There is an awful lot of real estate speculation going on in some markets (Florida, Las Vegas, and Boston are among the the highest spec markets). Those areas might experience a sort of bubble burst because investors are falsely raising values. Once those investors are forced to see it will flood the market which, like supply and demand dictates, will create rapidly dropping prices. That assumes investors start selling about the same time. With increasing interest rates and speculators showing no sign of slowing down I can see a few bubbles occuring. And if property owners with low money down loans are forced to sell and owe more than they get that will result in bad debts for banks which could make the bubble even worse and spread to other areas.

Strangely enough, despite skyrocketing oil prices inflation is slowing. So the Fed might be forced to raise rates, not good for real estate. That is a surprising factor not taken into consideration in previous analysis.

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All you need to know about the energy crisis:
ANWR Exploration Republicans: 91% Supported. Democrats: 86% Opposed.
Coal-to-liquid R's: 90% YES. D's: 78% NO.
Oil Shale Exploration R's: 90% YES. D's: 86% NO.
Outer Continental Shelf Exploration R's: 81% YES. D's: 83% NO.
Increased Refinery Capacity R's: 97% YES. D's: 96% NO

SUMMARY: 91% of House Republicans have historically voted to increase the production of America’s own oil and gas. 86% of House Democrats have historically voted against.

bubbles burst will not be normal home owners. By "normal" I mean you buy a house and plan to live in it for quite some time, whilst making principle and interest payments. Those folks will be fine even if prices fall. They will, after all, go back up. Speculators will suffer and that's fine. If you are going to play you may have to pay.

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I wasn't born with enough middle fingers.

The first wave of investors will sell before the proprties stop showing sizeable appreciation. Someone down the line is going to buy a property at a price the market cannot support. Dpnt be the last to buy the property.

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I have something to hide.

except for those who have to sell their homes for various reasons such as moving, retirement, or those who lose their jobs (or other financial reasons). As long as this bubble doesn't coincide with a recession then it will be mostly the speculators who are hurt. As you said, part of the risk. And it will only be certain areas geographically.

__________________
All you need to know about the energy crisis:
ANWR Exploration Republicans: 91% Supported. Democrats: 86% Opposed.
Coal-to-liquid R's: 90% YES. D's: 78% NO.
Oil Shale Exploration R's: 90% YES. D's: 86% NO.
Outer Continental Shelf Exploration R's: 81% YES. D's: 83% NO.
Increased Refinery Capacity R's: 97% YES. D's: 96% NO

SUMMARY: 91% of House Republicans have historically voted to increase the production of America’s own oil and gas. 86% of House Democrats have historically voted against.

a few "normal" home buyers will run into issues due to the circumstances you cited. Some may be OK depending on how much they own, but if you are in a bubble city I can see how you may get hurt if you are forced to move for whatever reason.

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I wasn't born with enough middle fingers.

The banks treat it as a sale which increases there profits.

They Credit Sales and Debit Debtors so everything looks rosy.
Till the bad debts hit.
But heh, thats the next managers problem.

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"Better to die on you feet than live on your knees" - Emilio Zapata

What typically drives up the cost of real estate is too many dollars chasing after too few properties. REITS have become, for many investors, their choice of investment. REITS are essentially mutual funds that purchase, manage and sell commercial properties. Depending on the REIT and the philosophy of the company managing the REIT, substantial prices are paid for properties even though the property's net return is somewhat conservative.

Investors have withdrawn from the stock market, in some measure, because the rates of return not only carry substantial risk, but also the market has under-performed in comparison to the real estate market. The problem with REITS is because they have so much capital, due to people investing in them, they are almost compelled to invest that capital into real estate. Their investments are forecasted over a 20-year period, and are based on somewhat variable and uncertain conditions. For example, they may forecast a 3% per year increase in annual rents. Running that increase in rents over a 20 year period results in a very high value of the property. Obviously, there is no guarantee they will be able to sustain a 3% increase in rents. Their primary tenant may go belly-up, merge, or be purchased by another company. Suddenly, this once class A tenant vacates 90% of an office building, and the owner has a real problem.

When Compaq merged with Hewlett Packard, they vacated hundreds of thousands of square feet of office space in the Houston area they once leased. In many cases, they're still liable for the rent. But retrofitting that space for a new tenant is very expensive, and there’s no way the owner can rent the space commensurate with the rates they were getting from Compaq.

Low interest rates and a stagnant stock market have contributed in very large measure to a rising market in real estate. Again, too many dollars being invested in REITS chasing after to few properties have resulted in spiraling prices for commercial properties.

It is likely real estate values won't crash commensurate with the way they did post Reagan tax reforms, pre S&L reforms and post oil glut as they did in the early and mid 80's. Properties during this time hit historical lows. S&L's took back huge portfolios of properties on foreclosure, and sold them at rock bottom prices. Nevertheless, it seems unlikely (to me anyway) that REITS cannot maintain paying these very high prices for real estate with the expectation they will return a profit in excess of the profits to be made by investing in the stock market. There's just so much profit a real estate investment can make, outside normal appreciation.

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"Victory at all costs, victory in spite of all terror, victory however long and hard the road may be; for without victory, there is no survival."
Winston Churchill