One of the nicer things about getting older is a lot of my friends are retiring or are semi-retired. They now have time to participate in some of the things that my career in real estate allows. Case in point, I have a friend who regularly goes yard saleing with me on Fridays, we rarely buy anything, but every once in a while someone really does want to sell the yard! (I explain this in my books “One House At A Time / Finding And Buying Single Family Rentals" and again in “Flipping For Fun And Profit".) We just couldn’t make it last Friday, but since both our wives were going to be out Saturday we decided to try a Saturday.

I arrived at my friends’ house at the appointed hour, his wife let me in, it seems he was walking the dog and would be back in ten to fifteen minuets. We sat down to talk something we seldom have a chance to do. She’s in the mortgage loan business too. In fact we met seven or eight years ago when she worked for me as a loan salesman, but she really found her niche as a processor so we do have mutual interest to talk about. I tell you all of this because you need to know she’s no spring chicken, no neophyte, no novice, she’s very good at mortgage lending!

We generally only discuss two subjects, our spouses and real estate, having learned long ago not to mention politics or religion. People from Nevada don’t discuss weather amongst themselves, it’s like discussing size with a Texan. The subject this day was real estate, specifically 100% mortgages and the soon to burst real estate bubble.

As I listened, she explained how upset she was that her employer wrote mostly adjustable rate 100% mortgages and other high loan to value mortgage loans. She was concerned about how the poor buyers were going to be in such trouble when the “sky falls" and the “real estate bubble" burst. Over and over she repeated the media mantra “the sky is falling," “the sky is falling!" She assured me, rates are going up, payments are going up! I couldn’t argue that rates and payments are not going up, that’s what ARMs do! But, the sky is falling? No way!

She went on. No one should be allowed to buy a house with less than 30% down, so that when the bubble burst and the “sky falls" they will still have some equity and they might be able to keep their house at it’s soon to be deflated value.

She went on to spew all the doom and gloom so prolific in the news! When I argued facts, she responded yes, but it’s all a bubble! This lady is an educated mortgage professional. She’s no kid. Her youngest daughter will never see middle age again. Despite it all she’s shouting “The Sky is Falling!" just like Chicken Little did!

You should be concerned! Or should you? All the doom and gloom reported ever hour on the radio and three times a day on TV is bound to convince more than a few of you, eventually. No matter what your politics if you look carefully, all the balderdash is misleading prophecy meant to displace Bush and his party. The doom and gloom is mostly political pandering. The tremendous growth in property values in the last four or five years is true!

Is it a bubble? What if the bubble should burst and the sky fall who’s going to get hurt? As always those among us with out a roof of their own are going to get hurt! Should you buy real estate in today’s market? Only if you want protection from falling skies!

But, what if the bubble burst and values do go down? The fact is real estate in general has gone down only twice since Manhattan was purchased for $26.00 worth of beads, it went down briefly during the Civil War and again during the Great Depression. Which do you anticipate? In both cases property values recovered in short order.

What about making large down payments to preserve your house incase values do drop or payments go up? Chicken Little’s problem is her experience has all been in good times! I started in lending in 1969 at a small loan company, the first thing I was taught about collections was to look at the collateral, never threaten anyone with nothing to lose. I quickly moved to a bank, it was the same story. When dealing in mortgages where deficiency judgements are rarely allowed, who stands to lose if you get in trouble?

Chicken Little is mistaken! Her common sense approach to protecting the consumer, is the equivalent to hiding under the only tall tree in the area to stay dry in a thunder storm! For those of you who don’t know a tall tree may keep you dry during a thunder storm, right up until the lighting kills you!

Those of you that have read any of my real estate books (“One House At A Time / Finding And Buying Single Family Rentals", “Flipping For Fun And Profit", “Get The Money / A Consumers Guide To A Successful Mortgage Application", or “A Bakers Dozen / A Real Estate Anthology") know that successful negotiating requires that everyone wins. When you’re in trouble you’re going to have to negotiate with your lenders. If you have enough equity for the lender to take your home getting all or most of their money back they win and you’re screwed! On the other hand, if the bank stands to lose money by adding to your problems they will work with you! Banks do this all the time, you’ve heard of “short sales" where a lender takes a known loss because it’s better for them than risking a known or probable higher loss. Savvy investors do this all the time, home owners can also compromise with the bank if it is in everyone best interest. High loan to value loans spread the risk between the buyers and the lenders. (FHA, VA, and PMI loans are normally, but not always, an exception.)

Back to our question and analogy. Should you buy real estate when the bubble might burst? What choice do you have? Renters (God Bless them, for they make landlords rich) without a roof of their own may well have the sky fall on them. Those home owners with only enough equity to protect the bank, may think the “Sky is Falling" on them, but it’s chicken droppings. Those few with so much equity that they are protected from the bank may lose money but they’ll come out of it.

The wise “Henny Penneys" among us will not only have leveraged their homes to the max forcing the bank to share the risk. They’ll also have several investment properties sharing the risk three ways, with the bank, and the volunteers!

Volunteers? Yes! Tenants volunteer to pay all the expenses with no chance of sharing in any of the winnings. God Bless them.

“Henny Penny" will have to actively protect her interest in case the bubble burst, but that’s the same as coming in out of the rain. “Chicken Little’s" only hope is the benevolence others.