9 Ways to Protect Yourself from the Housing Bubble

1. Don't assume you will have plenty of time to react when the bubble bursts.

In a matter of months, the housing market could go from "hot" to "dead," meaning you could end up stuck with overpriced investment properties, unable to sell your own home for a profit. So whatever you do, don't delay in taking steps to protect yourself from the impending real estate bubble.

With warnings now plastered on the front page of virtually every national magazine and newspaper, irrational investor exuberance could quickly turn into panic, and the end could come at any time.

2. Switch from an ARM or interest-only loan to a fixed-rate mortgage.

Fixed-rate mortgages are now at their lowest rate in 30 years. To avoid an unpleasant surprise should mortgage rates rise sharply, lock in those low rates immediately.

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3. Make sure you can afford to stay in your house.

If you are happy where you are now living and have no reason to move in the near future - and you have no problem meeting expenses (including any upcoming increases in mortgage payments) - don't worry about whether the value of your house goes up or down. After all, a home is much more than just an investment.

But if you are struggling to make your house payments (or you expect a hike in your mortgage rate soon) or expect to be transferred to another city soon, consider selling and moving now.

Another reason to sell might be your net-worth worries. If you took a hit during the ‘90s tech boom but have made back your losses - and even made gains - in real estate, it would be wise to sell your property and buy a smaller one, or rent and take some of your winnings off the table.

When the market boom is over, not only could prices fall - it will be difficult to sell your home, even in prime markets.

For example, if you sell your house now for $600,000, then rent for two years at $1,500 a month and eventually repurchase a similar home for $400,000, you would have a net gain of $164,000, plus interest on your $600,000.

For most people, the tax consequences of such a strategy will be minimal. Under new tax rules, a married couple can realize up to $500,000 in profits from their home without having to pay any taxes on it. Check with a qualified tax adviser for details and restrictions.

4. Consider selling investment homes and condos now.

This makes a lot of sense - if housing prices go down soon. And wouldn't you rather sell your property now for $500,000 and repurchase a few years from now for much less?

Even if you currently have a positive cash flow from rentals, ask yourself: Will it still be worth keeping the property if rents go down 10, 20 or even 30%?

Between 2001 and early 2004, apartment and house rents dropped by 15 to 30% in San Jose, Calif.

On the other hand, if you own property in a smaller city or rural area where property prices are still reasonable, there is no reason to sell now.

5. Make sure your savings are safe!

Financial institutions heavily invested in real estate will be at severe risk and could even fail when housing prices crash. Most at risk are banks and savings-and-loans.

To make sure your bank or S&L is safe, you can get an analysis of its rating from Weiss Research at www.weissratings.com for a small fee. Weiss Research is an independent business that provides objective and honest ratings of banks, S&Ls, insurance companies, health care plans and many other concerns.

Unlike Standard and Poor's and Moody's ratings services - which are funded by the companies they rate - Weiss ratings are truly independent and much more accurate, since they are free to divulge the truth. In the 1980s, just before the S&L collapse, Weiss was rating many S&Ls at "D" (weak) of "E" (very weak), while Standard and Poor's and Moody's were classifying the same companies as "AAA" or "AA".

Amazingly, in some cases they even maintained these absurd ratings for days after the companies had closed their doors!

So I recommend you play it safe. Get Weiss Ratings on your financial institutions before the crisis hits.

Also check out what percentage of their overall portfolio your bank, S&L and insurance company have invested in real estate. If you don't like what you see, change banks right away. Often, financial institutions right next door to each other have dramatically different portfolios and risk levels.

6. Get out of residential REITs (Real Estate Investment Trusts). In the past, FIR recommended REITs that focused on commercial - not residential - properties.

Since then, some of our recommendations have appreciated from 40 to 50% or more in a year.

For example, one of our picks, Catellus Development Corporation, shot up 61%, while another, Tanger Factory Outlet Centers, rose 48%. While we still believe commercial real estate will weather the housing storm that is brewing, at the moment, we would not recommend new investments in REITs.

7. Make conservative investments.

These include CDs, Treasury bills, precious metals and strong foreign currencies. See our June 2005 issue on Sector Investing and our April 2005 issue "The Inflation Lie" for specific recommendations.

8. Sell shares of companies most at risk in a real estate crash. That includes many banks, S&Ls, mortgage lenders, brokerage firms, real estate companies and other businesses that are heavily dependent on the housing market. Again, such companies are excellent candidates for short options.

One way to profit from the coming real estate crash is by dumping stocks most likely to fall as a result of it - including overexposed banks, construction companies and financial services companies - both in the United States and throughout the world.

Another strategy is to buy options - called "puts" - on these stocks. Since it is unclear exactly when the crash will occur, we recommend buying options known as LEAPs (Long-term Equity Anticipation Securities). These are long-term options expiring at least a year from the day you purchase them - or further out.

Weiss Research lists the following companies as some of the best candidates for dumping or shorting. Weiss rates them financially at D+ (weak) or lower.

If you own any shares of the stocks listed below, you should definitely consider selling them soon:

Building Products

Dectron Internationale Inc. (DECT: NASDAQ)
International Barrier Technology Inc. (IBTGF.OB: OTC.BB)
International Smart Sourcing Inc. (ISSG.OB: OTC.BB)
Lincoln Logs Ltd. (LLOG.OB: OTC.BB)
North American Technologies Group Inc. (NATK.PK: OTC)
ThermoView Industries Inc. (THV: AMEX)

Commercial Banks

Ameriserv Financial Inc. (ASRV: NASDAQ)
Bay View Capital Corporation (BVC: NYSE)
Grupo Financiero Galicia SA (GGAL: NASDAQ)
Harrington West Financial Group Inc. (HWFG: NASDAQ)
National Bank of Greece SA (NBG: NYSE)
Signature Bank/NY (SBNY: NASDAQ)
SNG Bancshares Inc/TX (SNBT: NASDAQ)
Texas Capital Bancshares Inc. (TCBI: NASDAQ)

Construction

Abrams Industries Inc. (ABRI: NASDAQ)
Corrpro Companies Inc. (CRRP.PK: OTC)
Diversified Thermal Solutions (DVTS.OB: OTC.BB)
Empresas ICA Sociedad Controladora SA (ICA: NYSE)
Foster Wheeler Ltd. (FWLT: NASDAQ)
Goldfield Corp. (GV: AMEX)
Integrated Electrical Svcs. (IES: NYSE)
RG America Inc. (RGMI.OB: OTC.BB)

Consumer Finance

Consumer Portfolio Services Inc. (CPSS: NASDAQ)
Equitex Inc. (EQTX: NASDAQ)
First Investors Financial Services Group (FIFS.OB: OTC.BB)
First Marblehead Corp. (FMD: NYSE)
Moneyflow Systems International Inc. (MFLW.OB: OTC.BB)
Nelnet Inc. (NNI: NYSE)
Nissin Co. Ltd. (NIS: NYSE)
Orix Corp. (IX: NYSE)

Diversified Financial Services

Ameritrans Capital Corp. (AMTC: NASDAQ)
Banyan Hotel Investment Find. (VHTI.OB: OTC.BB)
CapitalSource Inc. (CSE: NYSE)
First Albany Companies Inc. (FACT: NASDAQ)
Marlin Business Services Corp. (MRLN: NASDAQ)
MicroFinancial Inc. (MFI: NYSE)
SE Global Equities Corp. (SEGB.OB: OTC.BB)
Transnational Financial Network Inc. (TFN: AMEX)

Real Estate

Affordable Residential Communities Inc. (ARC: NYSE)
American Financial Realty Trust (AFR: NYSE)
Amli Residential Properties Trust (AML: NYSE)
Arbor Realty Trust Inc. (ABR: NYSE)
Equity Lifestyle Properties Inc. (ELS: NYSE)
Investors Real Estate Trust (IRETS: NASDAQ)
Luminent Mortgage Capital Inc. (LUM: NYSE)
Macerich Co. (MAC: NYSE)

Thrifts & Mortgage Finance

Accredited Home Lenders Holding Co. (LEND: NASDAQ)
Beverly Hills Bancorp Inc. (BHBC: NASDAQ)
BFC Financial Corp. (BFCFB.OB: OTC.BB)
CFS Bancorp Inc. (CITZ: NASDAQ)
Clifton Savings Bancorp Inc. (CSBK: NASDAQ)
Flushing Financial Corp. (FFIC: NASDAQ)
Franklin Bank Corp. (FBTX: NASDAQ)
K-Fed Bancorp (KFED: NASDAQ)

9. Prepare now for a major downturn in the economy.

Pay off your credit cards, cut your expenses and save more. When real estate crashes, the economy will take a hit.

At FIR, we may not have a crystal ball, but we know this much: Since the real estate boom will not be cooled by rising Fed rates, a soft-landing scenario is unlikely. And a hard landing could push the United States back into a recession.

This is why FIR continually recommends investment in sectors that will do well during a housing-induced recession. It is also why we encourage investors to look globally for opportunities.

Editor's note:
Sir John Templeton warns of market, housing crash – Read More Here
Alan Greenspan Warns of Housing Bust, Worse....
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