Equal Housing Opportunity
AV News Briefs - By Frank Donato
 

Frank Donato is a long time Valley Resident and Businessman, and a V.P. Account Manager for Fidelity National Title. Frank currently serves as A.V.E.K. Water Board Director (since 1987), and has served as A.V. Fair Director (1997-2001) and North County General Plan Advisory Council Member (1981-1986). Frank is also a Wine Grape Grower and Consultant and Owner/Partner of Antelope Valley Winery. We thank Frank for sharing his knowledge and unique perspective on current issues!

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Third Quarter 2006 Antelope Valley News:


Third Quarter 2006

Antelope Valley News

July 6th- The Lancaster Redevelopment Agency will acquire two parcels on 10th St West that will expand the Lancaster Auto Mall to the east side of the street. The City's goal is to land an upscale luxury car dealer that is currently not offered in the AV. Presently, the car dealers in the auto mall include Ford, Honda, Toyota, Subaru, and Dodge.

July 6th- Mojave airport officials report that over the last 4 years their facility has gone from under utilized to one where now all of the airports industrial space is fully occupied. With the successful flight of SpaceShipOne, a private venture into commercial space, airport officials say that the facility now has a major reputation as the "Silicon Valley" of the emerging commercial space industry. Proponents of the commercialization of space say that Mojave could become an "incubator" for
this emerging industry. The airport is also located at a crossroads for major highways (Hwy 14 and Hwy 58) and rail routes which has it's industrial park growing as well. One of the young companies thriving at Mojave is XCOR, which builds rocket engines. Founded in 1999, has recently had to increase it's work force to 30 to handle the ever-growing number of contracts. XCOR has a $3.3M contract with NASA to develop an engine for NASA next manned space vehicle. Scaled Composites, designer and builder of SpaceShipOne, is now working on SpaceShipTwo which will be larger and carry more passengers, hopefully paying customers, in suborbital flight. Scaled Composites has hired 60 new workers since the first of the year and has plans to hire 60 more. SC's work force is now 195, with the company starting to recruit nation wide. Scaled Composites is a partner with Virgin Galactic in a company called the Spaceship Company, whose product line, of course, will be to build suborbital spaceliners for commercial profit. SC says that it will be about a year or so before the Spaceship Company has any real activity.

July 11th- The Los Angeles County Economic Development Corporation is predicting a solid economy for southern Cal for the balance of the year, but says that higher interest rates and energy costs will slow the economy in 2007. This conclusion was released in the organization's annual mid-year report, put forth by Jack Kyser senior vice president of the LACEDC. Also in the report, the Antelope Valley ranks 12 out of the county's 13 regions in average annual income at $33,524.
The average wage in LA county is $45,744. However, workers in aerospace manufacturing in the AV earn quite a bit above the county average. The 4,900 workers in manufacturing aerospace earn an average annual pay of $53,000.

The mid-year report said of the Antelope Valley:

- 2006 has seen a new record level of jobs in the AV, now at 72,690

- much of the recent job growth has been powered by the retail trade industry

- the area is a center for advanced aerospace research and development, however

- the area needs to do a better job of promoting it's assets to those who live "down below", in the LA Basin, who often complain of a lack of affordable housing etc

- the AV welcomes growth and the big box stores, unlike other cities that seek to keep them out

- while many worry about a "blowout in housing", a diversified economy, continued population growth, and mortgage rates at 7% or below, will keep the economy on a even keel

July 12th- Most of you know that the City of Lancaster is in the process of studying - amending their General Plan. In April, the City launched a new web site for public comment. Here is a link: http://www.cityoflancasterca.org

July 12th- Los Angeles County Waterworks District 40 orders the shut down of 150 construction water meters because supplies in the districts 40 water storage tanks were not being sufficiently restored. The area affected is Lancaster, both east and west, and west Palmdale. District 40 inspectors starting showing up at construction sites on July 5 & 6, warning about "excessive use" that could result in huge fines. Projects in the grading and compacting stage cannot progress without water, so many of these projects are at a standstill, with heavy equipment sitting idle and some workers idle as well.
Housing tracts supplied by other, smaller water districts, are not being affected by the shut down. A District 40 official said, "On July 5th, the level of available water fell to 45M gallons. In July and August, and without construction, peak daily usage is 80M gallons. If we had not taken these conservation measures, people would be waking up in the morning and finding no water coming out of their faucets." Ten new wells are in the planning stages and other local water districts have set up interconnections so that the county agency can acquire more water. As of this writing, builders were told they may get their water back during the last week of July. As one official said, "It's not there is not enough water. There is not enough treated water and not enough infrastructure to get the water to where it is needed." On July 26th, the LA County Waterworks district ended the moratorium on construction water. Builders were notified that their construction water meters would be turned back on immediately and that they could resume construction. County storage water tanks were
replenished to the degree necessary, about 60% of full capacity, to allow construction to resume. LA County Waterworks is telling home builders, that through August, their peak demand period, another interruption is possible, depending upon unforeseen demand, other operational issues, and to the degree that water customers can (or don't) conserve.

July 20th- Community leaders and the public get their first look at the first draft of the City of Lancaster's new downtown specific plan. The plan, as it is now, includes a community theatre, winding streams, outdoor amphitheatre, and sculptured gardens. RBF Consulting, an Irvine, Ca firm, was hired to create a plan to transform the downtown area into a premier destination. In the plan, the downtown area is separated into different districts, each featuring different attractions. While the initial response was positive, there was also the question, "This is going to cost a lot of money, where will it come from?" Lancaster's City Manager said that money in the capital improvements budget would have to be set aside, and priorities would have to set, building each leg of the project as it comes. Brian Ludicke, Lancaster's Community development Director said that state and Federal resources could be looked into as well. RBF will next make an analysis of the project in regards to parking, infrastructure, developer regulations, design guidelines, and an implementation program.

July 23rd- California City is preparing an environmental impact report for Corrections Corp of America, a publicly traded company on the New York Stock Exchange, which contracts with federal and state govts for prison space. CCA already has a 2,000 bed prison in Cal City and wants to build a second facility that will house 550 more inmates. CCA, which owns 800 acres in Cal City, says that the new facility will be 200,000 sq feet and will provide 200 new full time jobs. The new facility will be for short term detention of inmates that are finishing up their time and have nearly completed their sentences. The 550 bed proposal is in response to the state of California's request to see some proposals for more prison space. California's state prisons are bursting at the seams, and more space is badly needed. CCA has an alternative plan if they do not get a state contract. The alternative plan calls for a 2,000 bed prison for federal prisoners and would employ 375. The present Cal City Prison is in it's 7th year of a 10 year contract with the federal govt. The prison specializes in holding prisoners for the federal govt that are "deportable aliens". To give you an idea of how bad prison over-crowding is state wide, the state
prison in Lancaster was built in 1990 for a population of 2,000. It now houses nearly 4,000. Governor Schwarzenegger has proposed a $3.6B plan to build two new state prisons and expand others which would add 51,000 new prison beds over the next 15 years. The State of California has 172,000 inmates in a system designed for 100,000.

Aug 2nd- The City of Lancaster is announced by Los Angeles County Economic Development Dept as one of five finalist for the title of "The Most Business Friendly City". There are 88 cities in LA county that could have been nominated. Over the past 25 years, LA County has added 2.5M people, but only 500,000 jobs. The City of Los Angeles, on a net basis, has actually lost jobs since 1980. The other four finalist are Burbank, Long Beach, El Segundo, and Santa Clarita, with the winner being announced Oct 5th at a gala dinner. Vern Lawson, Lancaster's Director of Economic Development said it is the perpetual focus of city officials to be business friendly, not just at attracting retail and restaurants, but also focusing on job
creation and economic development. Only 25% of the 88 cities filled out the nomination forms. For whatever reason, Palmdale did not fill out their nomination form.

Aug 4th- The City of Palmdale has suspended issuing building permits on the master planned community of Anaverde. The City says that the primary developer, Empire Land, has failed to meet some of it's contractual obligations on the 5,200 home, 1,985 acre project. There are two issues holding up the project, and both the developer and City have different views. A fire access bridge that crosses the California Aqueduct, that leads into the Anaverde project, is too narrow for fire safety vehicles according to the LA County Fire Dept. The bridge needs to be 8 feet wider. Also at issue, is whether or not the developer is required to build a flood control dam near Pelona Vista Park. Depending upon the configuration of the dam, the cost could range from $9M to as high as $24M. These two issues have locked the building permits on the final 518 homes of phase 1. The City is saying, that unless Empire funds the dam, the City will not issue more grading permits, which means
the project is at a standstill until a resolution is agreed upon. Also at issue, Empire is also required to build a new fire station after 1,000 homes are occupied, and a new 132 acre park is to be built and completed before 1,400 homes are occupied. In addition, Empire Land must complete the final paving of Ave S and build two smaller parks which are past deadline.

Defense & Aerospace News

July 17th- Without much fanfare, the Space shuttle Discovery lands safely at Cape Canaveral, Fl. after a successful 13 day mission. NASA officials say that the astronauts accomplished every objective during their visit to the space station. The shuttle dropped off a new resident at the space station and delivered 3 tons of equipment and supplies. The shuttle mission was the first of 16 needed to complete the space station before the shuttle's scheduled retirement in 2010. The shuttle Atlantis will go up next on or about the Sept 7th time frame. After the loss of Challenger in Jan 1986 and the loss of Columbia in Feb 2003, another loss here would have ended the shuttle program and indefinitely delayed the US space program, which also has major defense ramifications, most of which remain top secret.

July 19th- Developed at their Skunkworks facility at Plant 42 in Palmdale, Lockheed Martin unveiled their new unmanned, high altitude aircraft at the London Air Show. Called the "Polecat", the aircraft is a one of a kind technology demonstrator with a wing span of 90 feet. The wing design is very similar to the B-2 Bomber, which is believed to be helpful in high altitude flight. At a weight of 9,000 pounds, the aircraft can carry a payload of 1,000 pounds. The specific payload has yet to be determined. The Polecat can be flown remotely, or fly on pre-determined missions programmed by software. The Polecat is one of several new technologies that the top secret Skunkworks program is developing. The aircraft's speed and
range are proprietary, but the aircraft is designed to fly at sub-sonic speeds.

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National Housing Market- The following housing data is subject to large sampling and other statistical errors.
Substantial revisions in this data are common. It can take up to 6 months to firmly establish a new trend in sales activity.
The following data in on the NATIONAL housing market, and may or may not be in "sync" with the AV housing market.

June housing starts (Commerce Dept), released July 19th, saw starts down - 5.3% to an annualized rate of 1.85M. May housing starts were also revised downward by 100k to 1.95M.

June building permits, (considered a leading indicator and a signal of future activity) also released July 19th, fell - 4.3% to an annual rate of 1.86M. In May, permits were at the 1.95M figure.

June existing home sales (Nat’l Assoc of Realtors), released July 25th, fell - 1.3%, to a seasonally adjusted annual rate of 6.62M. The decline was close to expectations. The NAR says that inventories have risen to a 9 year high and that price appreciation has slowed to an 11 year low. As of June, inventory stood at 3.725M homes and represented a 6.8 month supply. Over the past year, inventory is up 39%. The supply of condos is up 63% over the past year and represents a record 8 month supply. Over the past year, the sale of existing homes are down 8.9%. Sales were flat in the west and mid-west, but fell 2.3% in the south and -3.5% in the northeast. When asked, realtors and agents say that they expect prices to fall. The median price of a home is now $231,000, which is up .9% over the past year.

June new home sales (Commerce Dept.), released July 28th, fell - 3% to an annualized rate of 1.13M. The release was below the expected 1.16M. May was also revised lower, which underscores the overall weakness in the new home market. Unsold inventory rose to a record 566,000 new homes, which represents a 6.1 month supply. Homes not yet under construction represented 19.8% of the inventory, which is the highest percentage since early 1991. Year to date, inventory is up 24%. Year over year, median prices are up + 2.3% to $231,300. The west was the only region of the country where new home sales were positive, up + 8.2%. Builders are reporting that they are offering incentives and cutting prices to get homes sold
and control inventory. Due to the slowdown, many homebuilders are cutting their profit outlooks.
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Antelope Valley Median Home Prices (source: DataQuick, most recently available data)

City April 2006 % Change vs. 4/2005

Lancaster- west $295,000 + 22.7 %
Lancaster- west & Quartz Hill $360,000 + 13.2 %
Lancaster- east $316,000 + 25.4 %
Palmdale- west $430,000 + 15.9%
Palmdale- mid town $320,000 + 15.7 %
Palmdale- east $355,000 + 22.2 %
Littlerock $340,000 + 23.6 %

DataQuick Information Systems is reporting that even as homes sales slow in southern California,
prices paid are still edging up. In June, even as sales slowed to a 7 year low, the median price of a
home in the 6 county area of southern California rose to a record $493,000. That is up + 1.6% from
May of last month, and up 6% from June 2005's number of 465,000. June home sales were up slightly,
versus May, but down - 17.5 % vs. June of 2005. June 2006 was the weakest month of home sales
since June of 1999. On Aug 4th, DataQuick Information Systems reported that California foreclosures, in Q2 of 2006, rose at the fastest pace in 14 years. In Q2, foreclosures were up 10.5% vs. Q1. Q2 2006 vs. Q2 2005, saw foreclosures in southern California up 69%. Statewide, for the same period, foreclosures were up 69%. "This is an important trend to watch", said a DataQuick official, "but this is not ominous. We would have to see defaults roughly double from these levels to have much of an affect on home values." Foreclosure activity hit it's low in Q3 of 2004, a year when home prices moved up 20%.

The Los Angeles County Assessors office has released the total valuations of assessed property in the county's 88 different cities. Palmdale's 48,277 properties have a total assessed value of $10.3B which had it place 11th highest out of the county's 88 cities. Lancaster's 52,275 properties came in at $9.7B and had it place 14th. Lancaster was listed as the city that had the largest jump in assessed values, jumping + 29.2% vs. last year. Lancaster's one year population growth of 4.5% earned it the number 1 ranking as the fastest growing city in LA county, and the 14th fastest growing in the nation. Other famous name cities in LA county placed as follows: Beverly Hills # 8, Rancho Palos Verde # 18, Malibu # 16, Long Beach # 2, and Los Angeles was # 1 in total assessed values.

The Construction Industry Research Board says that Antelope Valley building permits are down 8.5% the first 6 months of 2006, versus the same period in 2005. Lancaster is down 4.2% for the same time period, with Palmdale down 20.4%. Analysts say that the decline in permits reflects home builder caution; they do not want to over build and get caught with an abundance of unsold inventory. For the first 4 months of 2006, builders were pulling permits at a faster pace than 2005, but that has slowed considerably. Many builders are not pulling permits until the house has a waiting buyer, or is sold. And permits are being pulled at 10-20 at a time, even if the tract has several hundred lots. Komes fall into three categories: those waiting to be built; those with pulled permits and under construction; and those that are permitted, constructed, & sold.
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AV New Home Sales Data (source: Frank Donato - The New Housing Monitor, a Hanley Report)

As of July 23rd, 2006
-New Homes sold year to date - 1,722
-New homes sold since last month- 152
-New homes selling per day - 8.44
-New homes projected to sell this year based on current sales pace- 3,080
-New home sales pace in 2006 vs. 2005 (- 32%)

2005 - total of all new homes sold-
4,579
2004 - total of all new homes sold- 2,503
2003 - total of all new homes sold- 1,820
2002- total of all new homes sold- 1,162
1990- total of all new homes sold- 4,900 +

Number of "new home" builders in the AV- 37
Open subdivisions with sales in 2006- 75

Home builders in the AV (alphabetical order)
American Premier
Beazer Homes
Capital Pacific Homes
D R Horton
Eliopoulos Enterprises
Empire Homes (Anaverde)

Fieldstone Communities
First Pacifica
Forecast Homes
Frontier Homes
Gibraltar Homes
Grenhill Development
Harris Homes
Hearthside Homes
John Laing Homes
KB Homes
K. Hovnanian Co.
Larwin Co
Lennar Corp.
Matthews Homes
MBK Homes
Mitchell Development
New West Builders
Pacific Communities
Pacific Gateway Homes
Pinnacle Communities
Pulte Homes
Rancho Vista Development
Richmond American
Standard Pacific
Stratham Group
Sun Cal Communities (Ritter Ranch)
Tandis Homes
Trimark
US Home Corp.
Warmington Homes
Western Pacific
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Land Market

Supply closed out July at 3,139, a rise of 5.5% versus last month's (June) 2,975. Supply has now risen 15 consecutive months, having risen 79% since the low of April 2005 at 1,751 active land listings. This is a gain of 1,388 active land listings over the past 15 months. For calendar year 2006, supply is up 38.6%. While rising supply appears to be a never ending trend, sometime next year we should see the rise stop, and supply flatten out. There are two ways for supply to drop: property is either sold off the market, or it is removed from the market by the seller. I expect the later to be a factor in supply in 2007. The amount of time needed to sell all standing inventory, or active land listings, ballooned upward in July and has gone from a low of 5.6 months in May of 2005, to the July level of 17.5 months. The large 6 month rise in the "months needed to sell" column, in just one month, was due
primarily to a fall in demand (see below). Historically, rising supply, when accompanied with weakening demand, which we now have, has eventually lead to a weakening of prices.

Supply numbers in perspective:
Supply change vs. last month: + 5.5%
Supply change, year to date: + 38.6%
Supply in July 06 vs. July 05: + 70%
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Supply at end July 2006- 3,139
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Supply at the end of 2005- 2,264
Supply at the end of 2004: 1,902
Supply at the end of 2003: 1,607
Supply at the end of 2002: 1,770
Supply at the end of 2001: 1,665
Supply at the end of 2000: 1,800
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Why is the supply number important? The market value of all things, eventually, comes down to the
basic principle of supply and demand. The supply number helps to tell us the psychological condition of buyers and sellers, by it's change and it's rate of change. Large drops in supply could be signaling speculative behavior as investors fight it out to get into our market. If supply were to increase rapidly, that could be telling us that buyer's are backing off, and/or, that numerous new seller's are coming into the market. In combining this data with the demand number below, we can assess the current status of the land market. When supply numbers approach historical highs and lows, they can also be useful in signaling major turning points. Example: at the peak of the 1988-90 market, supply made a low in May of 1989 at 587. In hindsight, May 1989 was at or near the point of peak speculation in our market, as demand over-whelmed supply, drawing it down. The value in following supply, is not in the number itself, or what any one number might mean. The value comes from the magnitude of change, and that change in relation to demand.
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Demand in July (179), fell off sharply from June's 266. This represents a decline of 32% in land sales in July vs. the previous month, June. While I did not when this would happen, it was only a matter of time before it did happen. Previously I spoke about the quality of volume being suspect, that too many land deals were in low quality investment areas. When volume deteriorates, first the quality goes, then eventually, quantity falls off as well. The eventual consequence of rising supply and decreasing volume, historically, has been decreasing land prices. Since April's number of 323 land sales, land sales have fallen three months in a row, for a total decline of 44%. That is a huge drop for just 3 months. For 2006, average land sales per month now stands at 260, so July's performance of just 179 was WAY below the average. The April volume number was a revisiting of the mid summer
strength of 2005. Land sales the first 7 months of 2006, versus the same period last year, are down 7.4%. In July, the average time it took to sell a land listing was 145 days. This is a newer statistic just recently made available by our MLS system and will now appear here monthly. This is up slightly from last month (June), which was 142 days.

Demand numbers in perspective:
Land sales year to date- 1,825
July 2006 vs. July 2005 - 40% (down)
Land sales projected for all of 2006- 3,128
Land sales in all of 2005- 3,376
Land sales in all of 2004- 2,372
Land sales in all of 2003- 1,240
Land sales in all of 2002- 679
Land sales in all of 2001- 407
Land sales in all of 2000- 307
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Average land sales (in 2006) per month- 260
Average land sales (in 2005) per month- 281
Average land sales (in 2004) per month- 198
Average land sales (in 2003) per month- 103
Average land sales (in 2002) per month- 56
Average land sales (in 2001) per month- 34
Average land sales (in 2000) per month- 26

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Quik Sum of Land Market

The Beginning of this Bull market in AV land began in April of 2002 when land sales began in increase dramatically. For this reason, I consider April 2002 the beginning of this bull market in AV land. This means that the bull market in AV has now lasted 51 months (4 yrs & 3 months). However, with a major break in volume, coupled with supply numbers that have been rising now for 15 months, it is now time to say that this Bull market is over. While some may say, well, it's only one bad month, and that I am jumping the gun here, I say no. Let me explain. It may have been only one bad month of sales, but we have had 15 months of rising supply and probably 10-12 months of very poor quality volume. All through this period, in most areas of our market, prices have stagnated. On top of that, the July break in sales volume was the worst monthly break in land sales I have seen since before this bull market began. When a market breaks that badly, in just one month, it is a warning sign. Experience has taught me, that if warning signs are not heeded, the investor and his money are soon parted. In the next month or two, we may get sales that go back over 200, a retest if you will, but experience tells me that the path of least resistance in this market is no longer up. Measured in time (months), this was the longest Bull market in AV land on record. For the AV housing market, the bull market lasted even longer, as houses started to appreciate in the late 1990's. The last Bull market in AV land was the 1988-1990 period (3 years). As I said above, this Bull Market lasted 4 years, 3 months.

Over the coming months, how will the market look? Over the coming months, I expect supply to drift higher, then eventually flatten out. I also expect to see demand, monthly land sales, to move lower. All of this will be a very gradual process. In investment markets in general, there is a degree of fear. You can see it daily in the volatility of the stock market. From this point, it may take 6-12 months for most sellers to realize that the environment in AV land is not what it used to be. For those who are serious about selling, and have not already done so, re-pricing will be necessary. This is not the end of the world, just the end of the easy money that many of us have enjoyed over the past four years. The coming softness in our market will create some great opportunities. For buyers, patience will be a virtue. I should stress, that while we now have the cycle flattening out, and giving back some gains, this is a normal and inevitable process of how markets work. No market can go straight up indefinitely. Pullbacks and price corrections/consolidations are a normal consequence of any market cycle. If you missed the last buying opportunity in AV land, the late 1990's thru 2001, eventually, another one is coming. The very essence of successful investing is to buy when an asset is out of favor, and when change looks like it could be just around the corner. Out of favor assets are cheap; there is little or no competing demand for them. In short, buying in a buyer's market, and selling in a seller's market is the safest way to make money in AV land.

How long will it take for this process to play out? How steep will price declines be? At this time I do not know. I do not see a repeat of the mid 1990's when land prices fell 50%-70%. Ultimately, the FED has the answer. When the FED stops raising rates, and begins to lower rates, the answer to these questions will become more clear. Although almost no one is forecasting a recession, until I see the FED stop raising rates, and begin to cut rates, we must assume that anything is possible. If the US economy avoids recession, and the often talked about "soft landing" is achieved by the FED, a 2nd leg of this bull market in real estate is possible and cannot be ruled out.

In 1977 I came to the AV to accept a job in education. After about one year here, I realized that the AV's close proximity to the population centers of Los Angeles and the San Fernando Valley would be a major stimulus for growth for years to come. Ten million people live within an hours drive of the AV. I made a decision at that time that one way to profit from that growth was to participate in the real estate industry and to also invest in the AV real estate. I became a licensed agent in 1980. Over the years I have learned that growth in the AV comes in strong spurts, followed by periods of slower, steady growth. Even in the depths of the worst real estate market I have ever seen, the mid 1990's, the AV still grew in population. If my assessment of the AV real estate market is correct,
we are entering a period of slower, steady growth.

The AV today, regardless of where we are in the economic cycle, still has a great growth story and a great future. The AV is the only real place of substantial size that Los Angeles County has left for growth, and unlike many locales around southern California, growth here, is welcome. As I said earlier, future growth will not be in a straight line; there will be slow downs and buying opportunities. For new money looking for a home in AV land, the best advice I can give that "new money", is to be patient and disciplined. Time is now on the side of buyers, not sellers.

 


- Frank Donato, July 2006

Information presented above has been compiled from reputable sources, and is deemed reliable but not guaranteed. All opinions expressed are those of the Author.