Monthly home sales, median price & demand for Southwest California cities.

1. I‘ve just returned from our National Association of Realtors® year-end meetings. A
good part of my meetings included a recap of our legislative successes during the past
year (there were many) as well as a look forward to what the next cycle will bring. Given
that our meetings started Nov. 3, the repercussions from the election continued to
shower down on us throughout the week.
As I’ve noted before, one of my highlights at these meetings is the opportunity to hear
from Dr. Lawrence Yun, our Chief Economist. This years Dr. Yun entitled his
presentation ‘Recovery to Normalcy’ wherein he asked the question – “are we returning
to a virtuous or a vicious cycle?” His conclusion? Could go either way.
I’ve included a number of Dr. Yun’s slides in this report and you can hear him give his
report here: Dr. Yun – Residential Housing Report or download the full slideshow here:
Recovery to Normalcy.
So what’s happening in the market? Well, our local market is being impacted by the
same factors affecting the national market at this point – uncertainty & a lack of
confidence. Consumer confidence is low based on the continuing high unemployment
numbers and the often mixed or confusing signals coming out of Washington and
Sacramento. In spite of most major banks having a surplus of money, they’re not
lending it out. In spite of high Wall Street and corporate profitability, they’re not hiring
and they’re spending very frugally. As a result, main street is doing the same thing.
The foreclosure fiasco is also playing a role in this. Foreclosure filings continued almost
unabated following the announced moratoriums but foreclosure sales dropped
appreciably as lenders held off sales pending some resolution of the issue. Consumer
confidence, already lagging due to ongoing problems with short sales, took another hit
as prospective buyers were forced to consider a scenario wherein a previous owner
might one day show up at their door demanding return of the property bought at
auction. Uncertainty. Want to hear what the Congressional Oversight Panel has to say?
Most believe that this will not substantively alter the market but it will further delay
foreclosures and extend the time until we hit a definitive bottom. That’s already
expected to extend well into 2012 so any further delays just compound that. A
sustainable price recovery can’t occur until we breach bottom & increase employment.
What else will impact the market? The budget deficit. First it brings into play such
major financial institutions as the mortgage interest deduction – a tradition dating back
over 100 years. That’s causing major uncertainty in many circles right now. But even if
no adjustment is made to that equation (as most rational people believe), the budget
deficit will ultimately and inexorably push interest rates higher.
When questioned on a successful investment strategy for the years ahead – bonds,
stocks, gold, etc., one Deputy Fed Director stated – “I’m buying American land – they’re
not making anymore.” As you might imagine, he was warmly applauded.

2. 250
Monthly Unit Sales
Single Family Only
200
150
100
50
0
3/09 6/09 9/09 12/09 3/10 6/10 9/10
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake
You’ll note a marked difference in unit sales trends year to year. In 2009 our
market hit a trough in June and embarked on a fairly steady, if uneven, climb
in most Southwest California markets. That climb peaked in June of 2010
and we’ve been in a general decline since then.
This activity coincided with the first-time homebuyer tax credit which is
largely credited with reversing the decline in sales and stabilizing market
prices. That burst of activity was instrumental in reducing inventory levels
from 20 month+ highs to as little as 2 months in our area.
The vertical bars show year-over-year volumes which increased, in some cases
substantially, for all but one of our local cities. Simply follow the line across
from 10/09 to the current month to see how sales in your city have increased
during the past 12 months.
But also notice the trend line, which is heading down for unit sales for the
first time in 3 years. Whereas last year our 3rd quarter sales were strong, this
year they are following a more normal year-end trajectory. We’ll have to see
where they go in 2011.

3. $350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
3/09 6/09 9/09 12/09 3/10 6/10 9/10
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake
Median prices also took a little dip in October in 5 of 6 cities. Why? Declining
sales volume, less competition for properties, fewer clean REO’s, more
problematic short sales and a lack of sales over $700,000. For the most part,
if you look at where we were a year ago, we’re within a few dollars up or down
today. That’s consistency at least, and given that the line has been virtually
flat for almost two years now, hopefully goes beyond consistency to stability.
We’ll have to see what happens when the banks start pushing REO’s back out
and interest rates start to rise. While few experts predict a double-dip in
prices, flagging demand could signal a little weakness if inventory jumps too
much. Our consumption rate is not what it was a few months ago. It may be
pent-up, or it may be exhausted.
But don’t read too much into a one month swing – we’ve had them all along. If
you’ve ever fished you see the similarity when they refer to this median price
performance as ‘dragging along a rocky bottom’. Up one month, down the
next. The trend line remains slightly upbeat and the forecast has us avoiding
a double dip in pricing. There are several variables that could impact this
either way so let’s just get through the end of this year and see where we go
from there.

4. 6
700 7
1
600
4 4
8 7
1 2
500
3
400 3 2
0 5
0 2
300 4
1 1
1 1 1
8 9
1 7 6
6 5 1
200 2 1 2 6 1 1
0 0 0
7 0
3 5 3 7 6 6 7 7 6
5 5 5 5 5 6 4 5
1 6 9 1 3 2 4 2 5 2
100 5 5 2 3 7
3 7 2 3 4 6
. . . . . .
3 5
9 9 5 9 5 9
0
On Market Pending Closed (Demand) Days on Market % Selling Months Supply
(Supply)
Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar
Tracking demand, the number of homes for sale is declining. That’s not
unusual for year-end when many standard sales hold their homes off the
market through the holidays. This is exacerbated this year because of the
REO moratorium. As I mentioned before, banks are still filing notices of
default but they are holding off taking properties back even more so than
before. Many have either pulled their inventory from the market or are holding
off further sales until the ‘robo-signer’ issue is put to rest. This is simply a
delay that will result in more homes hitting the market sometime next year.
We can only hope that there are still buyers around when they finally release
them.
Homes are also staying on the market a little longer and the percent selling is
dropping – a least partially due to the ongoing failure rate by nearly 70% of
attempted short sales.
October Market Activity by Sales Type
Active Closed Failed In Escrow % Activity
Bank Owned 22% 38% 8% 36% 26%
Short Sales 51% 31% 68% 45% 48%
Standard Sales 28% 31% 24% 20% 26%
Other 1% 1% 2% 1% 1%

5. Total Payroll Jobs in Michigan
In thousands
5000
4500
4000
3500
Slides courtesy of NAR Research: Dr. Lawrence Yun Source: BLS
Total Payroll Jobs in Washington D.C. Metro
In thousands
2600
2400
2200
(Source: BLS)
2000
Want to go where employment opportunities abound? Then head for our
nations Capitol. If you live and work in DC you don’t see it, you don’t feel it
and that’s part of the problem. More people are working in DC for higher
wages than ever before and they have no concept of, and little empathy for,
what’s happening outside their little corner of the world.

6. Existing Home Sales (Closings)
Tax Credit Impact
Existing-Home Sales
In million units
Nationwide housing sales and prices have over-corrected according to historical trends.
Housing sales are roughly what they were in 2000 yet we have 30 million more people living
here. Dr. Yun points to this ‘pent-up demand’ as a potential driver of another boom/bust
(vicious) cycle without adequate safeguards. These include restructuring Fannie & Freddie
as well as only a moderate relaxing of current overly-stringent credit requirements.

7. Compelling Affordability
Monthly Mortgage to buy a Median Priced Home
2005 Q2 2010 Q2
San Diego $ 2,833 $ 1,564
Miami $ 1,726 $ 853
Milwaukee $ 1,014 $ 797
Kansas City $ 735 $ 600
Economists Expect Price Increases in Upcoming Years
• Macromarkets, a firm associated with Professor
Robert Shiller, (Case-Shiller Housing Index) surveys
about 100 economists about home price outlook.
• The consensus forecast as of August 2010 (which can
be found from Macromarkets or from news media
stories such as Wall Street Journal) are for
• 0.78% price increase in 2011
• 2.43% price increase in 2012
• 3.20% price increase in 2013
• 3.69% price increase in 2014
• No forecast for 2015 and beyond

8. Baseline Outlook
• Moderate GDP Expansion 2 to 2.5% in the next
2 years (historical average is 3%)
• 1.5 million annual job additions in the next 2
years
• Unemployment rate of 8% in 2012 … and
normal 6% in 2015
• Mortgage Rates rising to 5.0% in 2011 and
5.9% in 2012
• People worried about buying at the absolute market price
bottom could miss out on low rates
• Home values – no meaningful change in the
national price in the next 2 years
• Home sales to be choppy, but overall
improving, in line with job growth … 5.2
million in 2011 (up from 4.8 m in 2010, but
same as in 2000)
• Affordability conditions are too compelling
• There may be some pent-up demand. 30 million additional
people compared to 2000, but same number of home sales
as in 2000.