3-31-09

   We started off the New Year with the excitement of a new president and the thud of an economy that was falling far faster then anyone thought possible. We are now in a defined recession. Thankfully we didn't fall into a full blown Depression, which I think was a real possibility! Many of the government programs, including the stimulus package, and investments in companies and banks directly, have really had very little affect on the over all economy. However, I think it did have some positive affects on the lack of confidence that every one had as well as mitigating the general fear that was so strong in minds of Americans, if not the rest of world, as well.

   Much of the government intervention is to be a substitute ahead of private equity and standard lending, which the private market regularly does on its own. Now that they have bridged that gap and some of the markets are starting to function properly again, i.e., the commercial paper market and over night investing. Now the Fed and treasury are putting forth much bolder plans to directly purchasing mortgage backed securities as well as providing lending directly to the private markets to buy these up as well. Again, the main goal is to aid the private market until it's acting on its own again and then the Fed will take itself out.

   These types of programs are having a positive influence on the market. Mortgage rates have fallen to below 5% for the best borrowers. Most people with good credit, with 10% down can expect well below 7% and some people with great credit can expect less then 6%. This is spurring demand.

   For the first time we have some good news to report in the local housing market! New and existing home sales were up two months in row! Last year in January and February only 2,900 and 3,400 were sold respectively. This year, it was 4,700 and 5,400. I expect March to be well over 6,500 versus 4,200 last year. This would be the largest number of homes sold in a month for at least three years. I had said in the past, that I've seen signs of a bottom. I think we have it this quarter. Specifically in January would have probably been the fulcrum. Starting in February, I saw something I've not seen in three years of tracking market numbers. I keep track of MLS inventory, number of "pending" properties and total properties sold each month. In February, the "pending" number started to jump. Just to define, these are properties listed on the MLS and now are under contract. Typically it gives you an idea of how many properties will sell 30 days in advance, usually about 80% of the current pending number. That number had been hovering around 5000 to 7000 for the last few years. Starting in mid February, it started to jump. It's now 11,500. That's an amazing number. Yes, a majority of these homes are foreclosures and short sales being bought. In fact over 50% of all homes sold in Phoenix metro area are in that classification. I don't care what their label is, we have people buying! If this number stays steady and things improve in the economy, we could be back to a 4 to 5 months inventory by the end of the year.

   This demand creates price support, which is what we need in this market. I said in the past that I've seen a little bit of it here and there around the valley. Now I've seen more. I've also heard of people complaining that the bidding at the auctions is getting more competitive, which suggests that the buyers are coming out of the woodwork. Now don't think we are headed back to 2005. That's a distant memory. What it does mean is that we could be heading towards a better balance of supply and demand, which would give price stability and take a huge risk out of the market of falling prices. There are plenty more foreclosures coming through the system, so there will not be a shortage of supply. It's just now that we have some demand, which we've not seen in years.

   This is making me much more optimistic about the market. You are seeing it in the stock market, which is a leading indicator of the economy. Yes, there will be more bad numbers reported in the press. Unemployment will go higher, and there will be some really bad quarterly numbers reported next month. But I think the worst is behind us, and although we have a big hill to climb, at least it's not an avalanche anymore!

   The last of the temporary funds were returned in advance of the April 15th number. I took in nearly as much money has I returned. The portfolio sits just about $17 million. With a lot of the uncertainly out of the markets, I see the portfolio growing from here on out.

   I have updated the pictures of the current properties on the website. Thanks again for your trust, investment, and referrals.

   Denny J. Chittick