There is no doubt that we are in a changing real estate market. The predictions of a disaster in the bursting of the bubble, however, have nothing to do with the actual condition of the real estate market. The prophesiers of doom and the creation of anxiety on the part of investors are a fabrication based on not having clear understandings of the forces that affect the market.

For example, the babyboomers are the ones that made the three-bedroom, two- bath home the standard of the real estate market. As this group now enters a new phase in their lives, with empty nests, with thinking of retirement and travel, with tremendous equity in their existing homes, the picture changes to that of the new standard being in two-bedroom, two-bath condos. And thus, a new hot market is emerging in condo-conversions that will remain the focus for the next 10 years.

In selling their homes, the babyboomers will realize up to $500,000 in tax-free monies and invest in their new condos. And with the US population hitting the 300 million mark, there is no scarcity of people to buy homes in the future.

(As an expert on Wall Street, a real estate investor specializing in multi-unit properties and a professional developer, Greg Warr brings an exclusive knowledge and understanding to this area that no one else has and can discuss the major factors that will affect real estate investing for the years to come.)

Statement from Greg: “I think that this overall sentiment on real estate that the bubble is bursting and investors should get out is wrong and that, in fact, right now is the best opportunity for real estate investors in the last 15 years.”

Q1. With the stock market rallying and housing starts down nearly 20%, what do you see ahead for the real estate market?

A1. In actual fact, the housing starts statistic is a lagging indicator from about 6 months ago and, with interest rates down, now is a great opportunity for real estate investors. And with the Fed raising interest rates, this will continue the slow-down, but remember that these raises are only for the short term. You have to look at 30-year bond rates where mortgage rates are tied and you will see that these rates haven’t changed in many years.

Q2. But can real estate continue to go up forever?

A2. No, of course not, there will be a slow-down eventually, but not for 18 to 24 months, making right now a great opportunity for both home buyers and investors. The threat of changing interest rates is making people panic and when people panic there is always more opportunity for those of us who don’t do so. This is a great time to lock in interest rates. You should look for properties that have been on the market for a while and be ready to make deals quickly because others are panicking

Wall Street is going to hedge the money they lend and keep mortgages low. The next 6 to 9 months will be a great time for real estate investment. We have an inverted yield curve with short term funds going up and all those lenders that were trying to do 10-year mortgages facing this fact, while 30-year rates have stayed the same.

Q3. If you think real estate is coming down in 18-24 months, shouldn’t we be getting into stocks?

A3. As both a professional trader and a real estate investor, I can see that we currently have things backwards in that we are being told to hold stocks for the long term and people are flipping real estate, buying and selling short term. Stocks work in an efficient market and should be short term and since real estate has a built-in appreciation factor, it should be held long term.

When people are buying houses, rents go down. In 18 months, when the bubble does burst, people won’t be able to buy and will rent instead, with rents therefore going up. This is why real estate is a good long term investment.

Q4. We talked about stocks. What do you think about inflation?

A4. The run-up in fuel prices has been typical of the summer months, though it has been blown out of proportion. Although fuel is still relatively high, with oil prices coming down, building costs will come down which will increase building and housing starts, resulting in more employment and more investment. Inflation should stay at bay.

Q. The Fed came out today (9-25-06) and said that they foresee a big slump in the housing market; what’s your take on the situation?

A. To me, and any other good investor this means opportunity.

Q. You’re saying the Fed’s wrong?

A. No. In their opinion they might be right. They’ve been lowering interest rates with the hopes of slowing down the housing market and they’re getting to finally see some numbers that support their move, such as existing home sales and inventories. Investors and the Fed, though, will look at things differently.

Q. The numbers you’re talking about are by the NAR, saying that existing homes sales slumped .5 percent to 6.3 million units, inventories up 1.5% and average prices fell 1.7%; these seem pretty extreme.

A. They are and as a successful stock and real estate speculator I know as other speculators know: when you see these extremes you need to move in and start buying. The other factor that’s missing from this equation is that interest rates still remain low. Even with the Fed’s attempt to force interest rates up they were only really able to do two things: get the overnight rate up and scare the housing market.
In fact, the 10-year note was off this morning as it has been since July as is the 30-year; this is where the mortgage market’s going to be based. Also, the mortgage industry needs to sell mortgages, that’s their product and the good ones remain aggressive such as keeping their spreads tight.

Q. Speaking of mortgages, reports have also come out that say investors with ARM’s (adjustable rate mortgages) are defaulting at a higher rate in 2005 than they were in 2004.

A. ARM’s are a tool and like any other tool, if you don’t know how to use it you’ll
get cut. The mortgage industry calculates in a default rate and like any other
mortgage you’re going to have defaults. I don’t see any numbers to show that
ARM default is outpacing any other mortgage default either today or in past
default periods.

But just like when day traders moved into the markets in swarms in 2000, you’re going to have novice investors using advanced tools and they are going to get burnt.

All this being said, real estate, at least for good investors and astute home buyers,is still a great investment. With housing coming off in some areas investors can get a property at a good deal and lock in a low interest rate, correlate that to the financial markets and it’s like buying an inverted TED spread (T-bill-Eurodollar
spread); a great opportunity. The average investor is typically wrong and when
they panic it’s time for the good investor to move in and pick up the slack. And
oddly enough in some big markets on the east and west coast housing prices are
actually up.

Q. That is the big question: With all this negativity, why haven’t housing prices tanked? They’ve come down 1.7% as reported by the NAR but no one seems to know why they haven’t come down more. What’s your opinion?

A.That’s simple. It’s a smoke and mirrors type of thing. A person goes to sell their house because of all this negative news in the markets, they even feel that they need to unload it fast so they drop the price. When they do this they get buyers going to their local mortgage broker and they see that interest rates, beyond what they’ve been told, are actually still low and they can afford to buy more house than they thought. When you get this occurring to a few buyers they will drive the price up from that discounted point; it’s competition. This is why there appears to conflicting data, this is why inventories are up but so are housing prices, you just need to get buyers to the mortgage brokers office to see this and it’s just taking a little longer than a year ago. Housing prices are still up there and will remain to be but it’s just taking a little longer to sell a property.