Intense debate rages over the real estate crisis. At a real estate conference Leslie and I attended last week in Florida, one economist stated we wouldn’t see a turn around until 2012. Others say next year. Everyone has an opinion.

So – how’s a potential home buyer supposed to decide when to buy? Is this a good time or foolish time? Here’s my take, and it all revolves around Washington and politics.

I believe this quarter and the first quarter of 2009 will be good times to buy because Washington is trying mightily to shut down foreclosures. How? Through loan modifications. In our little world of west Ventura County, in some areas almost 80% of active homes for sale are distressed sales, either short sales or REOs (bank owned homes).

I found 834 homes and condos for sale in Oxnard on the MLS. But when you eliminate the short sales and REOs, there were only 141 for sale. 83% are distressed sales. Ventura had 279 actives, but after eliminating distressed listings, there were 156 (44% distressed). Camarillo is faring the best. They had 296 actives; after eliminating the distressed listings, there were 211 (“only” 29% distressed listings).

Washington wants to change that. Last Thursday, at the Senate Banking Committee’s hearings, FDIC chair Sheila Bair stated “Minimizing foreclosures is important to the broader effort to stabilize global financial markets and the U.S. economy… Unnecessary foreclosures perpetuate the cycle of financial distress and risk aversion, thus raising the possibility that home prices could overcorrect on the downside… The FDIC has strongly encouraged loan holders and servicers to adopt systematic approaches to loan modifications that result in affordable loans that are sustainable over the long term (my emphasis).”

Look how the FDIC is putting their words into action with IndyMac. “Specifically, on August 20, the FDIC announced a loan modification program to systematically modify troubled residential loans for borrowers with mortgages owned or serviced by IndyMac Federal. Of the more than 60,000 mortgages serviced by IndyMac Federal that are more than 60 days past due, in bankruptcy, in foreclosure, and otherwise not currently paying, approximately 40,000 are potentially eligible for our loan modification program… We are working with the owners of the remaining mortgages to gain approval to apply the new modification program to those loans as well.”

Countrywide/Bank of America last week announced the beginnings of their loan mod program, initially affecting about 400,000 loans. Here’s a part of what they plan to do:

“Pay Option ARM borrowers accepting a streamlined loan modification option will have the negative amortization feature eliminated from their loan. The mortgage interest rate will be reduced to as low as 2.5%, and the loan will be converted into either a fixed-rate mortgage or a ten-year interest-only loan. For single property owners who currently have no equity in their homes, Countrywide will write-down the principal balance to as low as 95% of the current value of the property to restore an equity position.”

Read that last sentence closely! A homeowner who was “underwater” will now get an instant equity in his/her property!

The Fed has required the 9 largest banks to accept billions of Fed (taxpayer) money. The political pressure is intense on these companies to stop foreclosures. I believe we’ll will see many more pronouncements of lenders stopping foreclosures and doing loan mods to help shore up our housing crisis.

Therefore – if this is true, how do we read the tea leaves? In my opinion, once the current inventory of REO properties is sold, and if Mr. and Mrs. Homeowner (who were on the brink of a short sale or foreclosure) no longer have to sell because they’ve taken advantage of a loan mod program, then inventory will substantially decrease. We won’t see a high volume of “normal” sellers yet. They’re waiting for price points to come back up.

Thus if there’s limited inventory “out there”, and if the perception starts to filter into the public at large that this is the “last train out”, it will definitely have an impact on price points for all levels for real estate.

I believe we’ll start to see this trend in the first and second quarters of 2009. But there are still huge unknowns. Will the economy completely go haywire? Will Wall Street stabilize? These big macro events will need to be played out. But the reduction in foreclosures should completely re-do the thinking about the “housing crisis”.