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 2009 Antelope Valley News: Jul/Aug September


July/August 2009

July 1- The Palmdale City Council votes to remove Los Angeles World Airports from any participation in the future leasing of the Palmdale Air Terminal.  The City will go it alone in the recruitment and leasing of the air terminal and pursue its own agreements with any new air carriers.  The land under the air terminal is under the control of the US Air Force.  Supporters say, that with 680,000 airline tickets sold in the AV per year, there should be an air carrier that can find a way to take advantage of that type of traffic.  Some Palmdale officials feel that LAWA had a conflict of interest in their support of the Palmdale Terminal, that LAWA’s primary goal was to consolidate as much business at LAX as possible.  Palmdale officials still believe that if the right routes are offered, there is a market in the AV for a regional airport.    

July 8 – A battery manufacturing firm out of Sylmar, Ca. has announced they will build a plant in the Fairway Business Park in west Palmdale.  The company, Quallion LLC, will be located near 10th St West and Ave O on a 9.6 acre lot.  The company makes lithium batteries for military, aerospace, medical, and the automotive industries. When completed, the facility will employ 1,500.  The development and operation of this new business, which is expected to be a major contributor to the AV economy, as well as a real morale booster, is not without substantial government help.  Quallion has applied for a Federal grant of $200M and a state grant of $9M, and in addition, the City of Palmdale has provided an incentive package of roughly $10.6M.  The City incentives includes the land and state tax incentives provided by the state’s Enterprise Zone.  Upon approval of the grant, construction would begin almost immediately with completion by 2012.  Quallion’s grant application has the support of 17 of California’s Congressman, along with local leaders.  The application also says that Quallion “will build advanced lithium ion cells, modules, and battery technology in volumes that will meet America’s current and future military and commercial needs.”  That said, all of this is contingent upon Quallion receiving the Federal Grant of $200M, on which, an answer is expected later this month.   Also in the Fairway Business Park are:  Fed-X, Davis wholesale Electric, Big John’s Custom Pools & Spas, Puppy Shop, Premier Merchantile, GR Lotus Collection, Energized Distribution, LH Holdings, Premier Water Systems, and Squirty’s Auto Body.  In total, they occupy 457,392 sq feet. On August 5th, the Dept of Energy  rejected Quallion LLC’s application for a grant to carry out the above move to Palmdale.  The Dept of Energy has $2.4B in grants and has given out $1B thus far.  Palmdale mayor, Jim Ledford, says that most of the grant money has been given out east of the Mississippi River.  It appears a similar firm in the rust belt got grant money battery facility instead of Quallion LLC.  Quallion still wants to come to Palmdale and is exploring other options on how to make the move happen.  By category, the grant money breaks down as follows:  $1.5B for the manufacturing of batteries and to expand battery recycling; $500M to produce electric drive components for electric vehicles; $400M for the purchase of 1,000’s of plug-in hybrid and all electric vehicles as test demonstrators in several locations.        

July 9 – The Lancaster Planning Commission votes 6-1 to approve the controversial west Lancaster Wal Mart location at the NWC of 60th St West & Ave L.  Quartz Hill High School is right across the street.  Then 3 hours later, the Commission also approved of a Target store at the SEC of 60th West & Ave L.  The 356k sq ft Wal Mart will be a super store, also selling groceries and produce, while the Target will be a conventional Target store of 160k sq ft.  Opponents of the two stores have until July 18 to file an appeal.  If the appeal is unsuccessful, the two projects would then move on to the final step- a vote by the Lancaster City Council.  It is highly likely that both projects will be approved by the city council. 

On July 23 & 24th, the Lancaster City Council gave their approval of both the new Wal Mart (3-2) and Target (5-0) stores.  The Target vote was a bit smoother because its site was already zoned commercial, where the Wal Mart site was not and needed a conditional use permit.  The Wal Mart site will be called, The Commons at Quartz Hill, and will feature7 other stores along with Wal Mart;  two fast food restaurants, a bank, a drug store, and 3 retail outlets.  Opponents of the two shopping centers are not giving up.  A grass roots organization called Quartz Hill Cares, is exploring all options, including lawsuits and a referendum effort.  The law suit would be based on environmental concerns, if one were filed.  Or the group could have a judge decide that the issue should be brought to the people and placed on the ballot for voters.  Once begun, it takes about 9-12 months to build and finish a shopping center.

July 14- Saying we need to protect city finances, and “The state is our enemy”, Palmdale Mayor Jim Ledford has taken the first step to make Palmdale a charter city instead of a general law city.  Being a charter city allows a city to set its own municipal operating procedures rather than follow state general law standards.  The mayor went on to say, “That if Palmdale had been a charter city 5 years ago, it would have saved several million dollars on the cost of building its water park, amphitheater, and new swimming facilities.”  Being a charter city allows a city to sidestep costly state regulations when developing projects.  The Charter basically serves as the city constitution.  In California there are 116 charter cities out of 478 total cities.  In addition, there has been no case where a charter city has converted back to a general law city.  It the Palmdale City Council approves of the move to a charter city, it would then go on the November ballot for the citizens to decide.  Being a charter city would give Palmdale more control of its affairs, in that, if a conflict comes up between state law and the city’s chartered law, the city charter would take precedence.

July 14- A grand reopening is held for Applebees, located on 10th St West, just south of the AV Fwy 14 and across the street from the AV Mall.  Greeted by Palmdale Mayor, Jim Ledford, the new owners, Apple American Group, were greeted with a ribbon cutting ceremony.  The Applebee’s building has been repainted and posted with new signs to give the exterior more appeal.  The area of the AV Mall now has a very competitive restaurant line up, with Applebee’s across from the mall.  Along the rim of the Mall itself are:  Denny’s, Chili’s, Carl’s Jr, Arby’s, Red Lobster, Olive Garden, Outback, Dave’s Famous Bar-b-que, El Torito, Ginza (Japanese), BJ’s Brewery, Romi’s, Claim Jumper, located next to Dillard’s, and Red Robin inside the mall.  The Yard House has committed to locate inside the mall as well.    

July 15- The Lancaster City Council gives its final approval to the annexation of 7,190 acres into the City.  The area, in general, is located north of Ave H, to Ave E, from 20th St East to 25th St West.  The annexed area is not a perfect rectangle as described above, with the area south of Ave G, west of Division St, excluded because it is already in the City.  The next and last step is for Los Angeles County officials to approve of the annexation. The area in question has been pre-zoned by Lancaster in the following way:  5,410 acres for rural residential, 1,358 acres for heavy industrial, 282 acres for light industrial, and 140 acres for a mobile home park.  The primary purpose of the annexation is to give Lancaster larger vacant land areas that they can control, for the recruiting of alternative energy companies.  This is an area that has very few homes or residents that could object to any new major facility or factory built in the area. 

July 15- The City of Palmdale announces that while the city has been hurt by the recession, 50 new businesses have opened up shop in Palmdale over the past 18 months.  The businesses range from hotels, fast food, clothing apparel, furniture, a major medical office building, and personal health care.

July 23- The Los Angeles Economic Development Corporation releases their mid-year report and forecast on the AV economy.  Nancy Sidhu, chief economist for the organization, says that aerospace will do OK under Obama, but that housing has a long road to hoe before making it back to full health.  Total employment in the AV rose 1.3% in 2008, but is expected to fall 4.1% in 2009.  Sidhu says that aerospace in AV is the “OK but….”sector, with the but meaning what else may the Obama administration cut?   If the F-22 is the last cut, then aerospace will be OK in 2009.  The new hospital in Palmdale is expected to generate 1,000 jobs and Quallion LLC, the new battery firm coming to Palmdale, will create 1,500 jobs.  

July 24- Besides the approval of the Target and Wal Mart centers, the City Council also approves of other General Plan changes.

The new General Plan changes are:
- create a new land use category for mixed use developments and classify 1,484 acres as such
- increase the amount of land classified as public by 202 acres
- open space, increased by 117 acres
- commercial use, increased  by 95 acres
- office professional, increased by 15 acres
- urban residential (RR 2.5), reduced by 944 acres
- non-urban residential, reduced by 372 acres
- light industrial, reduced by 266 acres
- heavy industrial, reduced by 193 acres
- multi-residential 1, reduced by 29 acres
- land for health care use, reduced by 27 acres
- multi-residential 2, reduce by 25 acres
Lancaster Mayor Rex Parris said of the new General Plan, “The goal is to create real neighborhoods rather than just living spaces that are miles away from stores and restaurants.”

July 29- Edwards Air Force Base (the US Govt) hosts 120 representatives of solar energy firms for the opportunity to lease 3,280 acres for a solar energy plant.  The project would operate under the Air Force’s enhanced lease program which allows the Air Force to offer under used land for private sector activities. Air Force land can be leased for up to 50 years.  The area offered is just about perfect for solar plants: it is flat, has lots of sun, is away from Air Force flight paths, has govt security, and it has close proximity to transmission, natural gas, and water lines.  Potential solar developers will submit their plans to the Air Force by the fall for evaluation and selection.  Edwards Air Force Base is located 10 miles east of Rosamond, in Kern County. 

There are several solar plants in the planning stages in the Antelope Valley:
- 617 megawatt hybrid solar – nat gas plant at 10th East & Ave M; ¾ the way through state process,
  City of Palmdale
- 250 megawatt solar plant NW of California City; in state review but has significant water issues,
  Beacon Solar LLC   
- 5 megawatt demonstration plant, Sierra Hwy & Ave G, debuts mid August, eSolar of Pasadena
  On August 5th, eSolar CEO Bill Gross, threw the switch and this plant began generating electricity,
  selling it to the Southern Cal Edison.   
- 230 megawatts, AV Solar Ranch One, on 2,100 acres, 170th West & Ave D, NextLight Renewable
  Power LLC
- 46 megawatts, near Rosamond’s waste water plant, near Air Force boundary, Fallbrook Energy   
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California:  On July 17th the US Dept of Labor announced that Cal’s unemployment rate held steady in June at 11.6%.  That is two months in a row of a record high jobless rate in California.  In June, 66,500 Californians lost jobs, the most of any state in the nation, followed by Texas, Ohio, and Michigan.  One year ago, California’s unemployment rate was 7.1%.  Job losses were widespread across the economy:  construction, mining, finance, manufacturing, transportation, professional services, leisure, health, education, and government all had job losses in June.  Imperial County has been hit the hardest with a “depression era” jobless rate of 27.5%.  Ten states have an unemployment rate of 10% or higher.  Michigan, due to the struggling US auto industry, is the leader at 15.2%.  The last state to suffer a 15% jobless rate was West Virginia in 1984. The other 14 states that have a 10% or higher unemployment rate are:  Alabama, California, Florida, Nevada, North Carolina, Georgia, Illinois, Indiana, Kentucky, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee.  The states with the lowest unemployment rates are:  North Dakota 4.2%, Nebraska 5%, & South Dakota 5.1%.

The Milken Institute, on behalf of the California Manufacturing & Technology Association, has just released the results of a study showing which way manufacturing and technology jobs are flowing.The period studied was 2000 through 2007 and included California and 7 other “peer manufacturing states”.  During the period studied, peer states added 62,000 jobs while California lost 79,000.  The Milken Report blamed California’s heavy regulation, a hostile legislature, and the highest tax rate in the United States the job losses.  Perry Wong, economist for the Milken Institute, said California has lost 25% of its manufacturing base and about 33% of its high tech sector since 2000.   

AV Aerospace & Defense

President Obama, backed by Secretary of Defense Gates, win their battle to limit the number of F-22 Raptors to 187.  The US Senate voted 58-40 to veto spending for the F-22, THE most advanced and expensive air to air combat fighter in the world.  The primary reason given is that the fighter is not a critical weapon in the war on terror, as in Afghanistan against the Taliban.  While this may be true, this view may be a bit short sighted as the Chinese and Russians will produce new fighter planes at record numbers.  Russia is expanding it fighter forces more than at any other time since the end of the Cold War.  The Russians plan to field 300 Su Fullback strike aircraft by 2022 and an additional Sukhoi Pak 5th generation fighters.  China has ordered 76 fighters from Russia and under a license, can build 250 on their own.  China is aiming for 626 air to air fighters available for air superiority missions.  When achieved, this would put China in the same league as the US.  While all of these numbers are off in the future, the decision to go there, or not to go there, has to be made today as these projects have long lead times.  The complexity of a modern fighter makes it very expensive to shut down a line, then restart it some years later.    

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Antelope Valley Land Market

"Supply and demand, in the end, determines the value of all things." 
     - Adam Smith, "Wealth of Nations" 18th century Scottish economist

Supply closed out July at 1,636, a drop of 150 land listings, or a fall of 8.39%.  The decline in supply picked up renewed momentum in July as 127 properties were pulled off the market and only 23 went into escrow.  We may be in the early stages of the capitulation phase where sellers cave in and give up, OR finally get their property priced in line with present market conditions. In attracting offers, the gap between listed prices and actual sales prices is still way too wide.  Too many properties still give off “sticker shock” and thus, get passed over, even though the seller may have accepted what the buyer may have been willing to pay.  This is why pricing is important; over pricing chases buyers away.  All of this tells me that the capitulation phase of the market cycle has yet to happen.  I do believe, and time will tell, that there is still another major leg down in supply to come.  When that leg down comes, supply will break through 1,500 and then some.  When and if that leg down comes, then settles down, that could mark the beginning of the capitulation phase.  Low supply, eventually, is good for sellers, as they would have less competing properties.  In the capitulation stage though, demand will be so weak though, that low supply will be of no help to sellers. If history repeats itself, supply will still be low when the actual “demand” recovery begins.  At that point, rising supply would be a sign that sellers are regaining confidence in selling and would be a bullish indicator.

Antelope Valley Existing Home Sales

According to MLS data for the month of July, existing home sales in the greater Antelope Valley area are up +42% versus July of 2008.  July saw 901 homes sold vs the 635 in July of last year.  Year to date, through July 5th, existing home sales are up +126% vs the same period in 2008.  Inventory is down to 1,100 homes, just over 1 month, which is considered very low.  In a “normal market” inventory levels would be between 2,000 to 2,500.  The average sales price in July was $132,766, some 33% below July 2008.  Year to date (July 5th), the average sales price of a home sold was $131,341, down 41% from the same period last year.  Realtors say that if a home is priced correctly according to the existing market, it will sell within a week.  Sometimes as many as 15 offers will come in on one home.  President of the real estate board up here says that he expects prices to begin rising on homes in mid 2010.  The majority of home sales are still bank owned homes.  In the AV, according to the Cal Assoc. of Realtors, 86% of AV households can afford to buy an entry-level home, as compared to 67% statewide.  Statewide, supply is
at 4.1 months, versus the 7.6 months in July 2008.

Comment:  One might think by reading the above paragraph, that the AV resale home market was healthy and healing.  Sales are going off at a record, or near record pace and inventories are at record lows, at about 5 weeks.  To realize a more accurate picture of the housing market, one must focus on what information is missing, not what is given. Truth be told, the AV housing market is a sick market, manipulated by the banks and the appraisers they hire.  Any agent knows that if a home gets 15 offers, the listed price is way too low.  Banks, which have title to most homes about to become available, are limiting when and how many homes they put on the market.  Then in turn, the banks give their appraisers strict guidelines (backed up by new Fed Govt regulations) to prevent prices from showing any appreciable rise, even though a rise may be warranted.  The residential agents, knowing all of this, have chosen to list low deliberately to create an auction type atmosphere which brings in multiple offers.  The Bank merely chooses the offer that nets the bank the most money.  The low average price of homes selling, around $131,000, also tells me that very few, if anything, above $200,000 is selling.  If enough homes above $200k were selling, the average selling price would be much higher.  Home owners in homes that are worth $300k, $400k, or more are trapped in their home.  If they did sell, most would take large losses in their equity.  In short, we have a resale housing market in which the banks are controlling supply and strongly influencing prices.  If the banks and govt would just get out of the way, and allow prices to rise, that alone would bring in more buyers.  Nothing attracts buyers to a market like rising prices. 

Antelope Valley New Home Sales

The data for new home sales listed below, for the years 2002 through 2007, were provided by the Hanley Housing Report.  Going forward, I will begin using a new source for new home sales, The Siracusa Company.

1990-  total of all new homes sold- 4,900 +
1999-  total of all new home sold-    694   (The Siracusa Co.)
2002-  total of all new homes sold- 1,162 (Hanley Housing Report)
2003 - total of all new homes sold- 1,820 (Hanley Housing Report)
2004 - total of all new homes sold- 2,503 (Hanley Housing Report)
2005 - total of all new homes sold- 4,579 (Hanley Housing Report)
2006 - total of all new homes sold- 2,584 (Hanley Housing Report)
2007 - total of all new homes sold- 1,720 (Hanley Housing Report)
2008 - total of all new homes sold-  906   (The Siracusa Co.)
2009 - projected to sell all year  -     756   (Cal Economic Forecast)
2010 - projected to sell all year  -  1,535   (Cal Economic Forecast)
2011- projected to sell all year   -  2,299   (Cal Economic Forecast)

During the May –July summer period, new home inventory fell to just 84 homes, a 22 year low. Due to foreclosures dominating the resale market, at prices well below the cost of construction, the new home market has “dried up” over the past 3 years.  Many builders walked away from finished lots, developed with bank money.  This lead to the “deep pocket” builders buying the lots for a song, enabling them to build new homes on a somewhat competitive basis.  By 2010 new home builders will have a real shortage of supply to sell.  The average price of a new home during the May – July period was $241,775.  Even though builders do have a shortage of product, do not expect them to rush out and build as the average price of a resale home in the AV is down around $131,000, well over $100k lower.  While it is true that nothing can beat the emotional appeal of buying a brand new home, the market has proven that saving $100k, or more, does.  Do not expect new home capacity to show any great improvement until the foreclosure market works off its excess supply problem.  That could take several years. 
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AV Aerospace & Defense

Northrop Grumman has completed its first Global Hawk (an unmanned spy plane) for a foreign government. The aircraft is being called the Euro Hawk and was built for the German Ministry of Defense.  The aircraft is a JV between Northrop Grumman and a European defense contractor.  The aircraft will be unveiled at Palmdale’s Plant 42 later this month (August).  The Euro Hawk can stay in flight for 30 hours and fly at elevations of 60,000 feet.  The Euro Hawk, like the US Global Hawk, is flown remotely by a pilot on the ground.  The German Ministry of Defense said, “We need the Euro Hawk to meet Germany’s need for airborne wide area surveillance and reconnaissance which will transform our situational awareness of the land, air, and sea.”  The US Global Hawk has been a absolute model of dependability.  It has flown 2,000 missions, totaling more than 31,000 hours, with 24,000 of those hours in support of the war on terror. Other countries expressing strong interest in the Global Hawk are Australia, Japan, and South Korea.

On Aug 10, the Airborne Laser prototype successfully shot down a ground launched missile in a test out
of Edwards Air Force Base.  The target missile was launched from San Nicolas Island, off the coast of
southern California.  This marks the third such successful test in which the Airborne Laser shot down a
ground launched missile.  The missile launched was similar in size and geometry to a ballistic missile.
In the coming months tests will include progressively more difficult targets. Comment:  this program is in danger of being reduced or cut by the Obama administration.  This type of defensive weapon, which kills other weapons, not people, if protected by air to air fighters, could be effective against countries like North Korea, which, unannounced, shoots off missiles regularly.  One of the North Korean missiles actually overflew Japanese airspace; others were targeted at Hawaii, but did not have the range to reach it.   

On or about August 27th, the Obama administration made a decision to abandon our anti-missile shield in Poland and the Czech Republic.  Russia, now one of the world’s largest oil producers, put on a full court press to discourage its deployment.  Reneging on a promise made by the US and NATO, during the later days of the Bush administration, Polish and Czech officials say they feel betrayed.  Observers say that this decision will only embolden Iran to accelerate their own missile program before  a European anti-missile system is available.  A Turkish general once said, “The problem with having Americans as our allies, is that you never know when they will turn around and stab themselves in the back.”  (Heritage Foundation)    

For an eye opening look at the anti-missile defense issue, take a look at this 7 minute trailer promoting a
video put together by the Heritage Foundation, called “33 Minutes”-   http://www.heritage.org/33-minutes                    
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August 5- eSolar CEO, Bill Gross, threw the switch on his 5 megawatt demonstration plant at Sierra Hwy and Ave G, as this plant began generating electricity and selling it to the Southern Cal Edison.  eSolar is based out of Pasadena, Ca.

August 20- International furniture retailer, Ashley Furniture, has announced they will occupy the site vacated by Wicks Furniture at the NE corner of 10th St West and Rancho Vista Blvd (Ave P).  The new store will employ 25. Currently the site is undergoing renovation and should be open by October 3rd, however the open date depends upon the work’s completion date.  Ashley Furniture is headquartered in Arcadia, Wisconsin, but also has stores in Canada, Mexico, Central America, and Japan.  Ashley’s chain of  stores employ 18,000.

Sept 2nd- a public hearing is held with the LA County Planning Commission, over a proposed motorsports park which would be located on 322 acres in the area of 170th West & Ave C & Ave D.  The owner and applicant, Tom Malley, aka the Malley Family Partners, says that the environmental impact report and noise testing done make the project viable for the area.  As one would expect, environmental groups have come out of the woodwork to defend the Lancaster Poppy Preserve, located 1 mile to the SE.  This portion of the Antelope Valley is referred to as the Fairmont area.  Malley Family Partners say that the track would be operational on weekends only and will not have lights for night events.  Apparently, this project has been 7 + years in the planning.  Part of the application would change the properties current zoning of agriculture to commercial.  Opponents, primarily environmentalists that don’t want anything built in the area, will argue against the project using noise and air pollution as their main weapons.  The  developers say those issues are minor and are supported as such by their required studies.  One citizens group that lives near the area, the Antelope Acres Town Council, voted in favor of the project.  As one citizen put it, “If one cannot build this project in the middle of nowhere, where can they build it?” 
                         
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Antelope Valley Land Market

"Supply and demand, in the end, determines the value of all things." 
     - Adam Smith, "Wealth of Nations" 18th century Scottish economist

Supply closed out August at 1,754, a rise of 118 listings vs last month, for a percentage gain of +7.2%.  The probable cause for the increase is that many of the expired listings at the end of July, were probably relisted and put back on the market in early August.  While I do expect supply to work its way lower, my target is 1,500 or so, it is fairly obvious it won’t do so in a straight line.  We still have the problem of high “asking” or listed prices, where the gap between what a seller wants and what a buyer is willing to pay is too wide, causing “sticker shock.”  In general, parcels that are closing escrow now are closing 50%-60% below the price highs of 2006.  There is an occasional exception, but those too will soon disappear.  At present, the best we can hope for is that the capitulation phase will begin sometime next year which will allow buyers to start clearing out the inventory by buying land.  This is year 3 of the Bear market.  The recognition phase is upon us; everyone knows that the market is weak and that prospects for a better market in the short term are impossible.  As the new year approaches, many land owners are going to sit down and have a “heart to heart” talk with themselves re: their land portfolio.  Land sellers are going to do some serious soul searching and will be asking themselves just how long do they want to own their land.  Eventually, that answer should lead us into the capitulation phase and lower listed prices.       
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Supply numbers in perspective:
Supply change vs. last month:     +7.2%            
Supply change, year to date:      - 16.47%     
Supply in July 09 vs. July 08:      - 34.5%
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Supply at the end August 2009- 1,754
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Supply at the end of 2008:  2,100
Supply at the end of 2007:  3,134
Supply at the end of 2006:  3,263 (market peak in prices)     
Supply at the end of 2005:  2,264 (market peak in volume)       
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
Supply  in  May  of  1989:    587  (market peak in price)
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Demand- Aug demand (26 ) was essentially a typical Bear market month, with sales in the 20-30 range.  As I have said in the past, we should see sales activity like this for many months to come.
Paramount to a recovery to the land market would be a recovery in the housing market first.  A recovery in the housing market, in relation to the total number of homes available, would have a minor number of foreclosure and distress listings on the market.  Prices would rise, but more importantly, the price range of homes selling would also broaden out.  All price ranges would once again start selling.  Presently, in the AV housing market, entry level homes dominate, with very few homes over $200,000 selling.  Thus far, none of these conditions exist, nor can we even accurately forecast when they might happen.  Based upon the existing amount of foreclosures, and those in the pipeline being held back by the banks, it could easily be another two years.  The quality of the recovery will also have something to say about the future of housing- job creation would do a lot to get new buyers into the market.  On the other hand though, more job losses in the short term do not bode well for an immediate healing.  Another major factor is government interference in the market place, which thus far, has only succeeded in lengthening the housing downturn.  What else might the federal government do?  As one might think, in an environment like this, land buyers are very price sensitive and are in no hurry; they know that time is on their side- the exact mirror image of a Bull market.  Land buyers have time, the time to wait and see if the seller will further reduce their price, and the time to wait if a better deal will come on the market. 

Median Listed Land Prices

Aug 08 median price-   $54,000
Aug 09 median price-   $49,000
Median listed land prices, year over year, are down -9.25%

Average Days on the Market-  372

Demand numbers in perspective:   
Land sales in all of 2009--------289 (projected per 2009 sales pace)                                                                             
Land sales in all of 2008------- 475
Land sales in all of 2007------ 1,637              
Land sales in all of 2006------ 2,648 
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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As you can see from the Demand numbers below, on a projected basis, we are back to 2000-2001 sales numbers, which were at the tail end of the last Bear market, and 2 years before our last Bull market began.                      

Average land sales (in 2009) per month-  24
Average land sales (in 2008) per month-  40
Average land sales (in 2007) per month- 129
Average land sales (in 2006) per month- 221
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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Inside the Land Market

Quantity of Supply- “C-”            
1700 + land listings may sound like a lot of property, but much of it is in speculative areas.

Quality of Supply- “F”
Speculative “out of town” properties dominate the MLS; in town developer properties are
few and retail priced

Demand numbers- “F”
Demand is very weak; at or near historic lows.  In August only 12 parcels sold.  Demand is firmly
in Bear market territory as we are doing similar numbers from the mid 1990’s

Valuation- "C+"
Actual selling prices, on average, are down -50%, but listed prices are still too high.  It is still very
difficult to find both a good property and a willing seller, all in one.    

Liquidity- “F”
The average days on the market is 372 days, over 1 year

Total Inventory at Augusts’ sales pace- 146 months, 12 years !
Summary- it is a buyer’s market, but listed prices are still too high, thus few sales as most sellers
                                   have not yet capitulated    

The Land Market Cycle

Here is my explanation of the four major parts of our cycle.  The time frames are approximate.  My view of the AV land market is based on objective MLS listing and sales data that I have been tracking since the 1990’s. 

- denial phase- contraction of volume, falling sales, can last 2  years (2006 & 2007)
         Even though land prices rose in 2006, it was NOT confirmed by rising volume.  In 2005 volume
         peaked, and then in 2006, declined.  Rising prices accompanied by falling volume is a classic
         non-confirmation that indicated that the 2006 land market was on “borrowed” time.  

- recognition phase- most sellers finally admit that the market is NOT going to bounce back as they
         had hoped.  Supply falls dramatically, listed prices drift lower, with actual SOLD prices falling
         as well, 2 years (2008-09)

- capitulation / accumulation phase- many sellers that were on the market in the previous phases, give
         up; supply is low, but so are prices, as the real sellers are all that is left.  This is the easiest and
         best time to buy.  Sellers are cooperative and easy to work with, with many selling right at the
         bottom.  Worse yet, many buyers refuse to buy the bottom, passing up huge gains that could be
         realized in the next phase, the recovery phase. 2-4 years  (2010-2012?)

- recovery/distribution phase- market begins to strengthen, land prices start to rise, investors pile into our land market and push up prices and “here we go again” - time to start selecting your “sell window” to take profits, 2-4 years

Where are we now in this cycle?  
As of Aug 2009, I make it that we are in year 2 of the recognition phase.    

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Which is better for capital appreciation:  land or homes?

I get this question a lot, so I let me go ahead and address this issue.  First, if you are investing for income, then a home or some rental units is your best option.  Land rarely provides income.  If you lease it, or carry a note when you sell land, it can produce income.  To be fair though, leasing land is very difficult, and when you sell your land, you may want cash to invest in another piece.  So by and large, land does not provide income.  However, if your goal is capital appreciation, then land, over a complete cycle, is a clear winner.  Here is some market history to explain.

If you bought a home in the AV area, in its last market bottom (1995 – 1996) by 2005, it was up 200%.  If you bought your home in 2001, by 2005 it was up 100%.  From the bottom of the market cycle in the mid 1990’s, to its cycle peak in 2005, home prices were up 100% to 200%.  No doubt, that is a very good ROI, after all, one has to live somewhere.  BUT if you bought land in the mid 1990’s and sold it in 2005 or 2006, you were probably up 500% to 1,000%.  Land bought in 2001 or 2002 made 300% to 500% moves by the 2005-2006 period.  I clearly recall selling some prime Quartz Hill acreage in 2000 for $10,000 per acre.  By 2005 and 2006, buyers were paying $80,000 to $100,000 per acre some similar acreage.  The challenge here, is to have patience.  The patience to wait for a bottom to form in the land market, the fortitude to buy when everyone hates the market, and the patience to hold for the next bull market.     
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IRA or Pension Plan Use
As I mentioned above, tax laws now allow one to buy real estate with their IRA.  If doing so fits your goals / investor profile, now, with the market quiet, would be a good time to get the account opened and your money (all or part) transferred to the new custodian.  Doing this now will avoid delays later on when the market offers opportunities.  Send me an email and I will reply with two proven and trusted
custodians for your IRA.  You can then contact them for more information.  I already have a few clients
that are taking advantage of this option.
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What to do Now

No changes here from the last several months.    

Sellers- We are now in a confirmed buyer’s market.  The entire investment community knows it. No one is going to be fooled into overpaying for a property.  To put it bluntly, sellers have two choices here:  get the property priced to where it has a chance to sell, or take the property off the market and get it out of the way.  Demand now is very weak.  Our entire MLS is selling, on average, about one land listing per day.   This is a 93% drop from mid 2005 when our MLS was selling about 8 land listings per day.  Buyers are being very tough on price, knowing full well if they can’t buy a parcel for the price they want, they can always go onto the next parcel and perhaps a more willing seller.  Buyers are being “picky” on price and are taking their time.  Most sellers are well aware that this market is not going to bounce back in the short term.  The most important thing a seller can do now to get their property sold, is to price it properly. 

Buyers- be patient, follow the market, and continue to build up your cash reserves.  Just because it is a buyer’s market, does not mean it is time to start buying hand over fist.  We are in the part of the cycle where it is too late to sell and too early to buy.  Occasionally, a deal will show up that warrants purchase, but these are still  rare.  Following market valuations in my newsletter is important because this allows one to recognize a bargain when one shows  up.   Being patient gives the market cycle time to work for you, not against you.  Learn how to use the market cycle to your favor, to buy low and sell high.  Good values will come up from time to time, keep yourself psychologically prepared to act.  In the
current market, I am finding deals about once every 2-3 months.  Patient is the real key here.  I don’t want my investors to run out of money before the all important capitulation / accumulation phase begins, which is when we will find the best bargains, and thus the greatest future profits.  The goal of being patient here, is to acquire land at lower prices, and to shorten our holding time for substantial profits, i.e., +100% or more.  If you can follow my advice, you be buying market bottoms and selling market tops. 

Longer Term View

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 in the AV is welcome.  Granted, with a temporary over supply of housing, that immediate growth rate is going to slow down.  The AV today, regardless of where we are in the economic real estate cycle, still has a great growth story and a great future.  If you missed the bull market of 2001-2005, we are gradually working our way towards another great buying opportunity.  The last buyer's market was in the 1994-2001 period.  Anyone who bought land, at market value, during those years, and then resold in the 2003-2006 period, made very good profits, well over 100% and in some cases, over 500%.  Better values will arise over time.  Your challenge, as an investor, is to be patient, and to make sure that you have “cash at the bottom”.  Eventually, this market will have bargains galore, and very few competing buyers, a perfect buying environment.  The bull markets we have had in land have one thing in common:  the old price highs of the previous bull market have been exceeded by the next bull market.  In between, there are recessions & price pull backs, which creates value and opportunity.  This is when one should build their inventory and get prepared for the next bull market.  This is how big money is made in AV land.   


September 2009

Sept 2nd- a public hearing is held with the LA County Planning Commission, over a proposed motorsports park which would be located on 322 acres in the area of 170th West & Ave C & Ave D.  The owner and applicant, Tom Malley, aka the Malley Family Partners, says that the environmental impact report and noise testing done make the project viable for the area.  As one would expect, environmental groups have come out of the woodwork to defend the Lancaster Poppy Preserve, located 1 mile to the SE.  This portion of the Antelope Valley is referred to as the Fairmont area.  Malley Family Partners say that the track would be operational on weekends only and will not have lights for night events.  Apparently, this project has been 7 + years in the planning.  Part of the application would change the properties current zoning of agriculture to commercial.  Opponents, primarily environmentalists that don’t want anything built in the area, will argue against the project using noise and air pollution as their main weapons.  The developers say those issues are minor and are supported as such by their required studies.  One citizens group that lives near the area, the Antelope Acres Town Council, voted in favor of the project.  As one citizen put it, “If one cannot build this project in the middle of nowhere, where can they build it?”

Sept 8th- The City of Lancaster is making it cheaper for home owners to install wind turbines.  The application to do such has been reduced from $7,929 to just $125.  Vertical axis wind turbine systems, or VAWTS, for residential homes are only 3-6 feet tall with many homeowners placing them on their rooftops.  Installation guidelines are: one per residence, on-site power consumption only, no part of the turbine can violate an easement for another utility, backyard installation only, and no part of the turbine can be any closer to another utility line than the actual height of the turbine itself.

Sept 14th- In preparing the environmental impact report for the high-speed rail line, from the SF area to San Diego, the High Speed Rail Authority is asking Antelope Valley residents for advice and input.  The high speed rail line will need a 60 foot wide route that runs 800 miles long, for a train that will have top speeds of 220 mph. In cities all along the projected path of the rail line, meetings will held for public ideas, concerns, etc.  At train stations along the way, of which Palmdale will probably be one, the right of way needed widens from 60 feet to 110 feet.  Due to the high speed of the train, streets crossing the RR line would either go over or under the rail line.  This will avoid the nasty accidents that MetroLink has had from time to time.  The 800 mile route will require 23 tunnels traveling roughly 24 miles underground.  Depending upon the depth of each tunnel, the cost of tunneling will run from $96M to $167M per mile.  Although the exact alignment has yet to be decided, in general, as the train leaves Bakersfield, going south, it would follow Hwy 58 into the Mojave area, then run south along the Union Pacific RR tracks into Lancaster and into Palmdale.  Funds to kick off this feasibility study are coming from the passage of Prop 1A in Nov 2008 when voters gave their approval for $9.95B in bond financing.
Total cost is said to be $40B, with a third of that money coming from federal stimulus money.  The rail authority says that the environmental studies will be done by 2012, with construction beginning then or by 2013.  The goal is to complete the entire system by 2020.  Rail authority estimates are that the system and its 24 stations could create about 450k permanent jobs.  Building the system will require 160k construction workers. 

On Oct 2nd, Governor Schwarzenegger announced that Cal has applied for $4.5B in federal stimulus money to begin work on this high speed rail project.  Schwarzenegger has pledged to match every federal dollar that Cal receives from the federal Govt.  High speed rail systems proposed for Chicago and Washington are expected to be Cal’s primary competition.  The Federal Rail Administration will make the final call.  With Obama a native of Chicago, I would not bet against Chicago getting the money.

Sept 16th- The Palmdale Planning Commission has recommended expanding the number of areas where secondary dwellings would be allowed to be built.  A secondary dwelling may be attached or detached to an existing legal structure.  These are often called “mother in law” units or “Casitas”.  The addition of secondary dwellings are being encouraged by the state legislature as a means to provide more housing.  Attached units would be limited to 30% the size of the primary unit, while detached units would be limited to 1,200 sq ft.  The owner of both units must reside in one of the units and only one secondary dwelling would be allowed per lot.  All proposed secondary units must be approved by the city’s director of planning.

Sept 21st- Palmdale’s new and under construction Regional Medical Center is on schedule to be completed by the end of the year and open by May 1, 2010.  The 379k sq ft hospital will open with 127 beds with another 36 beds to follow within a year.  When built out in total, the facility will have 239 beds.  Universal Health Services is spending $200M on the facility which will employ 700 to 800 people.  Adjacent to the new hospital is a new 60,000 sq ft medical office building.  Over the last 14 years, California has lost 3,895 hospital beds and 40% of the state’s hospitals have halted construction projects or major equipment purchases. The hospital will open with services for medical, surgical, pediatrics, obstetrics, neonatal, and intensive care. All beds are private rooms.  The economic impact on the Antelope Valley is expected to be $280M per year.

Sept 22nd- construction is ongoing on the $7M contract to turn Amargosa Creek from a natural drainage channel into a concrete one.  Upon the completion of the concrete channel, Lancaster’s new shopping center, on 110 acres, will take shape on top of it.  The concrete channel begins at Ave L, near 10th St West, then goes NW to Ave K-8, a distance of over ½ mile.  When the channel is done, the shopping center project will be shovel ready, with its construction depending upon the economy.   In addition, Kaiser Permanente will build a 44acre medical center.  The Lancaster Auto Mall, located across 10th St West from this area, will be expanded along Ave K-8, just north of the shopping center.

Sept 22nd- $4.34M of the President’s stimulus program has found its way to the City of Palmdale for major road resurfacing.  Thirteen different streets and areas will be resurfaced that will extend the life of the street another 15-20 years.  The city has awarded the work to Granite Construction Company. The total repaving will cover 70 linear miles which is 13.5%.  The streets will  be resurfaced with an asphalt hot rubber mix known as AHRM.  Lanes of traffic will be closed intermittently to allow the work to be done.  No word yet if the stimulus monies will also achieve one of the President’s other goals: create some jobs with the new work.  Lancaster is getting $4.25M in federal stimulus money, also for various road projects.

Sept 23rd- with their 230 megawatt solar project still under review by the LA County planning department, NextLight Renewable Power LLC is confident they will be able to begin construction on their project by the fall of 2010.  The project, being called AV Solar One, will be on 2,100 acres in the area of 170th West and Ave D.  NextLight has aggressive time lines, with their Environmental Impact Report being approved by April 2010 and their project approved by July 2010.  If so, the first power would be delivered to the state’s grid by summer of 2011.  Full commercial operations would begin by 2013.  For a power plant, the project will have a fairly low profile; 20 employees with the tallest structure only 13 ft high.  The photovoltaic technology that the facility will use means that it will be a low water usage plant, only using 12 acre feet a year.

Sept 24th- The City of Lancaster has run into a “speed bump” in its quest to annex some east side acreage to zone it a “green corridor” for future development of alternative energy sources, i.e., solar power and ethanol production.  Natural Resources Defense Council, a Santa Monica based environmental group, has filed a law suit vs. the City claiming that the City bypassed the state’s environmental laws when it moved to annex the area in question last June.  The area annexed is bordered by Ave E on the north, 20th West on the east, part of Ave H and part of Ave G on the south, and 25th St West on the west.  Total acreage to be annexed is 7,190.  Of that, 1,358 acres would be rezoned from rural-residential to heavy industrial.  Waste Management is located in the area in question and is also seeking to expand their site by 75%.  In response to the law suit, the Lancaster City attorney is recommending that the City do a full Environmental Impact Report.  The EIR is expected to push back the annexation about one year.  Waste Management is planning to sell their green waste to a bio- ethanol refinery being planned at 10th St East & Ave F.  Irvine based, BlueFire Ethanol Co, would turn wood and other green waste into fuel grade ethanol.  BlueFire’s plans for the facility were approved by County Board of Supervisors in November 2008.  Also, Daystar Farms of Delaware has agreed to work with the City of Lancaster to help develop the annexed area into a business park with an emphasis on alternative energy development. 

Sept 25th- financially backed by organized labor, the “Friends of Quartz Hill” have filed a law suit against Wal Mart to try and block the construction of their new store at the NWC of 60th West and Ave L.  On
July 22nd, the Lancaster City Council voted 3-2 in favor of the project.  Wal Mart and city officials expected the law suit, as it is standard operating procedure to sue Wal Mart whenever and wherever they want to build a new store.  The law suit takes the usual path, using environmental concerns as a reason to stop the project.  Specifically, the law suit claims:  that the City issued a defective notice when telling the public about the public hearing, that the City violated its own General Plan in changing residential acreage to commercial (just for Wal Mart), that the City’s EIR failed to disclose, analyze, and mitigate the effect of increased “greenhouse gases” that the project would produce, and that the EIR was biased in favor of the project.  As a remedy, Friends of Quartz Hill want a restraining order and permanent injunction rescinding the City’s approval of the project and prohibiting the City and developer from implementing the project OR an order by the court to set aside the City’s approvals with the City taking no further action unless it can fully comply with all guidelines of the Cal Environmental Quality Act, and the planning and zoning laws of Lancaster.  And of course, Friends of QH want to be reimbursed for the cost of the law suit, by the City, i.e., the taxpayers of Lancaster.  Once the project clears this hurdle, the new Super Wal Mart will be 217k + sq feet in size and will include a drug store, a bank, two fast food outlets, and 3 retail sites.

Oct 2nd- Taking over the space vacated by Wickes Furniture at the NEC of 10th St West & Rancho Vista Blvd, Ashley Furniture opened its doors to the public.  Ashley’s is a new retailer in the AV and has invested $300k in remodeling costs into the 42,000 sq ft site.  The store will employ 35.  The store’s manager says that the AV’s demographics are a good fit for their product line.  Ashley Furniture is headquartered in Arcadia, Wisconsin. Each store in independently owned / operated and licensed to sell Ashley products.  An Ashley executive described their line as “quality furniture that everyone can afford.”           
                           
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Antelope Valley Labor Market:  for July, the most recent period for which this data is available, Lancaster had an unemployment rate of 17.4%, while Palmdale hit 15.4%.  Between the two cities, nearly 20k people are out of work.  AV jobless rate is only surpassed (in LA County) by south central LA at 23%.  A major factor in AV joblessness is construction, as new construction has been cut back severely due to the high foreclosure rates.  Through the first 8 months of this year, versus last year, building permits pulled are down 54%.  Retail has also shrunk as Linen N Things, Circuit City, Gottschalks, and Mervyns have gone out of business.  Some of the retail jobs have been replaced though, as Forever 21 has taken over the Mervyn’s location and Smart N Final the Linen N Things site.  Analysts say, that since 2006, the AV has lost 1,800 construction jobs and retail has lost 1,400 + jobs.  David Smith, an economics professor at Pepperdine University sees the beginning of the recovery as being jobless, with the jobless rate climbing over 12% by the middle of 2010.   

 

FHA Mortgages: Another Mess Emerging

During the credit crunch and housing crisis, FHA have become very popular.  Buyers like them because they can buy a home with only 2-3% down, and lenders like them because the US Govt guarantees the loan.  During the subprime boom, 2% of all loans were insured by FHA.  Today that figure is 20%.  In August the Obama administration announced a program to help FHA homeowners that were in financial trouble, delinquent or in foreclosure.  The program was funded to assist 45,000 borrowers of FHA insured loans.  In September the number of FHA loans in trouble was released, and it is not good.  According to the Mortgage Bankers Assoc, 17% of FHA borrowers have missed at least one payment or are in foreclosure.  That 17% comes out 850,000 FHA borrowers.  The MBA said that the percentage of default for all other loans is down around 13%.  On Sept 18th the FHA announced that their financial reserves had fallen below their mandatory levels for the first time in its 75 year history (1934).  To recoup their financial reserves, FHA could be forced to raise its fees or it might have to be “bailed out” by the taxpayers.  The FHA mortgage rescue program works a bit different than the one for conventional loans.  On conventional loans, the focus is usually on reducing the interest rate.  In the FHA program, 30% of the principle amount of the loan is set aside interest free.  This reduces the home owners monthly payment substantially.  When the house is sold though, the borrower is still on the hook for the entire amount borrowed.  Example:  mortgage of $100k, borrower pays interest on $70k only, but when the house is sold the entire $100k (or whatever is the loan balance is at that time) must be paid off.   On qualifying catch:  if the borrowers spend more than 55% of their total pretax income on any recurring monthly debts, i.e., home payments, car payments, and credit card payments, they are not eligible.  Moody’s says, that of the 51M Americans with a mortgage, 16M have debt that high.  

 California Existing Home News

In August versus July, Cal existing home sales fell 12%, as reported by San Diego based DataQuick. The median home price also fell, down to $249,000 from $250,000.  Existing homes sales, year over year though, are up 5%.  In August, foreclosure sales made up 40% of all sales which is substantial improvement vs. last January when that figure stood at 59%.  Sales fell across the state and it is believed that one of the main reasons is fewer low-cost foreclosures. 

In the southern California six county area, existing home sales in August fell 11% with the median price of a home at $275,000.  

DataQuick says that there is considerable uncertainty about home prices, interest rates, the availability of credit, and the number of foreclosures still in the pipeline that may hit the market later.  For months now, it has been industry chat that a 2nd and final wave of foreclosures are coming.  At the rate that the banks are releasing properties onto the market, that second wave may be a trickle. 

California’s 90 day moratorium on foreclosures ended Sept 15th.  Expect to see a rise in foreclosures in the poorer, entry level areas.  Many of those buyers have lost their jobs.

According to the Coldwell Banker Price Comparison Index, Lancaster is the most affordable market in California for move up home buyers.  A move up home is described as 2,200 sq feet, 4 BR, and 2.5 baths.  In Lancaster the average price of a move up home is $165,205.  The Index covers 310 markets in the US and around the world where Coldwell Banker has a presence.  In the US, California dominated the top 10 most expensive areas, with La Jolla # 1 at $2.125M for the same 2,200 sq foot home.  Beverly Hills came in at $1.98M, Santa Monica $1.4M, SF $1.36M, Newport Beach $1.31M, Palos Verde $1.3M, and San Mateo $1M. Internationally, Singapore was the most expensive at $1.9M, with Salinas, Ecuador the cheapest at $69,375. 

Antelope Valley Existing Home Sales

According to MLS data for the month of August, existing home sales rose +7.7% vs.  July the prior month. For the first 8 months of 2009, versus the same period in 2008, home sales are up +103%.  The inventory of homes is at about ½ the historical norm at 1,100.  The norm is between 2,000 and 2,500.  The average sales price in August was $133,166.  This is up slightly from July, but down 30% versus one year ago. Realtors say that homes priced over $150,000 are beginning to sell again.  Local realtors say that foot traffic in the $200,000 to $300,000 range is also starting to improve.  The existing home market above $400,000 though, is very slow, almost no foot traffic at all.  Add it all up, and 75% to 80% of all sales are on foreclosed properties.  The low end of the housing market is flooded with young couples seeking their first home and investors seeking rentals.  The unanswered question that has been overhanging the housing market all year, is the often rumored “second wave” of foreclosures.  With supply still very thin, multiple offers on properties are still common.  In the high desert area, 86% of its residents can afford to buy an entry level home, versus the entire state at 67%.  Statewide, supply has also fallen, now down to 4.1 months versus 7.6 months at this time one year ago.  The real problem with shrinking inventory is at the lower end, the entry level portion of the market.  In a survey done by Cal Asso of Realtors (CAR), 40% of the first time buyers say they would NOT have purchased their home if the tax credit was not offered.   Comment:  Banks continue to hold back housing supply, which is manipulating prices by creating an auction atmosphere.  Thus the 10-15 offers on entry level homes.  New appraisal regulations, put out by the Obama administration are also killing off deals.  The time to toughen appraisal regulations was when home prices and lender risk were high.  That would have been back in 2006.  But now that home values have fallen 50%, the risk of a bad appraisal causing a foreclosure, is so low, it’s almost non-existent.  As the market is now, the new appraisal regs are not helping and are only hurting those that can really afford to buy a home.  If I didn’t know better, I would think that the banks and the administration are trying to control the rate of the housing recovery and also control it’s price appreciation.  How else can you explain the banks holding back supply when they are getting 10-15 offers per home, and at the same time, the average home price is only going up 1.5% per month.  The banks, for whatever reason, are controlling, and holding back, the rate of the housing recovery.       

Antelope Valley New Home Sales

The data for new home sales listed below, for the years 2002 through 2007, were provided by the Hanley Housing Report.  Going forward, I will begin using a new source for new home sales, The Siracusa Company.

1990-  total of all new homes sold- 4,900 +
1999-  total of all new home sold-    694   (The Siracusa Co.)
2002-  total of all new homes sold- 1,162 (Hanley Housing Report)
2003 - total of all new homes sold- 1,820 (Hanley Housing Report)
2004 - total of all new homes sold- 2,503 (Hanley Housing Report)
2005 - total of all new homes sold- 4,579 (Hanley Housing Report)
2006 - total of all new homes sold- 2,584 (Hanley Housing Report)
2007 - total of all new homes sold- 1,720 (Hanley Housing Report)
2008 - total of all new homes sold-  906   (The Siracusa Co.)
2009 - projected to sell all year  -     756   (Cal Economic Forecast)
2010 - projected to sell all year  -  1,535   (Cal Economic Forecast)
2011- projected to sell all year   -  2,299   (Cal Economic Forecast)

Overall, the AV new home market is predictably struggling, with permits down 53.7% in 2009 versus 2008. 

While many builder have just shut down and stopped building in the AV, one national builder is still doing quite well in the AV:  KB Homes.  There are good reasons why KB has thrived while others have withered.  First, KB was one of the first builders, on a macro basis, that a downturn in housing was imminent in 2005-2006.  Blocks of land that KB had in escrow at premium prices, were canceled.  KB knew, that with a housing downturn, comes much lower land prices.  I know of one escrow on 40 acres on the east side of Lancaster in which KB walked from their $200k deposit.  Next, they waited as builder after builder lost their finished lots back to banks as sales slowed and foreclosures rose.  KB then began buying up the finished lots from the banks that foreclosed upon them, but at a fraction of development cost.  At $40,000 per acre, a R 7,000 lot (7,000 sq ft), when finished, has a cost basis of upwards of $75,000 per lot.  By far, the largest cost in developing lots are the endless fees paid to the city on a per lot basis.  After acquiring dirt cheap lots, KB’s next decision was also correct:  they decided to build to the entry level market for first time buyers.  Presently, KB is building 1,400 to 2,500 sq ft homes on the east side of Lancaster which has a base price of $135,000 on the smaller models.  Profit margins are thinner on entry level homes, but with foreclosures dominating the resale market, the first time buyer market is where the action is.  I should mention that all homebuilders are still losing money, but a few, like KB Homes are reducing their loses and improving their sales. 
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AV Aerospace & Defense

Palmdale’s Plant 42 workforce, during the first 6 months of 2009, rose to 7,234 versus 7,039 at the end of last year (2008).  The aggregate payroll now at Plant 42 is $622.8M per year.  Most of the increase in employment can be credited to Northrop Grumman who added almost 200 workers to the F-35 Joint Strike Fighter program.  NG is building the fuselage for the aircraft at Palmdale. Other programs ongoing at Plant 42 include:  B-2 modifications, production of the Global Hawk, and the new unmanned combat aircraft demonstrator for the Navy, the X-47 (Boeing).  The F-117 NightHawk and F-22 Raptor programs are being phased out.  The F-117 is being retired and the F-22 program is being capped off at 187 planes per the Presidents defense spending priorities.  The entire Space Shuttle program is also winding down as the last scheduled shuttle launch is set for 2010.  The majority of the Boeing work force in the AV is involved with flight testing at Edwards Air Force Base (west of Rosamond) on the C-17, C-130, the B-1, B-2, and the F-22 Raptor.  Boeing has 28% of its workforce involved in their Airborne Laser program which is also out at Edwards Air Force Base.  Although the Laser Airborne program has been very successful thus far in all of its tests, it too may suffer cutbacks.  The Airborne Laser has demonstrated that it can shoot down missiles early in their boost phase with its laser.  An Air Force official referred to it as “hitting a bullet with a bullet.”  Plant 42 is known as a GOCO facility; Government owned, contractor operated, with the US Air Force providing all of the security.  

California:  On Sept 18th the Employment Dev Dept announced that Cal’s unemployment rate rose to 12.2% in August from Julys 11.9%.  In Cal, 2.2M people are unemployed.  Weakness was across the board with trade, transportation, utilities, manufacturing, financial services, business services, and leisure all losing jobs in August. On the good side, jobs losses per month are slowing.  August lost just 12k versus the 35k in July or Feb’s loss of 110k jobs.  In August, 42 states lost jobs.  The UCLA Anderson Report projects that the recovery is beginning now, but that California will lag the rest of the country over the next year.  Comment:  the bread basket of California, the San Joaquin Valley, has had 50% of their water allocation cut off so that northern California can protect the Delta Smelt, a 3-5 inch fish.  Protecting the smelt is a Cal Supreme Court decision.  Cutting off the water is a bureaucratic decision.  Farmers are laying off workers (40k) as the size of their crops shrink.  Before long, we should also see higher prices for food items grown in the central valley.  Isn’t it great to live in a state where a 5 inch fish is more important than people?  On Sept 30th, the Obama administration told Gov Schwarzenegger that he should call lawmakers into special session to deal with the state’s water crisis. Representative Devin Nunez said that his family has farmed in the San Joaquin Valley for 3 generations, and previous droughts have never led to the kind of water shortage farmers are now having.  Some Cal lawmakers were hoping for a policy of “biological balance” from the Federal Govt that would balance water use and protecting an endangered species.  Two such votes in the US Senate have been voted down……………………..

Two Cal University professors conducted a study on the effect of Cal’s regulations on business.  Here is a synopsis of their study. 
- total cost regulation on the state- $493B, and 3.8M jobs.  This breaks down to $134,122 per business, $13,801
  per household, and $4,685 per resident  
- 98% of all businesses in Cal are classified as small business & provide 52% of all jobs
- the $493B cost of regulation is almost 5 times the state’s budget and 33% of the state’s GDP
- the 3.8M jobs lost equals 10% of Cal’s population
- the $493B in lost money breaks down as follows:  $266.5B in directs costs to comply with regulations,
  $210.5B in lost labor costs, $16B in business taxes the state would have gotten w/o the regulations.
No one is suggesting zero regulations, however there does appear to be a lack of balance between regulating
and the need to encourage and nurture economic growth.    

 Why does California gas cost more?  Here is your answer from the California Chamber of Commerce.

- fuel refining costs are 5 to 15 cents higher due to special gasoline blends required by the Cal Air Resources Board
- few of Cal’s refiners are equipped to make this special blend, so availability is often limited and price is
  affected when these refineries break down or close for regular maintenance
- State gas taxes, in Cal they are 35.3 cents per gallon, that is 43% above the national average with only
  New York charging more
- Cal is a “fuel island” with no pipelines linking us to domestic oil supplies.  Thus all crude oil must come
  here by tanker.  Cal also has limited capacity for storage, having lost 6M barrels of storage capacity in
  the last 15 years.
- California has not opened a new gasoline refinery since 1969.  And since 1980, 20 refineries have closed
  down.  Existing refineries have only been able to improve capacity by ½% between 1995 and 2006.  During
  that same period, fuel sales increased 18%; a classic case of rising demand in a market that has a fixed
  output capacity.    

Antelope Valley Land Market

"Supply and demand, in the end, determines the value of all things." 
     - Adam Smith, "Wealth of Nations" 18th century Scottish economist

Supply closed out September at 1,768 which was 14 listings higher than last month for a percentage rise of .7%.  On supply, we appear to be in a sideways pattern, with supply bouncing around in the 1700’s for the last five months.  While I continue to expect supply to work its way lower, it is fairly apparent that it has its own schedule in doing so.  The primary reason that I believe supply can lower is that we still have too many sellers that have yet to capitulate or cave in and cut their price.  Many of these sellers, when they give up, will not cut their price, but will take their property off the market.  That will be the driving force behind the next leg down on supply.  Most listed prices are still too high, way too high.  The sellers want retail, but the buyers want wholesale, with the result being fewer sales.  In general, parcels that are closing escrow now are closing 50%-70% below the price highs of 2006.  Although it seems longer in many ways, this is only year 3 of the Bear market as we are solidly entrenched in the Recognition phase of the cycle.  As the new year approaches, I expect many land owners are going to sit down and doing some serious soul searching with themselves over their land portfolio and will have to answer the question, “just how long do I want to own this land?”  Eventually, the answer to that question should lead us into the capitulation phase and lower listed prices.       
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Supply numbers in perspective:
Supply change vs. last month:      +.7%            
Supply change, year to date:      - 15.80%     
Supply in Sept 09 vs. Sept 08:     - 23%
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Supply at end  Sept  2009 - 1,768
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Supply at the end of 2008:  2,100
Supply at the end of 2007:  3,134
Supply at the end of 2006:  3,263 (market peak in prices)     
Supply at the end of 2005:  2,264 (market peak in volume)       
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
Supply  in  May  of  1989:    587  (market peak in price)
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Demand- Sept demand (39) was up quite nicely, up 13 sales from last month’s 26, an increase of 33%.  This was the highest monthly sales figure since last March, which turned in 40 sales. At nearly 40, for this month, we are quite a bit above my forecasted trading range of 20 to 30 sales per month.  For a Bear market, 39 sales in a month is a fairly strong showing.  The question that remains to be answered is, will there be any follow through, i.e., another month of 35 to 40 sales? Most investors do not buy their land when they should- during periods of market weakness when prices are lower.  To get back into Bull market mode, we need a full recovery in the housing market, and as of this month, we are nowhere near the broad based housing recovery needed to generate new interest in land.  One of the first signs of a housing recovery will be the average sales price rising, and rising dramatically (at this stage).  At the present average sales price of an existing home at or near $133k, we are nowhere near that point yet.  Almost nothing is selling above $200k.  If you live in California and outside the AV, that number is probably hard to believe, but it’s true. I would not be surprised, if by the end of the President’s first term, the housing market is still struggling.  That is 3 years away, and with all of the homes rumored to be in the foreclosure pipeline, the interference of govt at all levels trying to “fix housing”, and the banks manipulating supply and values, I view that scenario as very possible.  The realist and pragmatist in me sees many more months of problems in the housing market ahead of us.  Remember, there is no chance for a recovery in land as long as one can buy a house at 30% to 40% below the cost of construction, and that is exactly what is happening now.

 


- Frank Donato, Third Quarter 2009

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