We are certainly in a buyer’s market right now and real estate investors have quite a bit of bargaining power these days.

But is this the time to buy or will real estate prices head even lower?

We are seeing millions of foreclosures coming on the market, which is currently driving prices even lower, but this could come to a head in the near term. Many experts think we could see the bottom in real estate prices sometime this year.

My suggestion: Keep your powder dry and get ready to jump into some real estate investments in the next year as long as the right opportunity presents itself.

My wife and I have had a great deal of success investing in real estate over the years. We were fortunate enough to see the writing on the wall and dumped most of our investment properties in 2006 at a net profit.

I attribute our success to a wise man that once told me “You make all your money in real estate the day you buy the property”, basically this means you have to buy the property for much less than it is currently worth.

Now, we are getting ready to jump back in and are looking to add real estate to our investment mix again. Recently we have been spending our weekends driving around looking at distressed properties. We are looking at properties that are bank owned or are being short sold by a homeowner that is upside-down on their mortgage.

The trick is to find nice properties that you can rent out and make a positive income stream. Essentially, you need to be able to receive more rent money than your mortgage payment.

And the most important part: Low Ball… Low Ball… Low Ball…

You need to make an offer 40% to 50% below the current market value. Now, 19 out of 20 people will tell you to go somewhere else. But if one out of 20 accepts your low-ball offer, you will get the deal of the century.

Source: Is it Time to Buy Real Estate Yet?

In addition, the wealth effect is a brand of self-fulfilling prophecy, which makes it even more powerful…

By investing in stocks that go up, we have more wealth.  Having more wealth causes us to go out and spend.  That spending, in turn, causes the economy to grow.  Economic growth then leads to better times for companies which, in turn, lead to higher stock prices.

Unfortunately, the power of the wealth effect works in reverse as well…

When we see our stock portfolios getting hammered, we feel a lot less wealthy.  That loss of wealth causes us to pull back on spending.  Less spending means slower economic growth, which is lousy for companies.  Poor outlooks for companies mean lower stock prices.

And declining wealth isn’t limited to stocks.  Take a look at this chart of real estate prices…

As you can see from this graph, the year-over-year change in home values — indicated by the dark solid line — began to slow around the beginning of 2006.  But economic growth — indicated by the red dashed line — didn’t begin to slow until the middle of 2008.

In other words, the wealth effect in real estate wore off long before the economy began to sputter.  In this case, the declining value in real estate was a huge leading indicator of poor economic activity to come.

In fact, changes in just about any asset — from stocks to houses to commodities — can cause their owners to adjust their spending habits.  And those spending adjustments are going to happen after the owners’ assets take a hit.  And that makes them a great predictor of where things are headed.

I’ve told my readers time and time again that a recovery in real estate prices — and stability in the real estate market — is likely going to be one of the biggest pluses for a stabilized economy and higher stock market values.  Real estate got us into this mess and it’s going to get us out.

Using These Leading Indicators for Profit

So, how can you make money off the predictive abilities of the stock market and other asset classes?

Simple.  While others are waiting for the big economic indicators — such as solid growth, the labor market, and the credit crisis — to get back on their feet, you can slip into key investments long before anybody else gets wind. The markets are telling us loud and clear patience will be rewarded.

Source: Profiting from the Wealth Effect