On June 26, 2005, the Houston Chronicle did an article about people in their 20's (Generation Y) entering into the real estate market. This age group of buyers was part of the bull rush to enter real estate boom, and I had the honor of being featured in this article.

During that article, I remember telling Nancy Sarnoff of The Houston Chronicle and it was later printed, ?There's a risk that some of these people who bought in hoping that they have the American Dream are going to be caught on the wrong side of this. Everybody hears the 30-second blurb on an infomercial or real estate is the hot new thing, it's explosive and better than the stock market, so people are acting accordingly.?

One year later, those fears are becoming a reality for thousands of developers and buyers who nationally are facing a period of decreasing sales, decreasing prices, and rising foreclosure rates. The National Association of Realtors has announced that they believe new home sales will dip 16% in 2006 and that existing home sales could fall 7.6%. Growth in prices is expected to increase 3% from 2006 to 2007. NPR reported in the 2nd quarter that foreclosure rates had increased 38% from the prior year.

This slowdown is showing signs of affecting the Texas market as well. Though Texas lags Arizona, California, Florida, and Nevada; the rate of foreclosures as noted by the Real Estate Center stated that Texas's pre-foreclosure posting rates of 63.3 per 1000 is above the national average of 57.6. Additionally, Texas rate of pre-foreclosure sales is also higher at 16.1 per 10,000 housing units versus a national average of 13.8. However, these rates do significantly lag the leaders.

The interesting caveat is that the Houston market has been insulated from these pressures. In the first quarter of 2006, the median rate of 6.2% outpaced the national rate and was better then Dallas's rate of 4% as noted by the Texas Real Estate Center. This growth can be directly linked to the city's dependence on the energy industry. During the past few years, the national energy scene has felt remarkable growth due to surging demand in oil and energy. This can be witnessed by the incredible earning produced by large energy conglomerates such as ExxonMobil who have posted over 1 Billion dollars in earnings in their past two quarterly returns.

Houston may be partially insulated from national housing dynamics due to our correlation to the energy industry, but investors should remember that this was the scenario that played itself out during the 1980's real estate downturn. If energy industry weakens, where will that leave all the rosy predictions for the future? We have already witnessed prices drop from peak highs in energy prices of $78.40 to prices closing above the $60 a barrel range. If demand and prices drop due to technological shifts in hybrid, ethanol, and renewable energy; what would that mean to the Houston energy industry? An energy downturn could disrupt our housing market, and investors who look at real estate in a purely speculative, short term mindset could suffer in that correction. If you need examples, look to other housing markets whose foreclosure rates are rising, prices are dropping, or time to sale are increasing.

Real estate has historically been an investment that millions of people have found and created wealth. This does not make it a fool proof investment, and as such, investors must take time to review their deals including a 'worst case scenario' analysis. This analysis should take into rising interest rates, longer time to sale, lower rental occupancy rates, or whatever dynamics that could affect your real estate investment to determine if you as an investor can deal with downturns or corrections. We may have enjoyed some immunity in the Houston real estate market, but it does not mean that prudence or caution should be removed from the decision-making. As they say, ?Bulls make money, Bears make money, but Pigs get slaughtered.?

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