Joshua Miller

1st Quarter Review 2010 Statistically the first quarter of 2010 North County Real Estate Sales was similar to the 2009 first quarter numbers. The total number of homes sold was right around 250 units for both quarters. The average sale price of a single family home came in at $287,000 both quarters. Even the sale pending numbers came in right around 100 units for both quarters. From these year to year numbers it is clear that the market has stabilized in North County. We predicted more residential single family homes will sell in 2010 than did in 2009. We felt this increase in sales could be as much as 10%. Banks have been holding back foreclosures and this is one reason the total number of sales is not increasing. With no new construction the new inventory is mostly foreclosure product and short sales. It feels as if more foreclosures will get to the market quicker but time will tell. A good 40% of the market will be distressed properties in 2010. Pricing is stable and firm below $400,000 in North County. Above $500,000 buyers are more selective and seller concessions are a bit more generous. Homes on acreage, 5 acres and up, have been dormant for well over a year. Foreclosures have quickly hit this final segment of the market in this first quarter. There are a number of distressed properties in this category that will dribble into the market in the coming months. Banks take longer to get these properties on the market. Financing is difficult for these properties. Often times the value is centered in the dirt. Seller discounts for these distressed properties will initially be very generous. These ranches are not commodity items so values are a bit more subjective. This is not a large segment of our market but we should see buyer activity as the year plays out. Raw land has been slow across the board for a few years. We have had a few recent North County closings of parcels above 20 acres. While no one would categorize the buyer activity as vigorous, we do see more buyer interest in acreage than we have seen in the past few years. Inventory is real thin. Foreclosure dirt is almost non-existent. Sale prices are down. Buyers are seeing value. This buyer interest trend should slowly inch forward. Our local wine industry is feeling the effects of our economic malaise. Tasting room sales are soft and demand for fruit is tenuous. Visitors are still coming to our community and buying wine. Most of the wineries feel that we are at the bottom of the consumer demand for wine. Everyone is still selling wine and our area continues to grow in stature. It’s just a tough business for most of the industry today. Commercial Real Estate is soft in terms of rents and property values. There is some demand for space from smaller office and retail users. No demand for commercial acreage. There is a fair amount of middle sized vacant office space for lease in North County. The savvy building owners are working hard to make deals and keep their current tenants. There will be foreclosures, in the coming years, in the commercial real estate category. Sales velocity is a leading indicator for price. Stable sales have created stable pricing in most categories. Any sales increase will probably not have an immediate impact on pricing because we have a good year or two left in the supply of most properties. Its true there is a lot of money on the sidelines and many buyers have been reluctant to make decisions. We have noticed an increase in the number of buyers coming in our office. This small uptick in buyer interest should show up over the latter part of the year. This recovery will be a process of activity spurts. Demand will pick up slowly. Absent another economic shock we should see activity slowly increase in 2010. Cautious Optimism!

Fear is rapidly leaving the North County Real Estate scene. The number of real estate transactions topped 1200 sales in 2009 with over 800 residential single-family home sales. Total sales volume was close to 500 million dollars. This sale increase equates to a 25% bump over 2008 numbers. There was a lot happening in 2009 and more to come in 2010.

The average sale price of a residential single family home today, in North County, is $301,000. This number represents a nearly 40% drop from the brief average pricing slightly above $500,000. First time homebuyers and investors are very active in this market. Apartment and home rents are not cheap in North County. With the combination of low interest rates and low home prices the monthly payments are very attractive. This price point of $300,000 is very competitive for buyers. We could very well see close to 1,000 homes sell in 2010. This activity is remarkable when one considers the almost complete absence of new construction.

Home pricing is a lagging indicator. The first step in a recovery is transactional velocity or the number of sales. With this current sales velocity we have already seen a floor established in pricing with periodic slight bumps upward. Pricing should be relatively stable but there is more chance of price increases, albeit slight, then price decreases in the core residential market. That's a huge change from the last few years.

Estate homes on small acreage are moving very briskly. These McMansions are selling for well below replacement cost. The values are stunning and the buyers are stepping up and buying. This trend will continue on into 2010 but the supply of these

Big Beautiful homes is much more finite than core residential properties. Today there is still great supply and pricing is very well established. This is a healthy market. There has been no upward price pressure in this market. We see no upward pressure in 2010.

There is a decoupling of vineyards and wineries in relationship to values. Vineyard values on the eastside are soft and Westside values are stable. The major international wineries, big buyers of our local fruit, are cautious. Everything seems tentative but this could change quickly. Today the wine grape market is unclear. The time and effort to get a permit for a winery and tasting room has become a two-year process. Buyers are starting to see the value in the entitlement for the winery. More important than anything is the health of the brand and wine sales. There are lenders for this category of established wineries. Values are well established. Sales are happening in wineries. Given the past economic shocks, our tasting room traffic is relatively good. There is no area, in California, that has more upside in the direct wine sales arena then North County.

The biggest change in North County sales for 2010 will be homes on acreage. Foreclosures have begun to hit the market in this category and this process then creates a floor in pricing. Buyers, sellers, lenders and appraisers all get clarity in values. This market segment is not a big part of our market but there are deals being made today.

Much has been written about the coming implosion of the commercial real estate market. Vacancy equals uncertainty. We do have vacancy in North County and we do have uncertainty. This market will probably bump around for another year or so before velocity picks up. Smaller tenants are doing deals and smaller buildings are being sold to users and investors. It's a very price sensitive market. The commercial market will be the last category to exit the doldrums.

New construction supply has been replaced by foreclosures and short sales. These distressed properties are fueling the market and creating a whole new class of homeowners. There will be more liquidity in distressed properties in 2010. After a few years banks are getting better at the process. Distressed properties will not be around forever. The opportunity is today.

Given the option of not losing money or risking making money, most people will opt for not losing money. The big fear in real estate, for the past few years, is that values had more room to fall. This fear of value erosion has left the building for the most part. It's still about getting a good deal but there is comfort that a bottom is in place. Now the hurdles are lenders and appraisers. This return in confidence could bode well for North County beyond anyone's expectations. Most probably foreclosures and short sales will not be around in a couple of years. The wine business has room to improve as well. There is still a lid on pricing but more importantly there is also a floor. It wasn't that long ago that North County was a billion dollar market! 2010 should be a positive year for North County.

2009 3^rd Quarter Forecast and Review

This report covers the first three quarters of 2009 North County Real Estate Sales. The majority of sales are residential single family home but the unique nature of our community encompasses land transactions, homes on acreage sales and commercial activity.

The average sale price of a residential single family homes remained virtually unchanged at $290,000 from the second quarter through the third quarter. In fact some properties in the $300K range experienced a slight price increase. Foreclosure properties, a strong supply component, have decreased over the past few months. This decrease is a reflection of Federal mandates and lenders slowing down the supply process. There will still be plenty of foreclosures coming into the system well into the 2010 buying season. There is good steady demand for residential single family homes below $500,000.

New construction of residential single family homes has been nil. With demand stabilizing, over the past six months, it appears some builder developers are cautiously reaching out for limited new projects. This demand for parcels is tentative and price sensitive. Absorption of new spec homes is spotty. What is clear, however, is the supply of new product is very low. If demand continues to slowly recover there will be a need for new spec product. North County does not have the supply of new standing spec product that is so pervasive in many urban areas.

Absorption in large estate homes, on 1-5 acres, will double in 2009 versus 2008. Many million dollar properties were built on spec in 2005-2007 and banks are getting these properties back and aggressively selling the foreclosed product. It's a Buyer's market and deals are being made today. There is plenty of supply in this category into 2010. Prices have stabilized in this category and clarity is present for Sellers, Buyers, Lenders and Appraisers. The cost value for the Buyer is exceptional.

Homes on acreage, from 10 acres on up, is a small but meaningful North County Market. This market has been stagnant due to the weak buyer demand, tougher financing and seller expectations. Everything about this market is changing today. The economy has created foreclosures in this category and price discovery will play out over the next 12-18 months. We just sold a twenty acre foreclosed property with two homes for $535,000. That's where this market is headed. In fact we are there today. The pipeline of properties for sale is filling up. Buyer demand is still very weak but good deal pricing will do the same thing for this market that pricing did for homes and estate homes.

Large acreage parcels and vacant residential lots have been dormant over the past few years. Supply is very shallow in both of these categories. There is some buyer activity in finished lots. Larger vacant dirt is still not in demand. Seller financial pressures do not typically exist in the larger parcels so absorption will probably remain weak well into 2010. The soft grape market also influences weak dirt demand. Finished lots will absorb much faster in 2010.

Publicly held wineries account for a dominant share of the demand for wine grapes. These handful of wine grape buyers have shut down demand based on their financial fears. There has been very little planting but Westside fruit is still in demand from local wineries. It's a very tough time to be a grower particularly on the Eastside. Agriculture is a high wire act and wine grapes are not exempt. Our area continues to produce and sell quality wines. Our tourism industry is growing. Creating and building wineries and vineyards is getting harder and more expensive. This market could turn around in a moment or slog through another year.

Commercial activity is weak but there are smaller users in the market leasing smaller spaces and trying to buy buildings. Everything about this market is price driven. The large vacant spec buildings and plentiful supply of vacant acreage is getting no attention. The Lowes opening will be interesting to gauge the impact north of town. Investors are brutal in their value judgments.

Our economy seems to be trying to recover in spite of government intervention. There is no bail out for our local real estate market and yet homes have stabilized. We have a very thin job market with statewide double digit unemployment and yet North County moves forward. These aforementioned facts coupled with our natural beauty bode well for the future. While big wineries bludgeon one another over market share many of our small high quality wineries quietly go about their business of selling wine. People visit our community and spend money. It's a beautiful thing.

Certainly this is a unique market we are experiencing. We believe that it will only get more expensive and difficult to build anything in San Luis Obispo County. Coastal California comes with a price. Water is going to be more of an issue. Our wine industry will grow and bring in more tourism dollars. Long term today's real estate values have generous upside. The recovery may zig and zag more than the market expects. Supply is omnipotent and they are just not making any more North Counties today!

First Half of 2009

The debate rages on about slump, green shoots, recession and recovery. If this is a generational event, then we are facing generational challenges and generational opportunities. Every market move makes someone happy. While happiness may seem to be elusive in North County Real Estate, it sure beats being in Michigan. This is what's happening in North County Real Estate Today.

Residential single family real estate has been much maligned in the state run media over the past few years. Today's low interest rates and low prices are attracting multiple offers on many properties priced at or below 300K. The headwinds in this category are appraisers and lenders. Appraisal values are all over the map and lenders are skittish. Federal rules and regulations are slowing down the sales process. Deals are routinely closing late. Half of the sales are distressed properties. Buyers have no fear of further price erosion. Shortage of product is already an issue.

More residential single family homes sold in the first half of 2009 as compared to the first half of 2008. This increase in sales was fueled by an average sales price of $290,000. Interestingly this average price reflected a 1% increase over the first quarter average price. Most of the buying activity is at or below $300,000. Inventory is thin across the price spectrum. New construction is at a standstill. We believe foreclosure properties will continue in our market into the first part of 2010. These foreclosures are the primary source of new inventory. Government mandates tend to interrupt the foreclosure process for periods of time. These mandates have only prolonged the foreclosure situation. Most buyers are well aware of how competitive this environment is for purchasing a home. This is a stable market with great upside in the next decade.

Price discovery is an important concept in real estate markets. When real estate markets seize up and falter, as North County did in 2006/08, current market values become clouded. Sellers take years to adjust their expectations while buyers sit on their wallets. Transactional velocity slows and pricing becomes a mystery. In North County the foreclosures came into our market, over the last couple of years, and defined the values in residential single family. There is a deep population of residential sales in North County so buyers and sellers have value clarity. More importantly lenders and appraisers have price clarity. Closed sales create price discovery which fuels confidence and clarity in the market place

High end home sales have started the process of price discovery in North County. Big home sales on 1 to 5 acres have doubled over last year's comparable period. With velocity and price discovery we are establishing a market bottom in this category. Demand is selective at the upper end and many of these homes are functionally challenged. The difficulty in obtaining jumbo loans also slows down this market. The healing process in the upper end will be longer then residential single family and more painful. The recovery process is underway in the market for these estate homes. It's still all about price.

Raw acreage is just starting to show early signs of price discovery. In down cycles dirt tends to fall much lower, on a percentage bases, than improved properties. The primary reason for this discrepancy is that an improved property sells for below replacement cost so there is no appetite for buying and building. Years of acreage supply have been building up. There are some stirrings and some sellers are moving to get ahead of the curve. We are not there yet. We can see it coming.

Commercial real estate is overbuilt and oversupplied in most categories. The combination of a weak economy and many vacancies is not good for values. This market is years behind residential single family. There is no velocity or price discovery in commercial real estate today. Rents are falling and will fall further. It's going to take a growing economy to get commercial real estate on track again. The weakest segment of commercial real estate is vacant land. Recovery will start with end users.

Our wine industry is surviving and actually doing fairly well with all things considered. Tasting room sales have been decent in 2009 but the summer has started out slow. Wine grapes have firmed in price and Westside fruit will command strong dollars. Big wineries, that are major buyers of fruit in North County, are tentative. The real question hanging over the industry today is wine sales. The global wineries are very cautious. Our local fruit is getting good prices but fruit buyers are very conservative. Fruit supply appears to be in balance which would bode well if wine sales improve over the next few years.

Inflation seems to be viewed as an inevitable outcome of the government monies being pumped into our economy. Real Estate has always been viewed as a strong hedge against inflation. Today most Real Estate has been beaten down in price. If you can join historic low debt cost with low real estate values the hedge position and upside for return would seem to be generous. Inflation is a sinister and covert agent of monetary erosion. Real Estate will provide a competitive edge for those folks looking to survive and prosper in an inflationary environment.

Residential single family homes have found a bottom in North County. Higher end homes are close behind with dirt and commercial real estate bringing up a distant rear. This is what bottoms feel like. Bumpy and uncomfortable. Fortunes have been lost and new fortunes will be made. We are living in an economy dominated by fear. Economic leadership is absent. We believe that a local city government is more impactive then our federal dictators. We have good leadership in North County and we will ride out this storm. It's a very selective market but the longer term prospects remain bright for North County.

This report details North County Real Estate throughout the first three quarters of 2008. Various segments of the market are performing at different levels of activity and price strength.

Just under 500 residential single family homes have sold throughout 2008. Approximately 40% of these sales have been foreclosed properties. The average sales price has hit $375,000 and there appears to be a bottom in pricing for properties valued below $400,000. First time buyers and investors are actively seeking single family properties priced below $400,000. There are multiple offer situations. Inventory is in balance at these price points. Pricing is defined. Buyers are very educated and will respond only if the price is right. There is no upward movement in price today. Residential single family homes priced at $500,000 and up are languishing on the market and pricing is not clearly defined. There is more supply then demand. The bottom, in pricing, is near and will probably be realized within the next two quarters. Sellers need to be aggressive in competing for buyers. Waiting for a market to turn is a doomed strategy.

Homes on acreage is also a two tiered market. Smaller homes on smaller acreage, priced below $500,000, are getting decent activity. Supply still outstrips demand but there is a bottom being established at these lower price points. The million dollar category of homes on acreage is an altogether different story. We have moved the price point for the analysis down to $800,000 since this is representative of the floor in higher end estate type properties today. There are over 100 estate caliber homes listed for sale today and there will be 20 or so that sell in 2008. Almost one fifth of the higher end listings are distressed which means either bank owned or soon to be bank owned. The price reductions have been dramatic in this category. Supply overwhelms demand. It is the ultimate buyers market. There are some great values in this category and buyers are slowly beginning to re-enter this market segment. There will probably be twice as many of these homes that sell in 2009 and the values will be extraordinary.

Vineyard oriented properties are experiencing more buyer activity. Grape pricing has firmed at a reasonable level and wineries are signing multi-year contracts to purchase fruit. There is clarity and definition in the wine grape and bulk juice market. We may even see vineyards being planted in 2009. Existing vineyards are reasonable values when one considers the replacement costs.

Commercial real estate lags behind residential real estate. After a couple of weak residential years the commercial market is softening. Office space is overbuilt, industrial dirt is overbuilt and rents are weakening. Big rental users and some niche smaller retailers are surviving. Retailers are surviving but prosperity is relatively absent throughout the commercial environment. Sales of commercial property are weak because buyers see the supply situation and buyers are demanding good deals. This market is stagnant and rents are dropping. Weak rents will attract tenants throughout 2009 and 2010.

The best buys in the market are finished lots and acreage. Pricing has to be right but as our market recovers dirt always jumps in value. Our residential market is in the early stages of recovery. There are very few lots for sale and the cost to create new subdivisions is enormous. Dirt is finite.

The single most significant situation in our market today is the short-sale listing category. A short-sale listing is a property offered for sale at a price below what the seller owes the bank or banks on the home. The lenders must approve the sale and the red tape involved makes these transactions long, frustrating and unpredictable. That's the good news. Many of these short sales never happen. The illiquidity of these properties creates a false illusion of an inventory situation that really does not exist. The media always focuses on inventory, or homes for sale, when commenting on the market, but most of these short sales are fake inventory. How many people do you know that would like to spend six months getting jerked around by a lender? Buyers have this figured out. Our inventory level is much lower in North County when one subtracts short-sales. There's a reason there are multiple offers on many residential properties even thought the inventory appears bloated. People want to buy properties that are deliverable. Short-sales do happen. The fact is that the number of short-sales as compared to the number of short-sale listed inventory is dramatically lower then the ratio of other sales to listing deliverable properties. Short- sales cast a shadow over the entire market.

The local economies of Paso Robles, Templeton and even San Miguel are holding up pretty well in this environment. Tourism and hotel occupancy are remarkably strong. Wineries are selling wine but it is competitive. Existing businesses are holding on throughout the malaise. It's unfortunate to watch the debacle in Atascadero and we certainly hope that the community pulls it together soon. Overall the Central Coast is poised for greatness and prosperity in the coming years.