When will the real estate market turn around?

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I was at a 'seminar' offered by a realtor in San Jose, California last night. I would say that he was very knowledgable but of course he had an agenda (he was looking for buyers ;-) By the way, the title of the meeting was "Buy Homes at Shameful Prices". You can read more about it here: http://www.svreo.com/

Let me list his main points for you.

1. Inflation go up and you have to buy Real Estate
   
   With some graphics and arguments he showed that inflation will go up. He then explained why leverage in real estate works very well especially with inflation, how the mortgage gets cheaper even on an Interest-Only loan. (No, he did not specifically recommend IO-loans)
   I agree that buying assets is a good idea to protect you from inflation. Of course real estate is not your only choice, but a good one. Especially if you buy a personal primary residence.
   
   
   
2. Prime areas will be rather safe
   
   He had created graphs per zip code in the south bay area and showed the inventory vs median price over the past 10 years. The 'prime' zip codes Cupertino, Saratoga... have now approx 2 months inventory. On the other end, the worst areas have - I forgot - 35 ? months of inventory.
   The graphics showed how these zip codes behaved when the dot com bubble burst and later, after 9/11. Indeed inventory did go up in all zip codes but the prime areas suffered only very little .. well you get the picture.. he tried to make a case that buying in a prime area is rather safe.
   
   It would have been interesting to see these graphs start in 1989 instead of 1998. That way we would've covered the last big downturn, not just the two small blips in 2000 and 2001.
   
   
   
3. Focus on bank owned properties (Real Estate Owned = REO)
   
   This realtor was focusing on REOs. He recommended against auctions - supposedly because there is no equity or the loan amount is even higher than the current property value, and possibly also because at auctions, there is no realtor involved = no commission for him. Obviously there are hardly any REOs in the desirable areas. And if there is one, then you will pay 90% of market value, no less. It seemed that most of the people were first time buyers and they would probably be happy with the undesirable areas (East San Jose, South San Jose) where you can submit offers for $380k on something that would've sold for $600k in 2005. He admitted that buying as a rental still is not the best choice unless you put down over 20%.
   I personally prefer to buy a pre-foreclosure. It is my experience that the REOs are the least desirable properties.
   
   
   
4. The subprime mess will be over in 08/2008
   
   I think this was a bold statement, but as a sales guy he has to be bold. And he had some arguments. This would apply only to South Bay, not nationwide. His explanation was that 99% of all subprime borrowers have 2/38 loans. Meaning 2 years teaser rate, 38 years higher rate. I did not know that. I thought the majority had maybe 1/29, or 2/28 (28 not 38!) or 3/27 or even 5/25.. anyway, I just had to believe that. 99% of all subprime loans reset after 2 years. Those loans originated in 2005, and some as late as in 2006. Those will reset in 2008 then. Further he explains that the banks will 'stop the foreclosure train cold in its tracks'. I really liked this graphical statement. I wish it was true ;-) The realtor explained that banks will re-negotiate. Coincidentally, yesterday on the day of the presentation, Countrywide Financial made big news that it will rewrite your loan if your loan balance is higher than what the property is worth AND you cannot afford the payments. So he may be right about that. I talked to him afterwards in private about 'how about those overseas investors who bought the securities?' and he dismissed this as a non-valid concern. They all will lose money either way, rather cut the losses and get less interest than have a non-performing asset. He may very well be right.
   
   He did not specifically say that the market will go back up in 08/2008 but that the worst will be over. Also note that he stated this only for the South Bay area. Not for Central Valley. Not for Southern California etc etc.
   
   He stated that 'the bottom will come much faster than most people think' and of course the reasonable conclusion is 'to buy now'. Big slide in his presentation:
   
   Do not buy to wait real estate.
   Buy real estate and wait.
   
   Again, this man knows what he is saying and this little line certainly has some truth.

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