, “bursting” the bubble.

Another factor in housing bubbles, which has played a big part in the current financial crisis, is lending practices. As housing prices go up, lenders can modify their practices so that people are able to afford houses at a much higher price than their income could sustain under more normal terms. Arrangements like “interest only” mortgages, low down payments, and Adjustable Rate Mortgages are among the practices that can allow someone to buy a house that is, in reality, far beyond their means. Unfortunately, these practices tend to backfire, leaving the homeowner in an untenable position when their mortgage skyrockets or the market price of their house plummets as the housing bubble bursts.

Buying Real Estate Wisely

By monitoring the real estate market carefully, you can often get a good idea of when a housing bubble is developing, and when it’s about to burst. If you’re able to invest in real estate near the beginning of the price rise and sell while prices are still higher than what you paid, you can turn a tidy profit. Hold on to the house too long, though, and you’ll take a loss. You could also take an uncomfortable hit if you take out a large home equity loan and find the value of your house plummeting before you’ve paid it off.

When purchasing real estate, avoid “trendy” real estate practices that could leave you out in the cold. Real estate is one area where the tried and true, traditional approach could keep you out of a good deal of trouble. A higher down payment, a more traditional, fixed mortgage, and staying within your means when you purchase a home all will serve to protect you from the volatile ups and downs of housing bubbles. Paying close attention to market trends before taking out a home equity loan can also help you make choices that aren’t as likely to backfire down the road.

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There are still ways to make money in real estate, though. Houses are always in demand, and whether you want to improve and resell a house or buy a property to rent, if you make smart choices and look for bargains, you can create a substantial positive cash flow for yourself. A property purchased at a low price, perhaps due to a foreclosure, can be rented for considerably more than you’re paying on the initial mortgage. Better yet, if you can purchase a smaller home at a bargain price and pay it off, all the rental income goes straight into your pocket. A little common sense, some luck, and careful planning can lead you to an excellent long-term investment.