The Return of Real EstateFortune Magazine headlined their April issue ‘The Return of Real Estate’. ‘Forget stocks. Don’t beton gold. After four years of plunging home prices, the most attractive asset class in America isHousing. It’s time to buy again.’

The article points out it is necessary to ‘keep your eyes firmly on the fundamentals’ and bases agood part of its recommendation on information provided by Metrostudy, a company that sends out500 inspectors to more than 45,000 subdivisions covering around 65% of the U.S. housing market.CEO Mike Castleman describes himself as a ‘dirt road economist, one who sees what’s happening onthe ground.’ I love that. We need more ‘dirt road’ economist and fewer ‘blue sky’ ones.

According to the article, the market is poised for two primary reasons – 1) the dramatic andunprecedented decline in prices since 2006, averaging 30% nationwide (and as high as 55% in ourregion) and 2) the massive decline in new home building – less than 25% of the 2006 peaknationwide and only about 12% of its former volume in our region. Hmmm, sounds a lot like whatI’ve been saying for awhile.

As a result, many markets, our own included, have become anywhere from 11% to 33% cheaper toown than to rent. And while there are still downsides ahead, i.e. continuing foreclosures, tighterregulatory climate, difficulty in obtaining loans, lack of consumer confidence; these factors shouldlargely mitigate within another couple years. That pent-up demand will come flowing back into themarket and there will be no buffer of new home inventory to absorb it. Castleman says ‘it takes threeyears from the time you mate a bull until you get a calf to market. Housing’s about the same way.From acquisition to permitting to ramping up labor to move-in ready – the demand will be here longbefore new houses will be.’

The article points out that non-distressed markets that suffered fewer foreclosures are ready tolaunch right now. San Diego, San Francisco, Indianapolis and virtually all of Texas, for example.But even in distressed markets the outlook is brightening – again due to reduced inventory,reasonably strong demand and a strengthening jobs picture. Even with anticipated foreclosurescontinuing at the 1 million level for the next 3 years, nearly 2/3 of them are being gobbled up byinvestors who love this market, so the continuing impact on inventory will be much reduced.

If there is a downside in the article it’s the notation that ‘some foreclosure markets won’t rebound foryears because they’re both vastly overbuilt and far from big job centers. A prime example isCalifornia’s Inland Empire, a real estate disaster zone 80 miles east of Los Angeles.’ Phew! Thankheaven we’re Southwest California and much closer to San Diego than that IE disaster zone.

Looking at our local market this month, our sales of single family residential homes took a nicebounce in most cities in March. We’re still off last years record sales pace by anywhere from 11% inTemecula to 18% in Murrieta and 22% in Lake Elsinore for the quarter. Last year we also had a verystrong 2nd quarter which we may not see this this year even though 1st quarter trended stronglyupward. If we can avoid sales falling off a cliff like they did last June through November, we’ll stillfinish the year with strong numbers.

Prices continued to hold steady entering their 3rd year of stability. Temecula’s prices were up 8%over 2009, Murrieta, Wildomar & Lake Elsinore were almost dead even over 12 and 24 months.Canyon Lake was down 13% from last year but up 9% over Q1 2009 and Menifee showed a 10%decline over 2 years – again mostly due to the incorporation of Sun City into their housing mix, thesame reason their unit sales were up 24% over Q1 2010.

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Southwest California1st Quarter Median Price Chart

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Chart 1:Unit sales of single family homes got a nice bounce in March in Temecula, Murrieta andLake Elsinore, smaller increases in Wildomar and Canyon Lake and about even in Menifee.That marked two months of increasing sales following the January dip showing a positivetrend for our 1st quarter. Of the two prior years, in 2009 we had a weak 1st half followed bya strong 2nd, whereas 2010 had a great 1st half but a weak 2nd.

Why was that? The impact of the federal first time homebuyer program – which removedsome 1.5 million homes from the market nationwide and helped prices stabilize from theirfree-fall. While the program may well have borrowed from future sales, that impact hasworn off now and our demand is returning to a more sustainable pace. If we can maintainthis sales rate through yearend we will still post strong sales numbers for 2011. Just lookat the yellow trendline which marks a steady growth pattern from January of 2009predicated on our regional sales.

Chart 2:The trendline for median price is also up but so slightly you almost have to look at thepage from the side to discern the variation. Canyon Lake posted the strongest increase of9% Q1 ‘09 to Q1 ‘11 followed by Temecula with an 8% bump over ‘09 and 5% over ‘10.Murrieta median was up 2% over ‘10 but virtually even with ‘09 while Lake Elsinore andWildomar showed declines of 2% and 1% over 24 months respectively. Menifee posts a 4%drop from ‘10 and 10% from ‘09 only because Menifee volumes now include Sun City sales.Sun City core properties traditionally sell anywhere from ½ to 2/3 the price of comparableMenifee homes.

Charts 3 & 4:These are the charts that suck the life out of you if you do the math. While strong salesnumbers and stable prices are all well and good, it’s the gap between good and great thattells the tale for our city coffers.

I’ve taken the liberty of running some of the numbers for you. If you’re squeamish you canstop reading here ( I know some of you stopped back on page 1). For example, in 2005Temecula sold 363 homes during the 1st quarter at a median price of $462,732 for a totalsales volume of $167,971,715. This year they sold 394 homes @ $300,124 droppingrevenue to $118,248,856, a decline of $49,722,859 or 30%. Isn’t this fun? Ehhh, not somuch.

Particularly hard hit are the smaller cities with revenue drops of anywhere from 55% tonearly 60% of anticipated (and probably budgeted) revenue. And while the impact fromthese declining sales is significant, annual tax revenue from the decimated property valuesis far more devastating.

If there’s any good news to be gleaned from this, it’s that with stable prices, Larry Wardprobably won’t need to make further wholesale reductions to property values this year.From here on out, values could actually start to increase again, maybe, hopefully, andyour revenue pictures will improve. More local jobs would speed that process.

City Peak Year Q1 2011 Q1 % declineTemecula 2005 $ 167,971,716 $ 119,848,102 29%Murrieta 2005 $ 141,133,260 $ 120,929,832 14%Lake Elsinore 2006 $ 81,187,250 $ 50,887,170 37%Wildomar 2006 $ 42,844,914 $ 19,267,970 55%Canyon Lake 2006 $ 41,388,130 $ 16,847,590 59%

March Market Activity by Sales TypeActive Closed Failed In Escrow % Activity

Bank Owned 17% 42% 6% 36% 25%Short Sales 48% 30% 65% 42% 45%Standard Sales 35% 29% 29% 22% 30%Other 1% 1% 1% 1% 1%

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Properties on the market dropped nearly 10% February to March whilepending and sold properties remained almost even. Days on marketincreased from 76 days in January to 86 days in March and monthsinventory has dropped back to 3.8 months across the region from 4.3months in February.

Mirroring the national trend toward fewer foreclosures, bank owned homesnow represents only 17% of active listings on the market. Don’t get tooexcited, they’ll be with us for at least a couple more years. But moratoriums,and an indication by lenders that they have finally figured out the short saleprocess may continue to reduce REO’s. Stabilizing housing prices and astrengthening jobs market will also mean fewer foreclosures going foreword.Standard non-distressed sales made up a full 30% of our market in March.

Finally, Notice of Default filings in California rose to their highest level sinceOctober 2010, up 17.3 percent month-over-month to 26,615 filings, but onlyincreased 3.2 percent on a daily average basis. Notice of Trustee Sale filingsfell for the third consecutive month, down 3.3 percent overall from February,and 25.2 percent on a daily average basis. Year-over-year foreclosure filingswere down with Notice of Default filings falling 19.7 percent and Notice ofTrustee Sale filings dropping 31.0 percent from March 2010. After a slowFebruary foreclosure sales rose with sales Back to Bank (REO) up 28.6percent and properties Sold to 3rd Parties, typically investors, jumping 61.5percent. On a daily average basis those increases were just 5.0 percent forsales Back to Bank (REO) and 24.3 for properties Sold to 3rd Parties. Theaverage Time to Foreclose continues to climb, up 4.1 percent month-over-month to 302 days, a significant 83.4 percent increase year-over-year, and anew record.

Since most of the figures I post in these reports concerns single family home sales and prices,a friend asked me to do a comparison of local condo prices from their peak to current. It wasan interesting exercise but not for the faint of heart and definitely not fun reading foranybody that bought a condo a few years ago.

So here is a comparison of condo prices in several of our better known communities:Location Size Br/Ba Q1 2006 (73 sold) Q1 2011 (93 sold) %Arboretum 730 1/1 $235,000 $70,000 -70%Madison 854 1/1 $220,000 $68,000 -69%Bucaneer Bay 961 2/2 $295,000 $104,000 -65%Anchor Bay 1,016 2/2.5 $305,000 $105,000 -65%Madison 1,159 2/2 $285,000 $90,000 -68%Arboretum 1,246 2/2 $314,977 $135,000 -57%Pelican Bay 1,387 3/2.5 $337,900 $128,000 -62%Socorro 1,508 3/2.5 $345,000 $133,600 -61%Arboretum 1,745 3/2.5 $365,000 $175,000 -52%

All I can tell you for sure is that a lot of first-timers lost a lot of money during the past 5years. BUT, if you're in a position to buy into one right now, your timing couldn't be better.There's almost nowhere for these prices to go but up. The problem right now is that investorshave been scooping these up as fast as they can so the ratio of owner occupied properties hasdropped so far most first timers can no longer get FHA financing in these developments. Butfor an investor is there any question? You can generate a positive cash flow from day one, holdonto it for 3 - 5 years and turn a tidy little profit.

What about Fannie Mae & Freddie Mac?

• 10 year wind-down (accelerate if possible)• Increase guarantee fees• Increase down payments to at least 10%• Increase private capitol cushion (MI & other fees)• Lower loan limits• Reduce portfolio – at least 10% per year

• Continue backing of U.S. MBS guarantees & debt obligations• Private mortgage lenders will step up to fill the gap

Administration Offers Three Options

1. Privatize system with government insurance limited to FHA, VA & USDA low/mod borrowers

2. Adds a backdrop guarantee mechanism for ‘times of crisis’.

3. Adds catastrophic reinsurance of private mortgage guarantee companies. Taxpayers protected by g-fees & private capital taking first risk.

The following pages are excerpted from President Obama’s recent proposal to eliminate thesecondary financing markets of Fannie & Freddie along with the response from the NationalAssociation of Realtors® and other concerned parties. Clicking on any paragraph heading willtake you to the original report or source remarks. As you have questions, please contact me.

National Association of Realtors®Message to the Hill

Restructure the secondary mortgage market toensure a reliable source of mortgage lending forconsumers, in all types of markets, to avoid majordisruption to the nation’s economy that would resultfrom the total collapse of the mortgage market.

Key Points & Principles

• An efficient & adequately regulated secondarymarket is essential to proving an affordablemortgage to consumers

• We cannot have a restoration of the old GSE model– private profits with taxpayer losses

• Reforms should ensure a strong, efficient financingenvironment for homeowners and rental housing

• The government must clearly and explicitlyguarantee the issuance of these entities

• The new entities should guarantee or insure awide range of safe, reliable mortgage products.

GSE Reform – Issues That Will Impact Your BusinessCenter for Responsible Lending

• Significant difference between low down-payment & subprimeloans

• Between 1990 and 2009 more than 27 million mortgages weremade with low down payments. These loans DID NOT carry therisky features found in the subprime market

• Increasing down payment requirements would materially shrinkthe mortgage market without a corresponding increase in loanperformance (chart 1)

• Based on the current median U.S. home price ($172,100) itwould take the average family 14 years to save enough for a 20%down payment (chart 2)

• Homeownership remains a key driver of personal and nationaleconomic prosperity and is fostered by responsible low downpayment loans

Low down payment loans have been originated safely for decades

Eliminating or limiting low down payment loans will close the door to homeownership for millions of middle class families