Avoiding housing market

We were about to invest in a rental, as you have so often recommended, when we read that housing prices have peaked and a total collapse is possible. We are talking about money we cannot afford to lose, not venture capital. Do you advise such investments? Do you expect mortgage rates to drop over the next year? W.P.

Investing in real estate, including a rental house, may not be a part of everyone's investments. It should not involve more than a significant fraction of one's invested funds -- say 25 to 40 percent maximum. Real estate is highly illiquid, thus your other investments should compensate for that lack of liquidity.

Housing prices are declining now in many areas because too few buyers can qualify for loans at today's interest rates, or usury laws have foreclosed the broad market. Interest rates reflect inflation. If inflation subsides next year, I expect interest rates to decline. Already there is the first inkling that short-term interest rates have peaked. At the right time and with favorable financing, rental property can be an attractive investment, but I would go slow for the next few months. I certainly don't expect or foresee a collapse of the real estate market.