Well, The Train Has Left The Station… (with apologies to Robert Johnson & The Rolling Stones)

… the longer you wait now, the further away that train will get and the harder it will be to catch. That was the prevailing sentiment expressed by many at The National Association of Realtors® recently concluded annual fall meetings in Orlando. But they were talking about two distinctly different trains with two very different destinations.

On one track you’ve got housing which, by all indication, has turned the corner in 2012 and is gaining strength across the country to one degree or another. Housing affordability is at an all-time high while interest rates and inventory are at an all-time low. That train is picking up speed and people who don’t catch it today will have an increasingly difficult time in future years as both prices and interest rates inevitably tick up.

On the other track is our country headed inexorably toward a fiscal cliff. As our leaders posture and preen on who has the strongest mandate going forward, the rest of us will ultimately pay higher taxes and be subject to more regulation in spite of their best efforts. It will either be bad or really bad – there’s no other outcome and again, the longer they wait to act, the harder it will be to catch it.

In this newsletter I have included remarks delivered by NAR Chief Economist Lawrence Yun where he outlines his rationale for predicting sustained housing price increases and strong sales but warns that the fiscal cliff will impact the strength of that recovery. For example, if sequestration is avoided, there will still need to be an off-set of $1 trillion in painful cuts elsewhere or revenue increases. If one or the other is not addressed the US credit rating will be cut at least once if not twice in the next few months impacting rates and liquidity. In the short term, interest rates may move a little lower but inflation and interest rates will start to rise by 2015.

A shortage of homes for sale will continue across the country, California in particular. Rising prices means fewer homeowners underwater and fewer distressed sales but prices will not rise fast enough to incent many homeowners with equity positions to sell immediately as they wait for increased profit margins. Builders are also stepping up but in a limited way. Major builders who are able to tap into national funding sources will provide limited inventory but smaller local builders still don’t have access to money. Commercial construction, which peaked at $570 billion in 2008, will post some recovery in 2012 but still only rise to $181 billion.

For the 4th election cycle in a row NAR was the largest direct contributor to federal candidates at $15.5 million. We continued as one of the most bi-partisan as well with some 54% going to Republican candidates and 46% going to Democrats. Our investments went largely to bolster key positions on committees like Ways & Means and Finance as we anticipate challenges in the tax reform discussions impacting preservation of the mortgage interest deduction for homeowners, capital gains, mortgage debt cancellation, sequestration and the deductibility of state and federal real estate taxes, among others. We’re keeping our seat at the table.

1/3 of the members of the House of Representatives are in their 1st or 2nd term in office, including this years crop of 79 freshmen. That presents both a challenge and an opportunity as we make sure our elected officials understand that Homeownership Matters.

Good local housing news in this report – sales are strong keeping us on pace for a record year throughout the Valley. Prices are generally up and apparently sustainable – Temecula has posted a median price above $300,000 for eight consecutive months. Standard sales make up over 50% of the sold market for the first time in more than 4 years and bank owned homes, which accounted for 92% of our market for much of 2008 and 2009 now make up just 8%.

Housing Market Uptrend Expected Through 2014 ORLANDO (November 9, 2012) - The housing market recovery should continue through the coming years, assuming there are no further limitations on the availability of mortgage credit or a "fiscal cliff," according to forecast presentations at a residential forum here at the 2012 Realtors® Conference and Expo. Lawrence Yun , chief economist of the National Association of Realtors®, said the housing market clearly turned around in 2012. "Existing-home sales, new-home sales and housing starts are all recording notable gains this year in contrast with suppressed activity in the previous four years, and all of the major home price measures are showing sustained increases," he said. "Disruption from Sandy likely will be temporary, notably in New Jersey and New York, but the market is likely to pick up speed within a few months with the need to build new homes in damaged areas," Yun added. Yun sees no threatening signs for inflation in 2013, but projects it to be in the range of 4 to 6 percent by 2015. "The huge federal budget deficit is likely to push up borrowing costs and raise inflation well above 2 percent," he said. Rising rents, quantitative easing (the printing of money), federal spending outpacing revenue, and a national debt equal to roughly 10 percent of Gross Domestic Product are all raising inflationary pressures. Mortgage interest rates are forecast to gradually rise and to average 4.0 percent next year, and 4.6 percent in 2014 from the inflationary pressure. With rising demand and an ongoing decline in housing inventory, Yun expects meaningfully higher home prices. The national median existing-home price should rise 6.0 percent to $176,100 for all of 2012, and increase another 5.1 percent next year to $185,200; comparable gains are seen in 2014. "Real estate will be a hedge against inflation, with values rising 15 percent cumulatively over the next three years, also meaning there will be fewer upside-down home owners," Yun said. "Today is a perfect opportunity for moderate-income renters to become successful home owners, but stringent mortgage credit conditions are holding them back." Existing-home sales this year are forecast to rise 9.0 percent to 4.64 million, followed by an 8.7 percent increase to 5.05 million in 2013; a total of about 5.3 million are seen in 2014. New-home sales are expected to increase to 368,000 this year from a record low 301,000 in 2011, and grow strongly to 575,000 in 2013. Housing starts are forecast to rise to 776,000 in 2012 from 612,000 last year, and reach 1.13 million next year. "The growth in new construction sounds very impressive, and it does mark a genuine recovery, but it must be kept in mind that the anticipated volume remains below long-term underlying demand," Yun said. "Unless building activity returns to normal levels in the next couple years, housing shortages could cause home prices to accelerate, and the movement of home prices will be closely tied to the level of housing starts." "Home sales and construction activity depend on steady job growth, which we are seeing, but thus far we've only regained half of the jobs lost during the recession," Yun said. Yun projects growth in Gross Domestic Product to be 2.1 percent this year and 2.5 percent in 2013. The unemployment rate is showing slow, steady progress and is expected to decline to about 7.6 percent around the end of 2013. "Of course these projections assume Congress will largely avoid the 'fiscal cliff' scenario," Yun said. "While we're hopeful that something can be accomplished, the alternative would be a likely recession, so automatic spending cuts and tax increases need to be addressed quickly." Regardless, Yun said that four years from now there will be an even greater disparity in wealth distribution. "People who purchased homes at low prices in the past couple years, including many investors, can expect healthy growth in home equity over the next four years, while renters who were unable to get into the market will be in a weaker position because they are unable to accumulate wealth," he said. "Not only will renters miss out on the price gains, but they'll also face rents rising at faster rates." Also speaking was Mark Vitner, managing director and senior economist at Wells Fargo, who said the fiscal cliff is the biggest situation that needs to be addressed. "Beyond concerns about the fiscal cliff, the economic improvement seems to be broadening," he said. "Housing will strengthen in 2013 even if the economy weakens because there is a demand for more construction, and the demand for apartments is rising at a faster rate than the need for more single-family homes," Vitner said. "Unfortunately, apartment construction is focused on about 15 submarkets, so additions to supply will be uneven. Even with declining market shares of foreclosures and short sales, Vitner said they will continue. "Distressed homes right now are like an after-Christmas sale - most of the best stuff has been picked over, but make no mistake they'll be with us for a while." Yun projects the market share of distressed sales will decline from about 25 percent in 2012 to 8 percent in 2014. The National Association of Realtors®, "The Voice for Real Estate," is America's largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

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Southwest California Homes Single Family Homes

Unit Sales

While national home sales posted an unusually strong October up nearly 15% (home sales typically slow in the 4th quarter), local home sales continued their slow decline, down 12% since June (796/698) and down 3% from the September (723). At nearly 30%, Temecula lead the drop (218/155), Murrieta sales fell 31% (232/160) but rebounded 12% from September to October (160/181) and Menifee slid 17% (184/152).

However, sales were still up 6% over October 2011 (657) and 5% over 2010 (666) keeping us on pace to finish the year with record sales. Murrieta sales were up 18% over last October (148/181) and Menifee sales climbed 17% (126/152). Temecula sold 3 more homes in October 2012 than October 2011 (152/155).

The slowdown in sales is best attributed to a lack of inventory of available homes to sell. Statewide the average listing is receiving 4.3 offers to sell. While I don’t have a hard number for the local market, most agents I talk with tell me of 5 – 8 – 10 or more offers for newly listed properties.

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Median Price

Median price across the region is up 3% over September and has improved in each of the past 4 months. Region-wide, median price is up 17% over January of this year ($217,924/$263,274) and up 8% over last October ($243,360/$263,271).

Temecula has had 8 consecutive months over $300,000 with an increase of 16% over January of this year ($286,246/$341,442) and 15% over last October ($290,710). Murrieta’s median is up 8% over last October ($259,975/$294,826) and up 12% since January of this year ($259,975).

You’ll note the regional trendline, after remaining relatively flat during 2010 and 2011, has started an upward curve during the past 12 months.

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Southwest California Homes October Housing Demand Chart

Inventory of available homes shrunk another 6% in October (775/725), down a whopping 68% since February (2,240). Back in January Temecula had 449 active single family listings, today just 181, a 60% drop. Murrieta has lost 65% (541/192), Lake Elsinore at 66% (317/107), Menifee down 68% (478/152) and Wildomar 75% (106/26). Canyon Lake is doing better than the rest and has dropped just 35% (103/67).

In January we boasted a relatively healthy 4.2 months inventory, down to 1.3 in October and the average home was staying on the market 91 days in January, down to 82 today.

In January we were selling .7 homes for every new listing, today across the region we are selling nearly 3 homes for every new listing – 2.4 in Temecula, 3.7 in Murrieta and nearly 5 homes sold for every new listing in Wildomar.

It’s no wonder prices are going up – the only mystery is why they’re not going up faster.

October Market Activity By Sales Type

Standard Sale Bank Owned Short Sale

Active % of MKT Sold

% of MKT Active

% of MKT Sold

% of MKT Active

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% of MKT

Temecula 146 81% 88 57% 14 8% 7 5% 17 9% 57 37% Murrieta 157 82% 91 50% 11 6% 22 12% 22 11% 65 36% Wildomar 18 69% 17 44% 3 12% 5 13% 4 15% 16 41% Lake Elsinore 74 69% 36 39% 11 10% 16 17% 19 18% 38 41% Menifee 108 71% 74 49% 20 13% 20 13% 20 13% 54 36%

Canyon Lake 55 82% 13 57% 4 6% 2 9% 6 9% 8 35%

Regional Average 558 76% 319 51% 63 8% 72 11% 88 13% 238 38%

Our product mix continues to shift with standard sales moving above the 50% threshold for the first time in more than four years – 76% of the active market, 51% of sales and selling nearly 60% of the time. Bank owned homes have exactly reversed their position from four years ago comprising just 8% of the active market today compared to 92% for much of 2008 and part of 2009. Adding in short sales, distressed properties account for just 21% of the active market today.

As prices strengthen, the percentage of underwater homeowners will continue to decline meaning fewer distressed property sales and increased activity in equity sales, though the increase in standard sales will not come on board immediately. Homeowners who remember what their home was worth 5 years ago will not immediately be jumping into the market hoping to wring a few more dollars of profit from the old castle before they sell. Even if their next home will be that much more expensive as they wait for their value to increase, most need to maximize their profit in order to take that next step.

Still, the ongoing shift in product mix is a good sign for our regional market which has been mired in foreclosures, short sales and declining prices for far too long.

From Foreclosure Radar… "The California Homeowner Bill of Rights that takes effect in January 2013 is beginning to impact foreclosure trends. This is another example of where changes in foreclosure trends are driven by government intervention, and not necessarily economic recovery. While the impacts are still unclear, the elimination of dual tracking may avoid some unnecessary foreclosures, but will lengthen the foreclosure process and delay ultimate recovery. Expect further impacts to foreclosure trends in the months ahead.“ October 2012 California foreclosure Cancellations were up 62.1 percent from the prior month, and 36.7 percent compared to last year. While this is not the first time Cancellations have spiked, this is the largest one-month increase since we started tracking foreclosures in September 2006. It seems likely that the increase is being driven by the Homeowner Bill of Rights legislation that goes into effect on January 1, 2013 and its provision to restrict the dual-tracking of foreclosures. Dual-tracking is the term applied to loans which are being considered for either a short sale or loan modification while simultaneously proceeding through the foreclosure process. Prior to January 1, lenders will have to cancel any foreclosure on a loan for which a short sale or loan modification is being considered, and it appears that process has likely already begun. October 2012 California Notice of Defaults was down 8.0 percent from the prior month, and down 48.9 percent compared to last year. October 2012 California Foreclosure Sales were up 9.3 percent from the prior month, but down 38.9 percent from the prior year.

As the number of foreclosed homes drops, it’s interesting to note some of the reasons why. Some are obvious – • All the low-hanging fruit and those most at risk have already fallen • Increasing prices have stalled another round of foreclosures as fewer people are underwater or nearing breakeven • The anticipated rash of strategic defaults never materialized • The much feared ‘shadow inventory’ didn’t exist • Government intervention has manipulated the market with both good and bad results.

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Canyon Lake

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The Last Word… Some further observations from our recent meetings. One of my favorite political hacks and a guest every couple years is Charlie Cook of the Cook Political Report. This year Charlie was joined by Major Garrett of The National Journal. I’ll share some of their observations for your entertainment.

• The 2012 election proved 2 things – the 2008 election of President Obama was not a fluke but neither was the resurgence of the Tea Party Movement in 2010 – both are important realities meant to maintain the balance of power in Washington with neither side obtaining an overwhelming mandate.

• Republicans would have fared better had they not forced their Presidential candidates to jump off an ideological cliff during the primary race. They also may have picked up the Senate without the unforced errors of candidates like Mourdock and Akin putting live grenades in their mouths and pulling the pin. It wasn’t just their own self-destruction but the collateral damage to their party as they garnered disproportionate and negative media coverage that spread to the rest of the party.

• Numbers to remember – 60% of Romney votes came from voters 60 and over, 50% of Obama’s came from 40 and under, not to mention Hispanics, Blacks and younger women. The Hispanic vote will play an increasingly large role in future races with the probability of Texas going from reliably red to purple in 2016.

• Conservatives have passion, liberals have passion, independents have lives. They are also typically lower information voters.

• Republicans turned down a 10 to 1 offer, $10 of spending cuts for $1 of revenue increases. Going forward they’ll be lucky to get 2 or 3 to 1.

• Will Congress willingly send our country over the fiscal cliff and into another recession, which is the very real outcome of no action. It will mean a 3% drop to GDP which is not overly robust to begin with. The quieter it is during the next couple weeks, the better it will be for us. If there’s a lot of press conferences and political posturing, we’re screwed.

• Obama doesn’t even know his own people. He has played 104 rounds of golf but just two of those included members of his own party and one with John Boehner, which was more photo op than productive. He has not met with his own Senate Finance or Housing Committee Chairs this year. If he can’t reach out to his own party, how can we expect him to reach out to Republicans.

• There have been 4,100 new regulation adopted by various agencies during the past 2 years that have not been implemented for fear of the negative impact they might have on the election (primarily from the Democratic side). Those will start falling into place now impacting virtually every facet of our lives including housing, the environment, finance, business and taxes along with the 2013 implementation of Obamacare and the Dodd-Frank Wall Street Reform Act. Hang on – it’s going to be a bumpy flight.