Today's housing bubble is nothing new. Even though I am a relatively young 47 years old, I have lived through two bubbles before this one.

In 1987 my wife and I bought our first house in an upscale Los Angeles suburb. That house doubled in value over about two and a half years. I borrowed against it and bought and sold foreclosure houses and multi family property.

People would borrow on a house and it would go up. They would keep the house and borrow on it, then use that money to buy still another house. As an ultimate example of stupidity, an acquaintance was developing two or three Brentwood condos and had $900,000 invested in each one, hoping to sell them for $950,000.

I could see things turning downwards. I was buying foreclosure properties from homeowners and prices were moving down but nobody had told these sellers that. They refused to see the truth. Since I found it hard to sell what I had bought, and hard to buy for a reasonable price, I decided it was time to exit the game.

At that point I had a lot of debt and no income. And our little house was too small for our new babies and I felt stuck. Fortunately, I researched the market and discovered the short sale and was able to get out. My income was so low and I had a lot of debts so I was the perfect hardship case. My luck turned quite rapidly, in an almost unbelievable way familar only on occasion to the true entrepreneur and we moved into a big and beautiful house overlooking the San Fernando valley, in Tarzana, that we bought on a 3% down payment without assuming a loan and with no qualifying.

We were able to turn the awful market to our advantage as buyers rather than sellers.

So that was my first bubble experience. My second was also most interesting.

The dot com bubble and me

I started working with my brother's company and became a minority partner in the late 1990s. I was still living in Tarzana. We noticed a fantastic opportunity in Internet advertising and we began building a new technology to take advantage of our vision. In 1999 we raised some venture capital from Silicon Valley investors who were amazing people (and still are). I owe them a great deal.

Companies were getting investment right and left. Some were going public and their stock prices were doubling and tripling. Some companies started up, had no revenue, and were sold for hundreds of millions of dollars. I was doing a deal with one such company and Yahoo bought it for not millions, not hundreds of millions, but billions of dollars (in stock).

I will never forget those good times we had, the going public dinner (although we never did go public) and the aftermath. The venture capital investors were throwing money at us and we had to try to keep up.

It was evident that something had to give. And after we raised more money, a few weeks later, the dam collapsed. There was an outpouring onto the market and many stocks sunk. Valuations plummeted. Advertising was the first casualty as it always is.

The stock market fell and fell, and especially tech stocks.

And that was the end of my second bubble.

But the fascinating thing is the connection between the second bubble and the third, the recent real estate bubble we are all feeling pop right now.

Why the real estate bubble?

Real estate valuations are a functionn in the long term of rents. Even house prices respond over the long haul to rents. So if rents rise, houses rise. If rents fall, house prices fall. Of course, with inflation, there is an upward bias to house prices but it isn't any greater than inflation over the long haul.

However, in the short term, real estate prices are a function of credit. So if credit is very easy, then prices will climb. People buy real estate based upon monthly payments. If interest rates are low, and credit is easy, people will buy real estate. More buyers drives prices up. Easy credit encourages people to refinance to pull cash out and then invest the cash, or buy stuff with it.

What people don't understand is that the real estate bubble happened as deliberate US government policy. The government loves asset inflation. When stocks were plummeting, Federal Reserve Chairman Alan Greenspan dropped interest rates to practically nothing. And poured out money to the banks.

The Japanese cooperated. As the world's great savers, the Japanese have huge influence over interest rates and the availability of easy cash. They poured money into the world economy.

And the Chinese got into the game. The US had (and has) a huge trade deficit. The Chinese would take our US dollars and buy US debt with them. They didn't want to sell those dollars. They wanted to hold onto them. In order to keep the dollar from falling against their own currency. It's a bit complicated. But the point is that there was a huge market of investors with cash to buy mortgages.

So the US bankers and Wall Street firms supplied the mortgages. Mortgage debt paid better than US treasury debt. There was a mad rush to buy US mortgage debts and that meant that mortgage money was never easier to get.

That is what created the real estate bubble. The US government, in order to avoid a deflationary depression after the tech boom crash.

And all bubbles pop. So this one is popping. And it ain't over.

So what should you do in 2008?

I saw the handwriting on the wall and got out of all real estate in 2005. I recommend people get out of real estate unless they are really in it for the long haul. I do expect it to come back in dollar terms. But I expect fearsome inflation to take hold in the US and world economy and we have to protect ourselves.

Having money put away is crucial. You should have enough money to pay six months to one year of living expenses.

If you have high debt levels, now is a good time to get out of debt. Restructure your debts so you can live, pay them off at least partially over time, and put money into savings.

Instead of just holding money in cash I recommend holding it in the form of gold coins and silver coins that you store safely in a bank safe deposit box. Having some cash is a good idea but you must realize that cash is worth less and less.

The US government policy is to make cash worth less and less. Why? Because the US government is dependent upon huge levels of debt. And when you owe money, you want to pay it back in cheaper dollars. Eventually, the dollars that are paid back are worth 5% of the dollars that were borrowed. And thus the US government and all debtors escape their debts. Technically they pay back the money. It's just that the money isn't worth anything anymore.

Remember the effects of inflation

If you want to build up savings, you will find yourself losing ground if you get 4% or 5% from a savings account or bond. Plus you will pay income tax on this phony income. What you need to do is invest your money in tangibles. Gold, silver, oil, agricultural commodities. These will have their ups and downs and of all those investments, the safest will be gold or silver. But what you want to do is build up a nestegg.

If you hold onto real estate, you can end up okay as you pay back the mortgage with cheaper dollars. But in real terms, that is, with inflation taken into account, I expect real estate to get cheaper and cheaper. Remember, real estate valuations in the short run are fueled by easy credit. And all the things that created the bubble in real estate are now gone. So do not expect a quick return of real estate valuations to their former levels. Prices may roll back to 2005, then 2004, then 2003, then 2002 and 2001. In some areas they may take many years to come back. And when they do, the money then will be worth much less than the money now, so a $300,000 house in five years will be like a $150,000 house is today.

You just have to realize that inflation is quite high contrary to what the government tells you. And inflation will cause you to lose your assets and lose everything unless you understand its effects.

I do think owning a house is a wise investment due to the tax advantages and the fact that you can pay in cheaper and cheaper dollars. However, owning a house also is a huge money pit. And with prices falling, it is not wise unless you are going to live there for a long time. If you are going to sell in a few years, then you want to try to sell now rather than wait.

And there is one more huge issue with owning a house that is going to be the issue of 2008 and 2009…

Property taxes will be the next battleground

In many areas, property taxes are $500 per month. If you own your house free and clear as about one third of American homeowners do, you may still find that property taxes make it impossible to afford homeownership.

If you rent, you still have to bear these taxes because they are passed through by the landlord. But for temporary stretches of time, due to increased supply of rental units, you may do much better renting than owning as landlords find they are unable to pass along the full effects of property taxes.

Expect local governments to moan and complain about tax revenues. They are used to being fat and happy because they benefited from higher home prices and the resultant increases property tax collections. Now that revenues are falling, homeowners are very concerned about high taxes and local governments are upset their incomes are falling.

This is what happened in California and the result was Proposition 13. I expect more taxpayer rebellions to take place in 2008 and 2009. You really don't own anything in this world. You may have a claim on a house but even if it is free and clear, your local government has a greater claim. Your property taxes can take 1/4 or 1/3 of your takehome income even if you have no mortgage at all.

So that's it in a nutshell. Consider selling your house if you think you will want to move in the next few years. Get out of debt by negotiating with your creditors. Build a savings account and put the money into gold and silver safely stored in your bank safe deposit box. As always, I could be completely wrong so don't listen to me and don't take my advice — do what you think is best because I like everyone else is probably wrong.

And have a safe and prosperous 2008.

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