9-30-09

   I was looking forward to writing this newsletter this quarter. There is a sense of optimism that is spreading; even the news has to report it once in a while. The stock market is up 50% from March bottoms, Uncle Ben says "recession is very likely over at this point", home sales have continued to post gains and inventory levels are dropping. We have seen six strong months of home sales and an ever improving economy. It's Christmas in September!

   We have had home sales of 9000, 8000 and probably 8000 again this month in successive months. Though it's slowed from the 9k a month run after three months, we are still up substantially over last year; the inventory is down to 4.5 months. The one thing we've not seen yet is price appreciation. Not that buyers and sellers aren't trying. I can't tell you how many conversations I've had from borrowers that when the appraiser came in it was substantially under the agreed upon buying price, even with backup offers. We have stopped price depreciation for the most part. There are pockets where there has been slight appreciation like a $1 or $2 a sq. foot. Not much, but hey, you have to start somewhere.

   What we are seeing is the bottom coming up, but the roof not rising. There were thousands, and I mean thousands of homes you could buy for less then 30k. Those for the most part have been bought, fixed up and sold again, or turned into rentals. Now the bottom is in the 50k price range. The houses that were selling in the 350k to 450k price range have continued to come down. This compression is keeping overall price appreciation to a minimum. Pending (houses under contract) homes on the market are holding steady between 12-13k, with 35k in inventory. That will mean a strong October.

   Lending costs are still at rock bottom. The Fed has said that they will start slowing down the buying of mortgages and allowing more of the market forces to take over. In just six months after the near collapse, if the Fed is talking about turning off the faucet, you know things have improved tremendously. Thus, rates will rise, but will most likely stay under 6% for the best borrowers for some time to come.

   Another government crutch is set to expire in 60 days. The first time home buyer tax credit of $8k is coming to an end. There is a lot of speculation that this might slow or reverse the housing market. There are several bills floating around congress which would extend it or enlarge it to keep things rolling. Being a screaming libertarian, I'd love to see the government out of business. I don't think the elimination of this program will send us into a nose dive again. With an improving economy and a pent up demand by buyers, we will continue to see stabilization and a full recovery in the year to come.

   As I had predicted last quarter, the 2nd quarter's economic numbers weren't nearly as bad as everyone thought, and I'm convinced more than ever, we'll be positive this quarter. Though we won't go roaring back to a "V" shaped recovery, I don't think it will be as slow as most think either. It was so deep, and cuts from inventory to payroll were over done, there will be a pick up, but not a snap back. I think we've peaked on the unemployment; we most likely won't hit the magic 10% number, which is really as unimportant as Dow 10,000, just a round number people like to hang a hat on. The important thing to watch for is employment gains. Those are probably not going to happen until season adjusted Christmas time.

   I had a net of one million added to the portfolio this quarter. We are at $18.8 million. I was hoping to hit $20 million by year end, and there is still an outside chance, but once again, it's just a round number.

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

   Denny J. Chittick