Was That The Bottom?

Everyone knows that housing prices have been pummeled lately. Whether the falling prices are causing the foreclosures or the foreclosures are causing the drop in prices is really just academic at this point. The fact is each problem is feeding the other in a vicious cycle that won't end, well, until it ends.

In the long run, real estate values will recover and continue to climb. Our population continues to grow, and people have to live somewhere. Or, in the famous words of Will Rogers, ''The best investment is land, because they ain't making anymore of it.'' The question is really when will the market turn around.

Accurately predicting the bottom can be very profitable. "Buy low, sell high" is still the best investment advice ever written. On the other hand, missing the bottom can be a disaster. Just ask anyone who bought too much house a couple years ago hoping to sell for a tidy profit in a few short months. That's why they call it speculation...

That being said, trying to time the real estate market is really no better than timing the stock market. Market timers typically lose in the end. Once again, see the last two years. The real question investors need to ask themselves is "can I afford this?"

Whether you're buying a home for your family to live in or an investment property to rent or sell for a profit, you need to know that you can make the payments. Investing based on the assumption that you can sell it next year is a great way to end up as the latest foreclosure statistic. While that kind of investing may work out, you need to go into it with the assumption that it won't. If you plan based on getting stuck with the property, you can't lose.

This is especially true for owner occupied homes. You have to pay to live somewhere. If the payment works for your budget, then it really doesn't matter what the value is. Whether you make money or lose money when you sell is really irrelevant if you're buying again in the same market. The money you make on the sale is just funny money if you're having to spend it all on the house you're buying. It's the same if you lose money selling but get a screaming deal on the buy. Unless you're moving out of the area, making or losing money on your own home is just numbers on paper. Which is why, once again, the main priority needs to be whether or not you can afford it.

As to the question of when we will see (or have seen) the bottom, for most of us that is the wrong question. Leveraged investing based on assumptions about the future of the market is what created the current crisis. If you bet on a bottom and miss or simply can't afford to ride it out, you lose. Don't try to time the market. Invest based on what you can actually afford and you will make money no matter when the bottom hits.