By now everyone is aware that the residential real estate market has gone into a severe slump. The tightening of mortgage qualifying guidelines due to the subprime disaster is having a significant impact on home sales in general. Most national home building companies are reporting serious losses for the third quarter totaling tens of millions of dollars, after posting healthy profits for the same period in 2006. Foreclosures are at historically high levels in most states, and most markets. But as is always the case, the most significant losses affect certain markets more than others.

For example, metro Atlanta, Georgia has suffered through one of the highest rates for mortgage fraud. In addition Atlanta is also a market that has seen tremendous investor activity inside I-285, know locally as the perimeter highway. Many neighborhoods inside the city of Atlanta have been so over worked by investors that the supply of available homes and rental properties is drastically exceeding the demand. In these specific areas, rent rates have dropped approximately 25% since 1999, and vacancy rates in some areas are leading to a snowballing foreclosure rate. In these specific neighborhoods, I expect prices to be off more than 50% from the 2005 peak, by the time we reach bottom. In general this would apply to any major market where these same characteristics exist. These areas will take the biggest hit in values. Smart cash buyers will pick up some great deals in these areas about nine months from now. Buy prices at 30 or 40 cents on the dollar will probably be common before it's over.

Many investors in these areas are over financed, most commonly with 80/20 sub prime "piggyback" loans, that allowed for no down payment, but 100% financing simply won't cash flow. As a result many investors are "upside down", which has been partially responsible for the rising foreclosure rates. The real damage has been done in the investor markets by over financing and too much emphasis on no money down acquisitions. These types of areas in any major city are probably the hardest hit areas for falling values and lack of buyers. They will continue to suffer declines for months to come, while inventory slowly balances with demand. These are the areas where the bubble truly existed, due to too much speculation and too little demand. As a general rule, anytime you have supply exceeding demand you have a bubble on your hands. For the past ten years, investor activity has grown at the fastest pace ever as more beginners entered the investing game for the first time. Unfortunately, many of them have made poor decisions when buying these properties and the result has been a drastic increase in investor owned foreclosures.

In suburban Atlanta, over supply is also an issue, but there are still willing buyers, and investor speculation has been much more diluted, which means that values and prices are a bit more stable. But in those areas where over supply and buyer qualifying is a problem, sellers will still feel the pinch. Over all the slump in housing has generally cost sellers about 20% to 25% of their value since 2005's market peak. High foreclosure rates in suburban areas will lead to additional value erosion in those areas as they will continue to aggravate the supply / demand problem.

The rule to remember is that demand always drives a local market. In this case we have tightening credit, which is reducing the number of buyers who can buy. Foreclosures are escalating for several reasons. The most common scenarios driving foreclosures right now are, in no particular order, over-supply of inventory, investor over-financing which causes negative cash flow and consumer spending with home equity lines of credit. Many have borrowed too much against their homes, and cannot now cover their payments; graduated payment mortgages whose low payments are now graduating to higher levels, and fraud which usually leads for foreclosure. Builders have over built, and speculators have added about 20% more volume to the supply of homes for sale. All of this taken together is forcing supplies up at a time when demand is falling due to a lack of liquidity in the mortgage market. These factors will combine to keep housing in a slump until demand finally begins to over take the available supply. This will likely take a year in better areas and two or more years in less desirable areas.

The winners will be smart investors who have been waiting for the right time to buy. In my opinion, the best time to buy may still be a few months down the road. January of 2008 might see sales prices in inner city areas approaching their lowest point in over 7 years. In fact, most areas will see the lowest prices in years by early 2008.

Retail buyers - those in the market for a home to live in should also be patient. Foreclosures have also escalated in upper class neighborhoods, and those prices are also off as much as 20%. It is reasonable to assume that properties which sold for $500,000 in 2004 may soon be selling for $400,000 or even less. One major builder in California is planning to discount an inventory of new homes from their original $300K listing price, down to $150K for an auction in the near future. This is only a preview of things to come for home buyers who can get funding. Patience is the key for investors and home buyers. The best is yet to come on the buying side.

If you are on the selling side and you do not have to sell right now, don't. It is not a good time to sell for most home owners in most areas. There are some exceptions, but those are limited to high-demand / low-supply items such as lake front homes in prime locations, prime coastal homes, etc. Again, supply versus demand is always the issue, right down to the individual property level. If your property is highly desirable for some reason, your price will drop less than average, or it may still go up.

The current market is actually the result of lots of factors that have converged to create the present set of circumstances. As always there is a good side to every market. In this case, it is good to be a buyer and bad to be an over financed seller. The key to long term success as a real estate investor is to always use solid financial and investing principles. Over financing is a recipe for disaster. Keep your costs under your income and you will always be on the right side of the market no matter what happens.***

Author Donna Robinson is the Director of The Real Estate Arena, as well as an expert in real estate market analysis. This is an example of the kind of investing information and education that is available to members of TREA. If you want to learn how to be successful in real estate no matter what the markets may do, you should check out The Real Estate Arena at this link: The Real Estate Arena