september 2011 southwest california housing report

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Home Forecast Calls for Pain (WSJ 9/21/11) “Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more people into foreclosure and clouding prospects for a sustained recovery. Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015 creating a ‘lost decade’ for housing.” After calling long-term unemployment a ‘national crisis’ in a recent speech, Fed Chairman Ben Bernanke also called on Congress to do more to help boost a U.S. housing market that remains, at best, in the doldrums. Bernanke said "strong housing policies to help the housing market recover" were needed to advance a tepid U.S. economy, along with a focus on jobs and solving budget imbalances. The Fed has taken aggressive action to maintain interest rates at historically low levels for the foreseeable future (at least through the 2012 election) yet across the country, buyers are staying away in droves. New home construction, which had rebounded slightly in 2010, is currently below 2009 levels, their worst year in memory. Our own market faired somewhat better than the national average for the 3 quarters ending 9/30/2011 – but not much. As a region, our sales are off by just 2% from last year. Murrieta and Temecula are both about 13% off the pace while Menifee has surged by 45% with the incorporation of a larger market. As a region we are 50% ahead of 2009 Year-to-date with Murrieta up by 24% and Temecula up by 44% over ‘09. Year-to-date median price has dropped 2% under last year and 1% under where we were in 2009. If you live in Temecula your home is worth almost $13,000 more than it was in 2009. If you live in Murrieta your home is worth $196 less than ’09 but a little ahead of last year. Economists had forecast a stronger 2 nd half this year figuring that unemployment would be dropping, housing prices would stabilize and consumer confidence would start to climb. None of those things have happened so the forecasts are being revised to accommodate the reality of stagnant growth, continued high unemployment and declining home prices still prevalent across much of the country. Our own Chief Economist, Leslie Appleton-Young, addressed this in recent remarks presented to the Murrieta Temecula Group. A year ago she predicted a 2% increase in home sales for 2011 – 502,000 sales up from 491,500 in 2010. Instead we will end the year at about 491,100, a decline of .1%. Similarly, after posting a 10.2% increase in median price between 2009 and 2010, she anticipated prices to rise another 2% in 2011 to $312,500. Instead we will see prices statewide decline by 4% this year to $291,000. Follow this link to Leslie Appleton-Young’s Economic Trends Forecast .

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Page 1: September 2011 Southwest California Housing Report

Home Forecast Calls for Pain (WSJ 9/21/11)

“Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more people into foreclosure and clouding prospects for a sustained recovery. Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015 creating a ‘lost decade’ for housing.”

After calling long-term unemployment a ‘national crisis’ in a recent speech, Fed Chairman Ben Bernanke also called on Congress to do more to help boost a U.S. housing market that remains, at best, in the doldrums. Bernanke said "strong housing policies to help the housing market recover" were needed to advance a tepid U.S. economy, along with a focus on jobs and solving budget imbalances.

The Fed has taken aggressive action to maintain interest rates at historically low levels for the foreseeable future (at least through the 2012 election) yet across the country, buyers are staying away in droves. New home construction, which had rebounded slightly in 2010, is currently below 2009 levels, their worst year in memory. Our own market faired somewhat better than the national average for the 3 quarters ending 9/30/2011 – but not much.

As a region, our sales are off by just 2% from last year. Murrieta and Temecula are both about 13% off the pace while Menifee has surged by 45% with the incorporation of a larger market. As a region we are 50% ahead of 2009 Year-to-date with Murrieta up by 24% and Temecula up by 44% over ‘09. Year-to-date median price has dropped 2% under last year and 1% under where we were in 2009. If you live in Temecula your home is worth almost $13,000 more than it was in 2009. If you live in Murrieta your home is worth $196 less than ’09 but a little ahead of last year.

Economists had forecast a stronger 2nd half this year figuring that unemployment would be dropping, housing prices would stabilize and consumer confidence would start to climb. None of those things have happened so the forecasts are being revised to accommodate the reality of stagnant growth, continued high unemployment and declining home prices still prevalent across much of the country.

Our own Chief Economist, Leslie Appleton-Young, addressed this in recent remarks presented to the Murrieta Temecula Group. A year ago she predicted a 2% increase in home sales for 2011 – 502,000 sales up from 491,500 in 2010. Instead we will end the year at about 491,100, a decline of .1%. Similarly, after posting a 10.2% increase in median price between 2009 and 2010, she anticipated prices to rise another 2% in 2011 to $312,500. Instead we will see prices statewide decline by 4% this year to $291,000. Follow this link to Leslie Appleton-Young’s Economic Trends Forecast.

Page 2: September 2011 Southwest California Housing Report

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3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

Unit Sales

Regional sales are not doing too badly through the first three quarters of the year. The area is running just 2% behind last years record pace. Remembering that first half sales last year were driven by the 1st Time Homebuyer Tax Credit, we might have anticipated a much steeper decline this year, as is being felt in many parts of the country. Also keep in mind that the regional numbers are somewhat skewed by the addition of new communities into the Menifee report. Temecula and Murrieta sales are off nearly 13% over last year while Menifee is up by 45%. Last year there were 5,827 homes sold regionally YTD while this year there have been 5,708. 200 fewer in Murrieta and Temecula, 400 more in Menifee. The summer selling season and the pre-school bump simply did not materialize this year as you can see in the continued series of peaks and valleys. Economists had predicted a strong 2nd half as the economy started to climb but that simply has not happened. While mirroring what is happening to the national housing market, our local market has actually outperformed both state and national statistics.

Page 3: September 2011 Southwest California Housing Report

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$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

Median Price 9/11

Our median price continues to flatline, down 2% from last year and 1% under 2009 YTD as a region. Temecula prices are up 2% over 2010 and up a whopping 4% from 2009. Murrieta’s prices are down 1% from 2010 and virtually even with 2009. Menifee, with an 8% / $17,000 decline in median price, impacts the region’s performance index. Again, this is simply a transitional year establishing a new baseline for Menifee. The expansion of their city which boosted their sales volume by 45% also reduced their median due to the lower priced areas like Sun City, Quail Valley and Romoland that are now factored into their market. That our median price has remained so stable since 2009 is remarkable given the shift in product from bank-owned homes to short sales and now including a higher percentage of standard and equity sales. In a ‘normal’ market, those shifts in product would have produced similar shifts in pricing. For example, a shift to more short sales can lead to a price drop since those transactions are more time consuming and troublesome than either bank owned or standard sales. The fact that our inventory levels remain in the 3% range with multiple offers being the norm for most transactions, keeps some pressure on the buyer side of the equation to keep prices strong.

Page 4: September 2011 Southwest California Housing Report

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100

200

300

400

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600

2009 2010 2011

339

519

502

409

560

515

200

325

327

151

292

427

69

106

117

77

96

102

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

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50,000

100,000

150,000

200,000

250,000

300,000

350,000

2009 2010 2011

300,5

2

4

305,1

9

4

308,6

5

6

277,6

9

0

270,7

6

3

276,0

4

4

177,6

0

1

189,1

1

9

177,0

3

6

193,8

5

6

250,7

5

2

190,3

5

8

233,7

6

9

221,2

2

7

221,6

1

2

275,7

4

0

250,7

5

2

231,5

7

7

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

3rd Quarter Median Price

Too many numbers invite analysis paralysis – however, they can also give us an idea of where we’re headed or at least where we’ve been. These charts show just Q3 numbers. Q3 was to be the tipping point – the first ‘normal’ quarter without stimulus or hang-over from stimulus that would tell us whether the year would finish strong or just limp along.

Forecast calls for more limping.

3rd Quarter Housing Sales

Page 5: September 2011 Southwest California Housing Report

September Market Activity by Sales Type Standard Sale Bank Owned Short Sale

Active % of MKT Sold % of MKT Active

% of MKT Sold

% of MKT Active

% of MKT Sold

% of MKT

Temecula 242 50% 70 44% 57 12% 42 26% 182 38% 47 30% Murrieta 278 48% 84 47% 73 13% 42 23% 228 39% 53 30% Laker Elsinore 99 31% 23 22% 45 14% 50 47% 178 55% 33 31% Menifee 199 40% 60 38% 65 13% 65 41% 233 47% 34 21% Wildomar 46 37% 18 41% 29 23% 17 39% 50 40% 9 20% Canyon Lake 80 65% 15 43% 14 11% 12 34% 30 24% 8 23% Regional Average 944 45% 270 39% 283 14% 228 35% 901 41% 184 26%

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20

40

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Temecula Murrieta Wildomar Lake Elsinore Menifee Canyon Lake

Standard Sale Bank Owned Short Sales

Market Share by Closed Transactions September

From a peak of 92% less than 3 years ago, bank-owned homes now make up just 14% of active inventory in the region. Short sales account for 41% and ‘standard sales’ now make up 45% of the active listings. Distressed sales now account for less than half of the homes listed for sale in the area for the first time since 2008. But lest you think that portends a wholesale shift in market demographics, keep in mind that as much as 60% of those ‘standard’ or equity sales, are actually flipped properties where an investor has purchased the property, rehabbed it, and is selling it for a profit.

And while their share of the active market is dwindling, REO sale still command a disproportionate share of the closed market with 14% of active listings but 35% of all closed transactions. That means 80% of active REO listings are selling during any given month, about 1/3 of standard sales but just 20% of short sales. Despite encouragement at both the state and national level to expedite the short sale process, banks are still having trouble dealing with this market and, as you’ll see on following pages, the result has been a recent increase in Notices of Default filed as well as the number of days (months) until the foreclosure process is even initiated.

Page 6: September 2011 Southwest California Housing Report

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On Market (Supply)

Pending Closed (Demand) Days on Market Months Supply Absorbtion rate *

544

250 1

56 8

2

3.5

78

446

271

150 7

4

3.0

78

315

110

101

78

3.1

92

459

227

151

71

3.0

86

117 4

2

35

56

3.3

94

97

66

36

75

2.7

112

Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar

September Demand Chart

Supply has dropped about 12% since the first of the year while closed sales have only declined 2%. This translates to fewer homes to choose from for a relatively steady stream of buyers. Normally this would spark some increase in prices, especially coupled with continuing record low interest rates. Hasn’t happened yet. Consumer confidence is stalling any recovery in spite of all the prevailing indicators that our market should be improving. I guess the fact that it isn’t getting much worse is as positive a spin as we can put on it these days. Homes are staying on the market about 3 weeks less than they did at this years peak back in February. Inventories are remaining in the 3 month range meaning if nothing new were brought to the market, the entire supply of homes would be depleted in 3 months. Healthy inventory is 6 – 7 months and anything less is considered to be a sellers market in a normal environment. Absorption rate is a key to watch – if takes the number of new properties listed during the month compared to the number sold during the month. As long as we’re selling 80% or 90% of the new inventory, the market is performing well. Last month Wildomar sold more homes than they had new listings to replace them.

Page 7: September 2011 Southwest California Housing Report

There was a spike up in August in Notices of Default filed. IF they proceed on a normal course, this will translate to more bank-owned homes hitting the market around the first of the year. Of course we know historically that banks are reluctant to foreclose during the holidays so the increase might not hit the market until later in the 1st quarter. Or it might not ever hit at all.

This increased activity, primarily in California, is the result of banks (primarily B of A), cleaning up their processes and deciding it’s time to get some of their non-performing assets moved through the system.

This is some of that ‘shadow inventory’ we’ve been talking about for years. Don’t worry. If it hits at all it won’t all hit at once. And with our market the way it is, we’ll be able to absorb the increase without impacting our median prices. Can’t say the same for some of the rest of the country but more product to sell would be good for our market..

Page 8: September 2011 Southwest California Housing Report

One last foreclosure stat to look at - one reason banks are deciding it’s time to move some product through the process is that lead time to foreclose. While Murrieta’s time to foreclose has stayed fairly constant at around 300 days, Temecula’s has increased over 50% from a year ago to 355 days and every other city in the region is up by 22% to 46%.

This figure is also referred to as ‘The Number of Days People Get To Stay In Their Homes Without Making Payments’ and banks are getting tired of it as are the rest of us. It is increasingly difficult to stem the tide of strategic foreclosures if people continue to see neighbors remain in their homes for a year or more without making a payment.

California, being a non-judicial foreclosure state, makes it easier for banks to proceed here. States with judicial foreclosure can easily double this lead time, meanwhile adding to the uncertainty of the market and acting as a continuing drag on prices and sales. More and more entities are advocating a ‘rip the band-aid off’ approach to get the chronically non-performing assets into play, get them sold and stabilize the market.