February housing report for Southwest California

1. Not a particularly auspicious start for the new year. As you’ll see from the numbers, after a spike up at year-end, sales tumbled
while median prices backed off a little. Whether this indicates a forming trend or simply seasonal shifts will be determined over the
course of the next few months. Prognosticators are mixed on what these numbers signify for the market with some believing we
are entering a ‘double-dip’ price phase, others seeing it as a temporary adjustment to the trending recovery.
After falling through much of the last half of 2010, foreclosure activity picked up again in January, up 51% from December adding
3% to REO inventory statewide. Locally, Notice of Default (NOD) filings were up 28% over December in Temecula, 41% in Murrieta
and 22% in Lake Elsinore. REO inventories started to build in the wake of these increased filings up 16% in Temecula to 494, 2.3% in
Murrieta to 575 and 2.2% in Lake Elsinore to 499. Banks are forecasting more aggressive foreclosures in 2011.
Inventory levels have increased sharply from January 2010, up 28% in Murrieta, 31% in Temecula and 45% in Menifee. January
sales were roughly the same as a year ago or slightly lower meaning properties were staying on the market 22% longer in Murrieta,
9% in Temecula and 30% longer in Menifee. This combination has increased ‘months supply’ by 32% in Murrieta (2.5 to 3.7
months), 33% in Temecula (2.6 to 3.9 months) and 53% in Lake Elsinore (2.2 to 4.7 months). Those are still pretty positive supply
numbers as much of the country remains well above the 6-7 month ‘healthy’ demand and parts of the country continue to languish
at 20+ months. (Las Vegas, Orlando)
Of greater long term concern is the jobs market. You may have noticed that the unemployment rate dropped from its peak of 9.8%
in November to just 9% in January, the fastest decline in 50 years. You might have wondered how they did this while adding only
36,000 jobs in January, well below the 100,000 necessary to break even. Well, they simply eliminated almost 3 million people from
the job rolls that they claim are no longer even looking for work. People reading the headlines will be delighted by the ‘turnaround’
in the economy, the rest of us will understand we’re in worse shape than before. With that many people out of work, whether the
administration counts them or not, it doesn’t bode well for the housing market recovery – fewer buyers and more foreclosures.
Add to that the President’s recently released study “Reforming America’s Housing Finance Market, A Report To Congress’, and
you’ve just added another level of uncertainty to the long term housing outlook. While there are elements to applaud in this
document, it clearly misses several key points of contention, some of which are addressed in the National Association of Realtors
issue analysis.
A couple of concerns that I would point out –
1) The President is relying on the recent Dodd-Frank Act of 2010 as a roadmap for this program in spite of the fact that its two
principle authors were largely clueless on the fundamental problems that existed at the GSE’s. In fact they were complicit with
Maxine Waters and others in actually exacerbating the problems by pressuring Fannie & Freddie to increase their loan portfolio at
any cost via the Community Reinvestment Act. They shifted the profit potential to the private sector while assuming the risk
structure on the public sector (you and me). Now they’re in charge of the fix. I feel better.
2) The recommendation that the temporary increase in conforming loan limits be allowed to expire later this year and allowed to
return to their previous limits – which in California could mean a drop from as high as $729,500 back to $417,000 (even lower in
Riverside County). This would be a devastating move for higher cost areas like California. This low loan limit, while adequate for
much of the country, was responsible in large part for the increased demand for exotic loans that sank our market back in 2006-
2008 since no federally backed loans were available in high price states like California, Florida and New York.
3) The repeated reliance on the old canard that government participation in the housing market draws capitol away from other ‘more
productive’ sectors of the economy. This ignores the fact that housing has pulled us out of 6 of the past 8 recessions (with the other 2
relying on wars). It further ignore the significant multiplier effect whereby housing accounts for 15% of our GDP and as many as 2.5 million
jobs when there are annualized sales of 5 million homes. Additionally, each home sale pumps up to $60,000 into the economy for
furniture, home improvements, landscaping and other related services. An investment in housing more than pays for itself. Why is that so
difficult for some folks to figure out. Homeownership is about jobs – you can’t have one without the other.
Fannie & Freddie consistently outperformed the private mortgage market and enabled thousands of homebuyers to acquire homes
over their 80+ year history. While significant reforms are in fact needed, it hardly seems reasonable to eliminate these sources of
funding for low to moderate income people for falling victim to the same greed and rapacious management that foundered many
private sector lenders at the same time. Their participation is even more critical at a time when the housing market remains
extremely fragile. The private sector has proven they cannot or will not step up in times of crisis.
Hopefully February will bring better news on the housing front.

2. 250
Southwest California Unit Sales
Single Family Residential
200
150
100
50
0
3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake
Tough trendline for 2010. Thanks to strong 1st half sales the year ended on a very positive note
with 4 of our 6 cities establishing high water marks. However, as this graph illustrates, 4 of
our 6 cities also started the year with sales well below 1/10 or even 1/09. People rushing to
close before year-end pushed a December spike but that was the only bright spot in the last
half.
Median prices continue to gyrate in that stable range with 3 cities up, 3 down.
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
Southwest California Median Price
$50,000
$0
3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake
Based on information from California Regional Multiple Listing Service, Inc. for the period 1/1/2009 through 1/31/2011. Due to MLS reporting methods and
allowable reporting policy, this data is only informational and may not be completely accurate. Data maintained by the MLS's does not reflect all real estate
activity in the market.

3. 160
Historical January SFR Unit Sales
140
120
100
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake
But while January 2011 may not have measured up well against the past two years,
historically it was still the 3rd best January on record for the region. Sales are still double to
triple what they were in 2008 so that’s good news. Menifee sales show a jump in volume
because Sun City numbers are being incorporated into the mix for the first time.
Here’s more good news. January prices remained stable for the past three years. Temecula
median price is up 14% over 2 years, Murrieta up 4%. Menifee median showed a decline
because core Sun City homes typically sell for up to 1/3 less than core Menifee homes.
$700,000
Historical January Median Price
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
2004 2005 2006 2007 2008 2009 2010 2011
Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

4. 6
700 3
7
5 Demand Chart
600 2
8
January 2011
4
500 4
1
3
4
400
5 2
2
7
5
300 3
3 1
1
1 7 1 7 1
3 9 4 2 3
200
8 9 3 7 9 9
8 7 8 9 9 8 8
9 7
4 5 4 4 9 9 8 4 2 9 2 5
100 3 6 3 3 3 4 3 8 2
9 4 1 6 3 1
4 8 2 . . . . . .
6 7
7 9 7 7 6 9
0
On Market Pending Closed (Demand) Days on Market % Selling Months Supply
(Supply)
Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar
60 day demand shows increases in supply over last year but declines in sales. As a precursor
to future sales, pending sales are also off across the region. That means fewer ‘solds’ next
month as well. Properties are staying on the market longer and the months supply has
increased, although still lower than a more normal 6-7 months inventory.
4
500 5 Demand Chart
9 3
January 2010
450
6
3 3
400 2
2 1 1
2
350 7 7 3
7
300 8 0
1 1 1
250 9 8 8 1
0 4 0 4 1
200 1 2
0 2
150 5 8
0 7 6 7 7 7 7 6 7 6 6 7
5 8 5 6
100 3 3 3 9 2 2 1 0 7 0 7 5 4 2 2 2 2 3
8 1 6 5 5
7 . . . . .
50 4 5 6 2 1 9 2
0
On Market Pending Closed (Demand) Days on Market % Selling Months Supply
(Supply)
Murrieta Temecula Lake Elsininore Menifee Canyon Lake Wildomar

5. Housing Affordability Index
Riverside County, 4th Quarter 2010: 64%
80%
% OF HOUSEHOLDS THAT CAN BUY
60%
40%
20%
0%
----
Jan-90
Jul-90
Jan-91
Jul-91
Jan-92
Jul-92
Jan-93
Jul-93
Jan-94
Jul-94
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
2007.2
2008.4
2010.2
One real benefit of home prices being in the tank – more people are able to afford a homes than
at any time in the past 20 years. That’s especially true for first-time buyers, many of whom had
been frozen out of the market for a decade. That’s good for communities.
First-time Buyer Housing Affordability Index
100%
Riverside County, 4th Quarter 2010: 79%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1/03
Q3/03
Q1/04
Q3/04
Q1/05
Q3/05
Q1/06
Q3/06
Q1/07
Q3/07
Q1/08
Q3/08
Q1/09
Q3/09
Q1/10
Q3/10

6. Price Differential by Sales Type
Median Price
Conventional Short Sale Bank Owned All Types
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10
January Market Activity by Sales Type
Active Closed Failed In Escrow % Activity
Bank Owned 19% 44% 13% 38% 27%
Short Sales 52% 31% 69% 45% 50%
Standard Sales 29% 25% 18% 17% 24%
Other 1% 1% 2% 1% 1%
The $64,000 question is – if banks make more money through a short sale than
by foreclosing on a property, why are they being so difficult negotiating short
sales and why are 70% of them failing?
To answer that you need to understand that the banks make money either way
because they have your mortgage insurance premium to fill some of the gaps and
bail-out money to make up the difference. Another reason is that the servicers,
those middlemen between your lender and you, the ones hired to ‘negotiate’ your
loan modification or short sale, actually make more through the foreclosure
process than if they reach some settlement with you.
Counter-intuitive? Maybe. But along with mark-to-market finance and other
incentives tied to the bail-outs, they are just some of the reasons that federal
programs like HAFA, HAMP & TARP have performed way beneath expectations
and well below the potential for good that was originally promised or intended.

7. Unemployment Rate
US vs. CA vs. RivCo
SOURCE: CA Employment Development Division
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jul-90
Jul-91
Jul-92
Jul-93
Jul-94
Jul-95
Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
RivCo CA US
The past 2 months have shown some improvement to both personal consumption and
consumer confidence. That has yet to translate to any meaningful improvement in
unemployment statistics. In fact, as we’ve seen, the decline in US unemployment from 9.8 to
9.0 over the past 2 months has been the result of dropping nearly 3 million people from the
unemployment rolls as they are ‘no longer looking for work’. Those people are still very unlikely
to buy new cars, homes, take vacations or spend substantially on consumer goods. In fact,
they are more likely to lose their homes and make increased unreimbursed demands on our
education and healthcare infrastructure and other safety nets.
Economists do not anticipate a return to ‘full employment’ (5 – 6%) until 2014 at the soonest,
and that relies on some rather optimistic projections. California’s outlook is forecast to improve
from 12.3% in 2010 to 11.4% in 2011. Of course we have to stop chasing away employers and
employees at an accelerating rate in order to do that. And Riverside County will need to focus
on shifting their jobs base as the traditional construction, manufacturing and logistics jobs
that built our region may be gone for good – or at least will be very slow coming back.

8. Regional Sales By Month
Temecula, Murrieta, Lake Elsinore
Menifee, Wildomar, Canyon Lake
1600
2004 2005 2006 2007 2008 2009 2010
1400
1200
1000
800
600
400
200
0
Longer term trends help level out the monthly peaks and valleys and may provide
a better idea of where we’re headed. Median price is up 12% from the trough, but
continued strong demand in the face of anticipated increases in REO inventory
will tell the tale during the next few months.
$600,000
Regional Median By Month
2004 2005 2006 2007 2008 2009 2010
$500,000
Peak
1/06
$400,000
$511,963
Trough
4/09
$300,000
$210,317
-59%
$200,000
$100,000
$0

9. 00
California Sales by Month
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
00 01 02 03 04 05 06 07 08 09 10
California Median by Month
$700,000
P: May-07
$594,530
$600,000
T: Feb-09
$245,230
$500,000 -59% from
peak
$400,000
$300,000
$200,000
$100,000
$0
00 01 02 03 04 05 06 07 08 09 10