I recently had a customer who bought a place at the beach because it was such a good deal. She didn't want to let it get away while the prices were so low.

I thought to myself that she didn't have to worry about losing what she thought was such a great deal. In fact, I wanted to scream at her DON'T DO IT! In deflation it takes years to work off excesses, and real estate (especially vacation homes) prices are no where near the bottom.

But that's the problem with human nature. We always do what has worked in the past, that is, until it doesn't work any more. I am afraid my clients that love real estate because they have always made money on it are about to learn that lesson the hard way, namely, that just because it worked in the past does not guarantee that it will work today.

It's hard to tell a bargain hunter to not jump at a bargain. Rick Ackerman's commentary today about Warren Buffett tells the same story.

As for Buffett and the optimists, it’s going to be difficult for them to resist the seeming bargains that come along over the next few years. And that is exactly why debt deflation poses such an investment challenge. If you’ve become adept a scooping up bargains, there are going to be bargains such as no one has seen since the depths of the 1930s Depression. The trick will be to distinguish between discount prices, distressed prices and extremely distressed prices. The example we have used here before is the East Side co-op that changed hands for $15 million in boom times. The discount price, which is where we are now, is $10 million; the distressed price is $4-$6 million; and the extremely distressed price – where we think things are ultimately headed – is $250,000. You could overlay the same downward trajectory on a chart of Chrysler Motors. Fiat is in at the distressed price, having bought its stake from private equity investors who thought they were getting a steal. But when Fiat is forced to unload the company a few years down the road – the buyer will be Chinese, of course – the price will be close to scrap value.