Can I Still Make Money in Real Estate?

The answer is a qualified "Yes," a very qualified "Yes." The housing bubble is for real and it is deflating quickly. This bubble and the satellite bubbles orbiting it are going to pop like soap bubbles at a birthday party. The housing bubble and the bubbles it fostered is not a natural phenomenon. Alan Greenspan, former Chairman of the Federal Reserve, created the bubble and did so quite deliberately. By lowering the prime interest rate to 1%, he made it impossible for people to earn money through savings or other conservative vehicles.

Ordinary citizens had to look for riskier investments in order to prevent loss of their nest eggs through inflation and the decrease in the value of the dollar. It suddenly became very appealing to refinance your home given the low rates for borrowing money. Unfortunately many of these borrowers didn't use that money for home improvement or even paying off debt. They used it to buy ego purchases such as SUVs and wide screen TVs.

The other effect of this low interest come-on was to convince people to buy houses in order to resell them at a profit. People who previously could not afford to buy a house were now buying houses. Lenders encouraged them with non-traditional loans such as interest only and adjustable rate mortgages (ARMs). Some lenders even encouraged borrowers to exaggerate their incomes, so-called "liar loans."

All of this buying sent housing prices up and a housing mania was underway. The other bubbles created by this buying and selling frenzy were those naturally associated with the housing market, realtors, construction companies, and suppliers of housing products, timber, electrical, plumbing, furniture, etc. Banks and other investment businesses began to take on riskier and riskier loans and sold those loans to others, including hedge funds and other funds. The sub-prime business became a secondary bubble that affected investment houses in other countries as well.