Don't Buy Real Estate..... Yet.
by David Tanner
As I have been preaching here for a long time, don't let this depressed real estate market fool you into thinking we are in a buyer's market.... we're not. At least, not yet. In fact, we are still very early in the game, as most Americans are still hanging on to their homes by a thread.

However, soon, you will look around your neighborhood at many, many vacant properties that can be had for fifty cents on the dollar, or less. THAT, will be the time to cash in your gold and jump on the real estate bandwagon.

Of course, THAT will be the time that NO ONE will want to own real estate because of the bloodbath that the real estate market will have just gone through. Which brings us back to that old, tried and true saying.... the time to buy is when theres blood in the streets.

To understand the factors that are driving this current real estate downturn and how you can profit from it, read the following excerpt from Casey Research regarding the recent history of this market. (The full article can be read here.)

Americans used to be savers. Not any more. As recently as 1990, Americans on average saved about 7% of their income (which allowed them to buy up much of the debt the government was issuing). But the savings rate fell over the 15 years that followed, hitting zero in 2005. Unlike in China, where the average savings rate is said to be 20% (some unofficial reports have it as high as 40%), or even in some European countries where it is reported at 10%, the savings rate in America is now negative.

The debt Americans have been building up isn't just a number that sits on a balance sheet. And it isn't spread evenly through the population and through the economy. It is concentrated in one area, residential real estate. And it is concentrated in an unstable fashion - thanks to the government's efforts to stimulate the economy.

After the equities boom faltered and the US economy showed signs of weakening in 2000-2001, the Fed started cutting interest rates and worked its way almost to zero. Americans borrowed and spent as never before. Anyone who didn't own a house borrowed to buy, increasingly with no money down or with interest-only loans. Those who already owned a house borrowed against it to buy furniture, cars, boats, yard-wide televisions, and trips to Hawaii. And the process didn't stop with just one round. Empowered by ultralow mortgage rates, people bid up the prices of existing houses, allowing their owners to draw even more spendable cash at the refinancing window - or to use their equity to bid on an even more expensive house, or even second and third homes, in the process taking on even bigger mortgage commitments and pushing home prices ever higher.

So it's not just the US government that is in debt, but also individual Americans who have racked up $8.7 trillion in home mortgages (many with adjustable rates that are now rising) and $2.2 trillion in consumer credit ($36,333 per person).

Now, what we must realize is that the same forces that pushed home values higher are now reversing and will push them lower..... much lower.

With trillions in home equity available, Americans went on a spending spree. But today, that equity is wiped out, gone, vanished. So the spending stops, which in turn reduces demand for products and services, which in turn, contracts the economy, which in turn, wipes out jobs.

Now, with homeowners mortgaged to the hilt, and losing their jobs, those mortgage and second mortgage payments become unsubstainable. This leads to defaults and repos which creates an excess supply of real estate on the market which in turn depresses prices.

So what's the game plan?

First, there is only one investment that thrives in times like these: gold. Until the real estate market bottoms out, keep your powder dry in gold. It's managed ascent at 20% - 30% a year will ensure you that you will have plenty of cabbage to go shopping with when the property market finally bottoms.

Then, when the bottom comes, you simply trade in your gold for property. At that point you can pick up $100,000 homes for $25,000 and rent them out for $1,000/month, a 50% annual return! In two years, your rental income will have paid for your property and all cash flows going forward are pure profit!

Don't forget, at the bottom, everyone will be renting. In other words, at just the time you are entering the market will be the exact time of the highest demand for rentals as most Americans will have dropped off the keys to their homes at the local bank.

So the bottom line is this. Be patient! This isn't get rich quick. But IT IS get rich, very rich, over the next 5 - 10 years by careful planning and a strict discipline to stay the course while others are still chasing yesterday's trends. There is a HUGE wealth transfer that is about to take place in this country and I hope you are in position to be the recipient and not the donor!