There is a formula that applies to almost everything and it is called reversion to the mean, also regression to the mean. Everything comes back to its average whether it has gone too high or too low.

It applies to the number of lemmings, the rise and fall in grasshopper population, the length of time for the success of a particular type of government, the rise and fall of the stock market and the appreciation and depreciation of home prices. And just about everything.

For the past 10 year we have seen home prices go up to many time their original value. In recent months the increase has slowed or stopped and in many even declined. According to a regression to the mean homes could lose 40% to 50% of current value in order to return to an average true value.

That won’t mean anything to the person who is planning to live in that house for the next 10 years or longer, but it can mean bankruptcy to those playing the real estate investment game. Many homes will appear on the market as foreclosures. The foreclosure rate has picked up dramatically. Those who think the market is “cheap” might buy only to find the market has not bottomed. That same home might appear on a foreclosure list several times before the bottom is found.

One of the other truism of investing is that prices overshoot their mark both upside and down side. A very good recent example was the break in the NASDAQ market that lost 78% of its value. That was too far and it has since bounced back somewhat.

Most investors do not realize that the components of the NASDAQ today are different from those of the year 2000. Many stock companies have gone out of business and other listed companies have been delisted.

If a downward trend takes hold in real estate this same action will apply. Homes that once were $100,000 and currently have an asking price of $300,000 will slowly find their way back to and below the original selling price. This could take several years as it did in the 1930s.

Many of these will appear on the foreclosure list and seem to be bargains at the time. The really smart real estate buyer will wait and wait and wait until that $300,000 house has come down to $50,000. It can happen and has happened in the past as true value is overshot from over value to under value of the average. Now that home is a true investment that can be rented with a positive cash flow.

All real estate investors know that no property should be bought unless it produces income over and above all costs.

Just because a property is in foreclosure does not mean it is cheap.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Copyright 2006 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"