Headlines are meaningless– Knowledge is priceless.

In this newsletter I’ll give you my take on the differences between the headlines and thefacts on the two biggest questions I get asked today:

Gene, how's the market doing?The market is doing great, or not so great, depending on where you are and what you’retrying to do. If you’re in a buying mood, our local market has never been better. Inventoryis up, interest rates are down and uncertainty is keeping some buyers on the sidelines soit’s not as competitive as it was even six months ago.

If you’ve got cash and would like to scoop up a condo or two for investment purposes,you’ll return a profit starting day one. That’s good. If you have equity in your home andwould like to sell to move up, or down, or out, it's also good. Chances are you’ll sell quicklyand at a little higher than market. Not so great? You still won’t sell it for what you thoughtit was worth two years ago.

In a recent review, our Chief Economist presented a downward revision for 2010 homesales for the state – down 19.2% from this time last year. Not here. Through the first ninemonths of 2010 our sales across the six city region are up 35% over last year. At 5,863units sold, single family sales are more than double our volume for all of 2007.

However, Q3 sales were down from Q2 – partially because the homebuyer tax creditexpired mid-year and partially because our inventory has shifted from 60% - 70% bank-owned-homes last year to 50% short sales this year. In 2009 housing sales accelerated inthe 4th quarter – that may not be the case this year. More on that later.

Our median price is rock solid. From 3rd quarter 2009 to 3rd quarter 2010 our regionalmedian crept up by just 1% - from $234,069 to $236,307. That’s actually pretty good whenyou consider that during that time we’ve seen tax incentives, stimuli, moratoriums and amarket shift from REO to short-sale. Q1 to Q3 Temecula, Menifee & Lake Elsinore are upabout 4%, Murrieta up by 1%. When you look at our trendline the past 2 years it isessentially flat. After two years of precipitous drop, flat is good.

Demand remains strong but is slipping a little. Inventory has jumped, leading to increasedtime on market and a lower percentage selling. So far the increases have not beensignificant – days on market are now in the 60’s and 70’s instead of the 50’s while percentselling is in the 50’s and 60’s instead of the 70’s. The lions share of that shift is not somuch due to a lack of demand as the shift in the product mix.

With short sales continuing to make up half the market, it’s no wonder. With a failure ratenear 70% and approval times stretching for months or years, properties are staying on themarket longer and some buyers are now sitting on the sidelines in frustration in spite ofhigher inventory and lower interest rates. While Murrieta’s nominal inventory has risen toalmost 4 months with 700 properties for sale, if you back out the 82 homes over $700,000and the 217 short sales that will fail, you wind up with about 401 homes that are actuallysalable reducing your real inventory to just 2 months.

I apologize for the length of this report. I always try to keep it short and sweet for you (well,short anyway), but I did want to provide some feedback on the second question oneverybody’s mind these days:

How’s the moratorium going to affect us?

Who knows? Best case is it will simply delay the inevitable for a few more months and life& foreclosures will go on until they’re done. Deal with the pain – start the healing.

BUT… as one wag put it, follow the lawyers and the politicians. There is already asurfeit of attorneys coming out of the woodwork filing claims for properties in foreclosureas well as some that have already sold and been re-sold. One lawyer is even making theclaim that since the note on the foreclosed home was paid off at the time of trustee sale bythe insurance company, the note has been satisfied and the defaulting owner should nowown the home free and clear. And that’s the scary part – if they can start invalidating salesthat occurred months or years ago, it interjects a whole new note of uncertainty in amarket already reeling from chaos. Uncertainty – the enemy of a stable market.

AND… if politicians get on their knee-jerk high horses and start a witch hunt the hearingscould drag on for months – again delaying the inevitable and keeping uncertainty alive. Ormost of the political posturing could dissipate on November 3rd.

Have the banks been guilty of shoddy practices with their robo-signers? You bet. But thereality is ALL these people were delinquent for months or years to begin with. We’ve beencomplaining that the banks haven’t acted quickly enough to take back homes to put thispain behind us. People are staying in their homes an average of 22 months without makingpayments. People making timely payments may be justified in feeling a lack of sympathyfor those folks. Others are using the delays to fuel a surge in strategic defaults – they couldmake the payments but why bother if they can live rent free for years.

As I’ve mentioned before, the banks and their servicers have been woefully inadequate,unprepared and incompetent in this process from day one. Spurred on by greed, bydemand and by political pressure to make every American a homeowner (via theCommunity Reinvestment Act, Fannie & Freddie), they made loans to millions of peoplethat were pre-ordained to fail. When the inevitable happened, they did not shift gearsanywhere near fast enough to address the issue. But in fairness, few companies anywherecould ramp up their business to deal with a tenfold increase in demand within a year ortwo. So they resorted to short cuts to try to expedite the backlog of paperwork and nowthey’re under attack for that. Some days it doesn’t even pay to get out of bed.

And don’t forget that of the paltry few loan modifications they have done under HAFA &HAMP, nearly half have already fallen into delinquency again.

But it will have an impact on our market at least through the 4th quarter. Eliminating ordelaying foreclosures impacts the 25% of our market closing 93% of the time and replacesthat inventory with sales that are failing 70% of the time.

Probably appropriate that it’s Trick or Treat time. Happy Halloween.

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September Market Activity by Sales Type

Active Closed Failed In Escrow%

ActivityBank Owned 21% 37% 7% 33% 25%Short Sales 49% 33% 67% 46% 48%Standard Sales 30% 29% 26% 21% 27%Other 1% 1% 2% 1% 1%

September Demand Chart

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Sales: -19.2% YTY, Median Price: +1.2% YTY

California Existing Single-Family Home Sales – August 2010

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CA New Housing Permits - 2009: 36,200 2010: 39,000

Cyclical Similarities & DifferencesCalifornia Sales of Existing Homes and Median Price

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Sales of Existing Detached Homes Median PriceUNITS/MEDIAN PRICE $

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These charts, taken from a recent housing update by CAR Chief EconomistLeslie Appleton-Young, highlight some of the similarities and differencesbetween our local market and the state and national markets.

The previous page shows a 19.2% year-over-year decline of home salesstatewide while our local market is currently performing about 35% ahead oflast year.

This chart highlights the significant difference between the last three housingdeclines in the state. Most noticeable – this most recent drop only took 18months instead of 4-5 years. Of greater significance, during the previousdrops in sales, prices were not impacted nearly as much as this time – andagain, within just 2 years. Locally, we actually lost about 40% of value duringthe 1990 drop but that was not reflected statewide.

The chart on the following page shows what many consider to be an over-correction in pricing based on historic run rates giving the market room torecover without another spike.

Trough: Feb-09

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Peak: May-07$594,530

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Median Price of Existing Detached HomesCalifornia, August 2010: $318,660, Up 8.6% YTY

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Affordability for 1st Time Homebuyers – CA 64% U.S. 78%

Percentage of households that can buy

Slide courtesy of California Association of Realtors

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Slide courtesy of California Association of Realtors