Why Real Estate Is Bubble Proof

Several years ago, economists began using the term "bubble" to describe the incredible yearly increases in the price of an average home in many U.S. markets. Inevitably, when those increases tapered off and home prices glided back to more normal levels, they said the bubble had "burst."

I firmly believe that the housing market (as well as commercial real estate) will continue to expand and that young, first-time homebuyers have the most to gain from it. I see nothing on the horizon to change my outlook either-not today or 10 years from today. As long as the United States experiences steady population growth, there will be constant demand for homes. Growth guarantees an ongoing appreciation of residential property values for years to come.

In my book, Bubble Proof, I go to explain two very important things: call them the "macro" and "micro" concepts of "bubble proofing." I'll share some of that insight here.

First, the macro: Real estate is bubble proof over the long term because it has always shown itself to be resilient and rewarding. Real estate is always in demand. Someone is always buying, selling or investing in property, so there's always a market for it. Its major segments-residential, rental, commercial-don't move in lockstep, so that a diversified "real estate portfolio" can be built and adjusted for performance.

It is also important to note that, unlike the stock market, real estate trends are foreseeable from a distance. Prior to any up or down movement in the business as a whole, we have reliable predictors: interest rates, home sale figures, building permits and the like, issued monthly and debated endlessly by economists, business reporters and experts.

Contrast that with a normal week on the stock exchange. Some days, market losses can amount to 2 or 3 percent due to some upsetting event: an overseas terrorist attack, an OPEC announcement or a poor blue-chip earnings report. Unless your last name is Buffet or Kerkorian, normal investors can't divine the stock market's next move. But I can tell you where my real estate holdings are headed-and that kind of predictability helps make them, and me, "bubble proof."

Now for the "micro" explanation of "bubble proof."

I advocate the purchase of houses, duplexes, condos, apartment buildings or even office or storefront space only if they meet certain requirements, and therefore are "bubble proof." In other words, applying my methods, homebuyers and investors can bubble proof their investments.

What constitutes "bubble proof" real estate? Obviously, not all real estate qualifies. I certainly wouldn't advise a client to buy land on a decaying waterfront, or in a bad neighborhood, where only a Herculean government program could possibly turn its fortunes around. But I do recommend that prospective buyers seek out the countless quality opportunities to acquire and profit from real estate using the bubble proof approach.

In my book, I provide an in-depth examination of the components that go into bubble proof purchasing, starting with your first home and then branching into investment properties. For the purposes of this article, I will keep it brief and just touch on the basics that every deal needs:

* Affordability. Without a doubt this is the most important factor to consider, whether it is your first home or your twenty-fifth condo. This may sound obvious at first, but it is amazing how many people stretch too far and get trapped when their low interest adjustable mortgage shoots skyward.

* Favorable conditions. It doesn't matter what has happened elsewhere; focus on where you want to buy. Look for markets that are appreciating, and where homes are selling and not sitting. Be sure the nearby area is prospering, not struggling. (Here's how to tell: Find the towns with the best schools, and then go house hunting.) You may have to research newspaper archives, business journals and the Internet for some of this information, but it will keep you from committing a major blunder later on.

* Location. Here's where Realtors earn their stripes. They know the local market, inside and out-and about opportunities that you would never unearth on your own. Remember: Your goal is equity growth, not looks, so forget about buying the nicest house on the block. Instead, buy a house that needs work, in the best neighborhood you can find.

* Realism. Buy for today and trust that the future will take care of itself. No market is immune to bumps and dips in the road; but smart buying can overcome nearly every obstacle. Real estate using the Bubble Proof tools will not make you rich overnight, but it will over time.

* Common Sense. Make sure that any real estate deal you strike makes sense today. If the property is affordable, in a good market, fundamentally sound and has real potential to appreciate, then -and only then-you should pounce. Buying in an area that's only projected to boom is a fool's errand. Let speculators lose everything instead.

By meeting each of these requirements, a home or property acquisition meets my criteria for being "bubble proof." It's easy to see how these basic standards mesh into a bulletproof vest, if you will, that protects my investment before I've even placed my down payment. With these safeguards in place, buying your first house should be almost anticlimactic, because you've eliminated the negative factors that can result in disaster.