The California Association of Realtors recently released 2nd quarter reports on the state of California housing. Itlooks like sales and prices are both up slightly and affordability has slipped a bit. In Southwest California, our salesare down slightly from a year ago, our prices are stable to moderately rising and affordability has ticked down from64% to 60% in June for Riverside County.

Regionally, housing affordability fell in the higher-priced areas of the state, such as the San Francisco Bay Area andCentral Coast, but edged up in lower-priced areas, such as the Central Valley. At 77 percent, San Bernardino Countywas the most affordable, while San Mateo County was the least affordable, with only 21 percent of householdsable to afford the county’s median-priced home. The Housing Affordability Index is considered the mostfundamental measure of housing well-being for home buyers in the state.

It was only 3 or 4 years ago that affordability in Riverside county, and much of Southwest County, was under 20%. Ifthere’s an upside to this current debacle, it has to be the availability of housing to nearly 3 times as many families .That includes many first time home buyers who have been qualified under the rarified atmosphere of the currentlending jungle and would appear to be taking homeownership seriously. The default rate for newer loans has fallenway off, which is one potential good sign for the future. The size of the down payment is secondary to rationalqualifying to determine a good loan candidate. That’s why VA and FHA loans continue to outperform even loanslike the QRM with 20% down. Qualified buyers make good homeowners – skin-in-the-game is secondary.

This market has also been a boon for investors. In California it is now estimated that 1st time buyers and investorseach make up about 40% of some markets, including ours, with 20% being made up of your more typical move-upor move-down buyer. Again, the government on one hand is working to make it more difficult for lenders to loan toinvestors while on the other hand the President proposes that Fannie & Freddie work hand in hand with investorsto take some bulk inventory off the market. Don’t know which end is up? Join the club.

When Congress reconvenes next month, or next week as the case may be, Mortgage Interest Deductions will be

part of the mix before the “Super Committee”. They are looking increasingly agreeable to lower the top ratefrom $1 million to $500,000 (or possible $250,000), and the deduction for 2nd homes will also be on the block. Howmany of us will that impact? Hard to say, but it will invariably hit us harder in California than in 70% of the country.Other high priced, or formerly high priced, or hope to again be high priced areas of the country are lobbying hardto keep that from happening but obviously we’re part of the ‘rich’ so our concerns have less gravity.

Finally, I’ve been talking about the pending expiration of higher loan limits for Fannie & Freddie. Bills have beenintroduced in both the House and Senate to extend the higher limits for awhile or for good. Housing can ill affordanother body blow at this delicate stage while the pending cut would deliver just that. The highest cost areas of thecountry will reduce from $725,000 to $625,000 while the rest of us would revert to either $425,000 or 125% of thelocal median price. Anyone trying to find a mortgage over $425,000 would be faced with higher interest rates,higher down payments, and tighter loan qualification requirements beginning October 1. Yeah. That’s what weneed, higher cost and more regulation. First, do no harm.

To our Congressional Leaders – First Do No Harm.You might not be able to make it better, but please don’t make it any worse.

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Southwest California Homes Single Family Homes

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Southwest California Homes Single Family Homes

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Sales – we knew they were headed back down since pending sales were down last month. Notdown a lot – watch for a little increase next month and another spike in September. If we keep thecurrent run rate, we’ll post sales volume close to last year, which was a good year. Sold 162 homesin Temecula in July, 187 last year, 114 in 2009. Murrieta sold 168 homes last month, 180 last yearand 131 in 2009. Realtors often get into 90 day productivity cycles but I’ve never seen a wholemarket do it.

Median price? Not much change – up $12,000 in Temecula ($308,901), up a grand in Murrieta($272,306), down $500 in Lake Elsinore ($181,439). Lake Elsinore’s median two years ago was$181,376 so if you live in Lake Elsinore your home is worth $63 more than it was two years ago.Yippeee! Temecula was at $282,876 in July of 2009, up to $308,901 this year. Plodding along butstill better than 80% of the country.

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July Market Activity by Sales Type

City Short Sales Bank Owned StandardActive Sold % Active Sold % Active Sold %

Temecula 185 31 17% 59 50 85% 217 78 36%Murrieta 210 48 23% 83 45 54% 262 72 27%Lake Elsinore 182 32 18% 60 49 82% 79 34 43%Menifee 182 32 18% 78 45 58% 164 54 33%Wildomar 43 10 23% 14 10 71% 34 10 29%Canyon Lake 29 6 21% 11 5 45% 73 9 12%Total 831 159 19% 305 204 67% 829 257 31%

By Market Percentage% of Active Listings % of Closed Sales

Bank Owned 15% 32%Short Sales 42% 25%Standard Sales 42% 41%

Other 1% 1%

There’s a new category at the end of the demand chart – the Absorption Rate. Absorption rate takes the number ofnew listings that come on the market in a month compared to the number of closed sales that month. In theTemecula market, for every new home listed, another one sold. That’s one reason the inventory remains low. LakeElsinore’s doing the same – actually selling more than they brought in last month with a low inventory.

It’s a sign of the times that with prolonged conditions like this that our prices aren’t rising. Economic uncertainty iskeeping money out of the lending market and more buyers on the sidelines.

This last chart shows the market activity by sales type in the area. Interesting to note – I haven’t published thischart in a few months and the market has continued to shift. Short sales still have a miserable close rate in spite ofbanks claiming expedited procedures. Bank Owned homes continue to fly out the door but they’re down to about15% of our market. Standard sales have really taken off and it’s a mix of sales by actual people with equity still intheir homes (you’d be surprised how many there are) and ‘flippers’, people who have purchased a house, spruced itup some and are reselling it. Standard sales are even with short sales right now with 42% of the market and with abetter closing rate than short sales.

Southwest California HomesJuly Demand

This chart on the right shows what’s happenedto mortgage interest rates in California thepast 6 months. If you turned that chart upsidedown, you’d have the unemployment chart.

The Fed just vowed to keep their fund rate atthe current level until 2013. Yet lenders, manyof whom are sitting on comfy reserves, areloath to lend. Until they have some comfortlevel with future policy, the market will be intheir grip. Even more-so if Fannie & Freddieare pulled from the market as the Presidenthas proposed. For the first time in nearly 100years, housing availability would be totallydependent on these same private lenders whohave frozen the market since 2007.

The chart to the left and following pageoutlines the foreclosure market. Some areas ofthe county were hit harder than others, someareas of cities were hit harder than others.Overall, Notices of Default and Notices of Salewere down anywhere from 20% to 30% from ayear ago.

In Riverside County 1 in every 143 housing units

received a foreclosure filing in July 2011.

Total new foreclosure activity in July.

Chart by bankrate.com

Chart by RealtyTrac.com

Here’s more information on the foreclosuremarket from ForeclosureRadar CEO & FounderSean O’Toole. "Our statistics clearly show thatreal estate investors continue to far outperformbanks in dealing with distressed properties. Yetpoliticians and bureaucrats are putting pressureon banks to become landlords, which will hurtlocal economic activity, as fewer properties aremade available to local investors, alsoimpacting their Realtors, contractors & propertymanagers; as well as to home buyers in need ofaffordable housing."