I‘ve just returned from our National Association of Realtors® year-end meetings. Agood part of my meetings included a recap of our legislative successes during the pastyear (there were many) as well as a look forward to what the next cycle will bring. Giventhat our meetings started Nov. 3, the repercussions from the election continued toshower down on us throughout the week.

As I’ve noted before, one of my highlights at these meetings is the opportunity to hearfrom Dr. Lawrence Yun, our Chief Economist. This years Dr. Yun entitled hispresentation ‘Recovery to Normalcy’ wherein he asked the question – “are we returningto 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 hisreport 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 thesame factors affecting the national market at this point – uncertainty & a lack ofconfidence. Consumer confidence is low based on the continuing high unemploymentnumbers and the often mixed or confusing signals coming out of Washington andSacramento. In spite of most major banks having a surplus of money, they’re notlending it out. In spite of high Wall Street and corporate profitability, they’re not hiringand 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 almostunabated following the announced moratoriums but foreclosure sales droppedappreciably as lenders held off sales pending some resolution of the issue. Consumerconfidence, already lagging due to ongoing problems with short sales, took another hitas prospective buyers were forced to consider a scenario wherein a previous ownermight one day show up at their door demanding return of the property bought atauction. 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 delayforeclosures and extend the time until we hit a definitive bottom. That’s alreadyexpected to extend well into 2012 so any further delays just compound that. Asustainable 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 suchmajor financial institutions as the mortgage interest deduction – a tradition dating backover 100 years. That’s causing major uncertainty in many circles right now. But even ifno adjustment is made to that equation (as most rational people believe), the budgetdeficit 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’renot making anymore.” As you might imagine, he was warmly applauded.

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Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Monthly Unit SalesSingle Family Only

You’ll note a marked difference in unit sales trends year to year. In 2009 ourmarket hit a trough in June and embarked on a fairly steady, if uneven, climbin most Southwest California markets. That climb peaked in June of 2010and we’ve been in a general decline since then.

This activity coincided with the first-time homebuyer tax credit which islargely credited with reversing the decline in sales and stabilizing marketprices. That burst of activity was instrumental in reducing inventory levelsfrom 20 month+ highs to as little as 2 months in our area.

The vertical bars show year-over-year volumes which increased, in some casessubstantially, for all but one of our local cities. Simply follow the line acrossfrom 10/09 to the current month to see how sales in your city have increasedduring the past 12 months.

But also notice the trend line, which is heading down for unit sales for thefirst time in 3 years. Whereas last year our 3rd quarter sales were strong, thisyear they are following a more normal year-end trajectory. We’ll have to seewhere they go in 2011.

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Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Median prices also took a little dip in October in 5 of 6 cities. Why? Decliningsales volume, less competition for properties, fewer clean REO’s, moreproblematic 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 downtoday. That’s consistency at least, and given that the line has been virtuallyflat 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 outand interest rates start to rise. While few experts predict a double-dip inprices, flagging demand could signal a little weakness if inventory jumps toomuch. Our consumption rate is not what it was a few months ago. It may bepent-up, or it may be exhausted.

But don’t read too much into a one month swing – we’ve had them all along. Ifyou’ve ever fished you see the similarity when they refer to this median priceperformance as ‘dragging along a rocky bottom’. Up one month, down thenext. The trend line remains slightly upbeat and the forecast has us avoidinga double dip in pricing. There are several variables that could impact thiseither way so let’s just get through the end of this year and see where we gofrom there.

October Market Activity by Sales TypeActive 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%

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Pending Closed (Demand) Days on Market % Selling Months Supply

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535

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Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar

Tracking demand, the number of homes for sale is declining. That’s notunusual for year-end when many standard sales hold their homes off themarket through the holidays. This is exacerbated this year because of theREO moratorium. As I mentioned before, banks are still filing notices ofdefault but they are holding off taking properties back even more so thanbefore. Many have either pulled their inventory from the market or are holdingoff further sales until the ‘robo-signer’ issue is put to rest. This is simply adelay 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 releasethem.

Homes are also staying on the market a little longer and the percent selling isdropping – a least partially due to the ongoing failure rate by nearly 70% ofattempted short sales.

3500

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Source: BLS

In thousandsTotal Payroll Jobs in Michigan

Slides courtesy of NAR Research: Dr. Lawrence Yun

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2600

(Source: BLS)

In thousands

Total Payroll Jobs in Washington D.C. Metro

Want to go where employment opportunities abound? Then head for ournations Capitol. If you live and work in DC you don’t see it, you don’t feel itand that’s part of the problem. More people are working in DC for higherwages than ever before and they have no concept of, and little empathy for,what’s happening outside their little corner of the world.

Existing Home Sales (Closings)Tax Credit Impact

In million units

Existing-Home Sales

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 livinghere. 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 & Freddieas well as only a moderate relaxing of current overly-stringent credit requirements.

Compelling AffordabilityMonthly 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

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.