It's one of the biggest investment topics being discussed at the moment...

The news coming from this sector has become so bad, and sentiment has become so negative, that I mentioned to my wife the other evening that perhaps we should look to capitalize on it.

The Mrs. is very bright (that must be where the kids get it from), but one thing she is not is a risk taker. And certainly not when all hell is breaking loose in the markets.

Like many other folks, she'd rather hunker down and wait for things to calm down. I can't blame her. It's tough to have the courage to buy any kind of investment when prices are plummeting almost across the board.

But I theorized that this particular situation was the proverbial "blood in the streets" opportunity. I have a hard time picturing things getting much worse.

And recently, I ran into an acquaintance of mine, who's a lifelong expert in this field (he's in his sixties now) and has made a multimillion-dollar fortune from it. He confirmed my theory, but also provided some valuable other insights that I'm going to share with you today.

Read on to find out what you should do with your money when it comes to the real estate market...

There's Blood, But Is It In The Streets Yet?

While discussing the current housing environment, my contact (let's call him "Mr. Big") said to me: "Marc, I've seen every kind of market, including 17% interest rates. It always bounces back." He then gave me the exact same words that I'd said to my wife the previous evening: "The time to buy is when there's blood in the streets."

Okay. "But is there blood in the streets now?" I asked.

He quickly responded, "No. I think it's going to get worse."

But here's the interesting thing. Without knowing that I write for a newsletter myself, this guy stated: "You know, I see all these newsletter writers saying we're headed into a nasty recession or depression. They're all so negative, so I have to think we're near the bottom now. But we just have a little way to go yet."

(Quick aside: This "blood in the streets" investing theory is just one way that the real pros make money in the stock market. We've talked about it in the Smart Profits Report before because it's an important concept. Xcelerated Profits Report subscribers know exactly what I'm talking about because this is the approach taken with two recent recommendations -- both in a battered sector, but both super-solid, top-ranked firms in little danger of going under and which will likely lead the recovery. For more details on how to invest like a pro, check out this link.)

But back to my story... why should I listen to this guy about real estate, and how can we apply the "blood in the streets" theory to this market?

Mr. Big's One-Way Route To Real Estate Riches -- An Essential Skill In A Market Stuffed With Bad News

The reason I listen to Mr. Big is simple. While exuberant guys like Donald Trump like to brag about their real estate wealth, this guy didn't make and lose his money several times like him. He made his riches just once -- and then grew the money into a nine-figure fortune.

And that kind of track record is just what you need when an ugly market is trying to take wealth from you. Just recently, we've seen yet more awful real estate data...

Mortgage research firm RealtyTrac said January got off to a miserable start, with a +57% surge in foreclosures compared with January 2007. It was also an +8% rise over December’s figures.

The percentage of mortgages that fell into foreclosure across America during the fourth quarter hit a record high of 0.83%, compared with 0.78% during the third quarter, according to the Mortgage Bankers Association.

The delinquency rate (homeowners more than 30 days behind with their monthly payments) is also rising -- up to 5.82% during the fourth quarter -- the highest since 1985.

The Pain Game

Global Insight estimates that 1.4 million homes will go into foreclosure in 2008, helping to sink residential real estate values by $1.2 trillion. Yep... that's trillion.

In addition, Kieran Quin, chairman and CEO of Column Financial, says there are three million subprime adjustable rate mortgages in the market. Two million of them will reset to higher rates this year.

Those figures indicate there is more pain ahead -- and Mr. Big's analysis seems right to me. The question is: What do we do about it?

Your Real Estate "Percocet"

I'm bottom-fishing in the real estate sector now, researching various markets, so I can determine where I'd like to pounce when the opportunity is right.

And how will I know when it's time to put some money to work? One area I'll be keeping a close eye on is homebuilder stocks. Many are very cheap right now, and with stocks being forward-looking mechanisms, if these shares continue to rebound, it could signal that a bottom in real estate is near.

However, if these stocks reverse course and head lower, we may have more time until the streets are crimson enough to look for the ultimate bargain.

Hoping your longs go up and your shorts go down --

About Marc Lichtenfeld

Marc Lichtenfeld is a senior analyst for the Xcelerated Profits Report and Smart Profits Report. After starting out as a trader at Carlin Equities, Marc moved onto the contrarian Avalon Research Group as a senior analyst. He also obtained his NASD Series 86 & 87 licenses (required for all sell-side analysts). At Weiss Research, he co-managed the Real Wealth Portfolio and beat the S&P 500 by +17% over a six month period. Marc also enjoyed a successful period as senior columnist at TheStreet.com.