Learn to sail in all winds. Many years ago a friend of mine attempted to teach me how to sail. Having grown up in the mountains of Colorado there were no bodies of water conducive to sailing either because of their size, because nobody owned a sailboat or because they were just too damn cold. Anyway, my friend Brock took me out on Lake Minnetonka, the largest inland body of water I had ever seen up to that point, and tried to show me the ropes – and I do mean ropes and knots and tillers and a variety of nautical things foreign to my eye. I finally managed to get the dingy moving in a brisk breeze headed out from land but try as I might, there was no way I could turn the thing and head back to the dock. Brock’s advice? ‘To be successful, you’ve got to learn to sail in all winds.’

I’ve been reminded of that sage advice at various times throughout my career and it has never been more appropriate than attempting to navigate the economic waters we currently find ourselves adrift in. The housing industry, our city, state and national economies, and our political models have been waylaid by strong headwinds since 2007, with major and unpredictable cross-winds buffeting us at almost every turn. Right now it appears we may be benefitting from an incipient tail-wind as we set our course for the horizon., But there are still strong gusts with the potential to blow us off course and up onto the shoals.

OK. Enough of the nautical analogies. We’ve navigated through some tough times and, by all indications, may actually be through the worst of it. Consumer confidence has been edging up since November, housing starts are up, unemployment is down, heck there was even a positive housing/economic piece on the CBS Evening News last night (Housing Market Starts to Pick Up). You know by the time the media starts reporting the market is picking up, it’s been picking up for awhile.

The good news is that it appears to be picking up in all areas of the country. Sales are up 8% in the West, 14% in the Midwest, 9% in the South and 4% back East. More good news is that it is driven by basics – compelling affordability and record low interest rates. There are no government incentives or gimmicks, just ordinary people deciding now might finally be the time in spite of all the roadblocks to qualifying lenders have erected along the way. If enough people figure that out we could start to see a real and sustained housing recovery.

The downside? Well, prices are still down and dropping in most parts of the country. Locally January sales ticked up 14% over last January (don’t get too excited, last January was the worst month of the year) but our prices were down regionally by 7%. I’m hearing more agents talking about how many buyers they have and we’re still seeing multiple offers on most homes. Agents who specialized in bank-owned homes are singing the blues because they have no inventory as distressed properties shrink from 92% of our market in 2008 to just over 50% today.

Don’t get me wrong – we’re not out of the woods yet. As Congress debates tax reform their resolution of the mortgage interest deduction issue will be critical. The future of Fannie & Freddie is also a huge concern as is the current credit tightening by those two giants. Did I mention the additional fees being charged homebuyers and owners to pay for the payroll tax credit extension or the possibility of bulk sales of huge blocks of homes to investors to pump up the rental market at the expense of homeownership? At the local level, your redevelopment funds are gone but your housing element demands remain and reassessment of commercial properties means another drop in your revenue stream for 2012-2013.

What’s a body to do? Learn to sail in all winds is probably still good advice. Wish I’d learned how to sail – I’d go right now.

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

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

It’s not unusual for sales to drop off in January. Buyers and investors are pushing to get their deals closed by year-end so they can start the new year in their new home or enjoy some additional tax benefit for the past year. After a strong surge in December 2010, January 2011 sales fell very sharply before correcting. Sales declined in all our markets this January as well, though not as precipitously as last year. With the exception of Wildomar, sales for all cities was higher than last January. 1/2011 12/2011 1/2012 Temecula 113 170 (8%) 157 (28%) Murrieta 125 187 (23%) 144 (13%) Lake Elsinore 87 109 (17%) 91 (4%) Menifee 111 130 (2%) 127 (13%) Wildomar 36 31 (10%) 28 (22%) Canyon Lake 12 26 (46%) 14 (14%)

Month to Month Year over Year

All figures taken directly from MRMLS database. Numbers are assumed to be correct but not guaranteed. Numbers are for single family sales posted through the mls and do not include condominiums or courthouse step sales.

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

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake Poly. (Murrieta)

Southwest California Homes Single Family Homes

Median Price

Prices pretty much took a nose dive across the board in January. Overall, the decline is right in line with what happened across the state and country last month – sales were up while prices continues to slide. At least in our region, some of this decline might be attributable to increased investor activity, especially in lower end properties. Real Estate investors started off 2012 with a bang. Sales to Third Parties, typically investors rose significantly in January throughout our region. California saw the most activity, with investors purchasing 3,964 properties for $766.2 million. Note that trustee sale investors must pay in cash, in full, with no title insurance or inspections prior to purchase. This is the fourth largest month on record in California, and the busiest since March of 2011. One unfortunate side note of this trend is that there are few, if any, remaining opportunities for first time buyers of the most affordable properties on the market – condominiums. As investors have increasingly saturated that market, most local condominium complexes have long since exceeded resident-owner/tenant ratios so that virtually ALL condo transactions today are on an all-cash basis as FHA will not loan and Fannie & Freddie will not underwrite. That will impact our market even after we start climbing out of this hole.

January inventory was up about 9% from December but still down 10% from last January. Closed transaction were off 14% from December but pending sales are up 17%, which points to a better February. If closed and pending sales were both down we’d have cause for concern but that’s not the case. With an increase in active listings and a decrease in sales, months supply also increased to slightly to over 4 months for the region but still in that 2.5 – 3.5 month range for most cities. And after last months absorption rate of 119%, it was inevitable that that would fall as it did, to 67%. Still all very healthy numbers and no reason to doubt our market is healthy and improving.

For the first time since early 2008, the number of standard sales almost equals the number of distressed properties. Distressed properties now make up just 51% of homes on the market but still 60% of sales. That’s a drop from the 92% we were seeing just 4 years ago. Bank-owned homes are still selling 60% of the time while short sales failed almost 75% of the time. Of course standard sales also failed about 78% of the time last month as equity sellers try to push the market by setting higher prices on their homes.

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On Market (Supply)

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

541

287

144 8

9

3.8

61.00

449

271 1

57 9

6 2

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83.00

317

196

91

93 3

.5

78.00

478

277

127

92 3

.8

70.00

103 3

9

14

103 7

.4

41.00

106

83 2

8

74

3.8

68.00

Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar * Absorption rate - # of new listings for the month/# of sold listings for the month

January 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 234 52% 66 42% 52 12% 30 19% 159 35% 62 39%

Murrieta 289 53% 51 35% 60 11% 39 27% 185 34% 52 36%

Wildomar 44 42% 10 36% 17 16% 8 29% 44 42% 8 29%

Lake Elsinore 100 32% 29 32% 52 16% 26 29% 153 48% 35 38%

Menifee 198 41% 41 32% 58 12% 42 33% 202 42% 41 32%

Canyon Lake 68 66% 7 50% 10 10% 2 14% 27 26% 4 29%

Regional Average 933 48% 204 38% 249 13% 147 25% 770 38% 202 34%

California 39 57% $1,147 Riv Co 25 70% $1,118 Temecula 17 72% $1,398 Murrieta 13 76% $1,365 Lake Elsinore 18 69% $1,149

Avg. age Of home

% Owner Occupied

Median Rent

No 2010 census data available for combined Menifee market.

No 2010 census data available for combined Menifee market.

Even a hampered market economy is wonderfully resilient, and we’re seeing signs that the economy is improving a bit. That’s good for obvious reasons, but there’s a downside as well. Any economic rebound will likely delay real efforts at reform: When things go well financially, the public is happy and governments will have more money. All the worry about debt bubbles, incompetent government and pension costs will subside. Governments tend to institute true reform only when they have no other choice. An improving economy gives them other choices.

Just for fun, try to name a few areas of your life that aren’t taxed or regulated by the government. The government can take away your children based merely on assertions of abuse, or take your property and give it to a developer. You cannot build anything or remodel anything in your home, start a business, hire someone, drive anywhere, buy a firearm, make a political donation or do much of anything without being subject to myriad rules, regulations, taxes, fees, inspections & permits. Heck, you can’t even smoke outdoors or throw a football or Frisbee on the beach these days without getting crosswise with somebody.

Yet by the end of the month our Legislators in Sacramento will have come up with another 1,000+ bills they will propose to further regulate, tax and otherwise guide our daily lives. Governor Brown has already spent the tax increase he hopes and prays we’ll vote for, and the anticipated windfall from a Facebook IPO is burning holes in Sacramento’s pockets. Thank heaven for our little corner of the world…

Parting thoughts…