It is interesting how investors often use one set of rules for securities investments, and an entirely different set for real estate.  Safety and diversification are essential… except for real estate.  $50,000 is invested in ten different index funds (never margined, because margin in dangerous), but $3 million is invested in one property, with an 80% loan-to-value (because leverage is smart).  No one can beat the market… except in real estate.  Because real estate never falls.  I met an investor who was horrified at hedge fund fees, yet regularly invested in real estate partnerships in which the general partner charged 4.5% annually plus 20% of the back-end.

A common deadly sin is to try and catch a falling knife.  Anyone who bought that $200 dotcom stock all the way down to $4 is extremely familiar with this principle.  Yet friends and acquaintances, who once swore "never again," are again rushing out to buy real estate "at the bottom," often with significant leverage.  Because real estate never…oh wait.  Well, it always comes back.  It's a long term investment.  They're not making any more of it.  Rich Dad, Poor Dad…

Every asset class has its cycle, and it is way, way too early.  Residential real estate has not yet begun to fall.  Has. Not. Yet. Begun. To. Fall.  Bold words.  How can I be so absolutely positive?

Because, so far, prices are falling without a catalyst.  Mortgage rates are still extremely low.  Anyone with any kind of credit rating can still get a loan. People still largely have jobs.  And home prices for sale are still ridiculous.  Sellers still "want their money" out of the sale.  "Their" house is different.  "Their" city is different.  Retirees are buying.  Canadians are buying.  Saudis are buying.  Someone will fall in love and pay "their" price. 

Bubbles don't re-bubble.  Hundreds of billions of mortgage defaults are not irrelevant.  Markets (of every kind) rise higher, and fall farther, than we ever believe is possible.  Mortgage rates are trickling up in spite of the Federal Reserve.  At some point, the bond market will reprice inflation and default risk back into yields, and mortgage rates will go up.  A lot.  Because of the leverage, home prices will fall disproportionately to the rise in mortgage rates.  And then sellers will begin to capitulate, as they realize the market will not snap back and bail them out.  How long?  Obviously, it depends, but at least a year or two before the falling stops.

A lot of people lost a lot of money in the bursting dot.com bubble.  However, I know more people who went bankrupt in the real estate bust of the late 1980's-mid-1990's, then ever lost in the dotcom bust.  And I'm frankly stunned that so many of those same people have forgotten such a visceral lesson.