Watch for falling knives

If some housing bulls are correct, there is a small army of potential buyers already assembled that's chomping at the bit to enter the market at the first sign of either a bottom or possible soon-to-come stabilization - heck, some would even have you believe that we're at or near the bottom already.

Then, again, Wells Fargo just called the current housing market the worst since the Great Depression, but hey...not everyone can always agree on everything.

Don't buy anything based on blind faith. Do your own research. Learn about and track prices for your target neighborhoods/cities - historically, during the bubble run-up, and now going forward.

That way, you'll be the first to know when prices approach reasonable levels for your focus areas. By reasonable this includes taking into account realistic appreciation rates that are standard for the area. No, 25% appreciation per year is not normal - not even in Laguna Beach.

If you jump in too soon, you'll either catch a falling knife or be snared in a real estate bear trap. Yes, this is not too big of a problem if you plan to stay in your house for a long period of time, since prices will recover eventually. But why pay more for a place to live than you have to, if all it takes to avoid the mess is some additional due dilligence? And why risk you and your family's financial future if life heads in an unexpected direction and you're forced to sell?

Take the following examples. On the surface, these properties seem like good deals, and could be tempting to buy. But watch out. These are only good buys when you compare them with bubble-induced prices that are not connected to reality. If prices fall better in line with incomes and rents due to the return of sane lending - as many believe - then you're going to be upside down for some time.

Property 1: 24342 Barbados, Dana Point
Asking price: $680,000
Previous sales price: $800,000 on 1/22/2007
Reduction from last sale (not incl sales csts): $120,000
Forecasted price*: $442,432.94
Based on: $257,500 sale on 6/1/1999

Property 2: 23235 Sky Dr, Lake Forest
Asking price: $649,800
Previous sale: $705,000 on 5/17/2005
Reduction: $55,200
Forecasted price: $463,067.43
Based on: $220,000 on 2/23/1996

Property 3: 25271 Bentley, Laguna Hills
Asking price: $650,000
Previous sale: $685,000 on 5/12/2006
Reduction: $70,000
Forecasted price: $436,419.29
Based on: $254,000 on 9/17/1999


Property 4: 53 Bentwood, Aliso Viejo
Asking price: $300,000
Previous sale: $359,000
Reduction: $59,000
Forecasted price: $239,261.44
Based on: $149,000 on 9/19/2000

* - Forecasted price assumes a very generous compounded 7% appreciation rate for each year of ownership, based on a further back past sale that occured before the bubble.