AV Breaking News: Chinatown Redux! Well not quite, but in a fast growing area like the AV, a battle over water was bound to happen sooner or later. Two large carrot farmers have filed suit over rights to who owns the water underground. Because of the filed law suits, LA County Waterworks has told at least two tract home builders that "water may not be available" for their projects. This was viewed as a knee jerk reaction, and later a planning deputy said, "there is no definitive change in policy concerning water for new homes in the AV." As reported here in previous years, there is enough water in the AV to support a population of 700,000, about double of what it is now. The water is there, but who owns it is in question. The farmers feel they have the right to pump all the water they need from under their land. Sounds fair, but the underground bodies of water, extend beyond the boundaries of these farms, with no way to determine underground water boundaries. As it is now, anyone with a water pump and well can extract as much water as he wants, meaning that water in the AV is unadjudicated. Adjudication would set limits on the amount of water available to all users, including water agencies. That in turn would require water agencies and growers to rely on more expensive state water imported from the California Aqueduct. All parties in the suit, the water agencies and the growers, are accusing each other of pumping water like mad. LA county officials are now considering ways to raise fees on developers to help pay for new water storage and delivery to new homes. The fees could also be used to dig more wells for LA County Waterworks. No estimates are yet available re: fee increases on developers. Diamond Farming and Bolthouse Farms are the two main plaintiffs in the suit. About a dozen AV farmers are trying to negotiate a settlement to end the lawsuit. The farmers solution would begin a water use monitoring program and spell out rights for all users, existing and future. Since unlimited pumping of water is ongoing now, water companies are reluctant to store water underground; there is no way to protect it. Last year, AVEK, the AV's wholesaler of water, allowed 13B gallons of water to flow into the Pacific Ocean because there was no way to store it and none of the water agencies or growers wanted to purchase it. Clearly, the problem is NOT supply, but storage and distribution.

Ritter Ranch has a new owner, a clean balance sheet, and is in a position to move forward with development. In bankruptcy court since 1997, Ritter Ranch, the 10,000 + acre master planned community of west Palmdale, now has a new owner. After 75 rounds of bidding, SSC Acquisitions LLC, is the new owner of Ritter Ranch. Their winning bid at the bankruptcy trustee's sale, held August 5th, was $57.2M. Each of the 6 bidders had to put up a $2M deposit to qualify for bidding. SSC now has 14 days to close escrow, or lose their $2M deposit. Upon close of escrow, $34.3M will be paid to senior bondholders. The balance of the funds will be held in trust, and paid to junior bondholders. Palmdale Mayor, Jim Ledford, said, "We are happy that RR is finally moving forward. The new owners have a vested project, which means they have done a lot of due diligence to give them development rights within the city". Upon completion, Ritter Ranch will house 7,200 residential units. No word yet as to what date the new owners will begin to push dirt around. A project of this size is a major long-term commitment. Some estimates have the project taking up to 20 years, or more, to build out.

National Housing Market
JULY housing starts, after being down in June (-8.5%), bounced back strongly at + 8.3%. Housing starts were up in all 4 regions of the country. July's stronger than expected number has many analysts calling the June weakness an "aberration".

JULY building permits, also bounced back nicely, at +5.7%. June had been down over 7%.

JULY existing home sales, released August 24th, -2.9%, just a bit weaker than the expected -2.0%. However, behind May and June of this year, this is still the 3rd highest level ever. Nationwide, the supply of homes is 4.3 months. Also nationwide, the median price of a resale home is $191,300, which is up + 8.7% versus 12 months ago. The resale market is still very strong.

JULY new home sales, released August 25th by the Commerce Dept, fell more than expected, at -6.4%. While the report revealed weaker new home sales, the new home market is not weak. With new home sales at record levels, strong pullbacks off of record numbers should be expected. On a relative basis, the west was the strongest sector of the country, as new home sales only fell slightly. June was also revised downward, from the original -.8% to a much larger -5.6%. That is two fairly strong down months in a row now. Two months does not make a trend, but the next two monthly reports could be telling. While down from June, year over year, the median home price is up 9%, and now stands at $207,400.

JULY construction spending- released by the Commerce Dept on September 1st, came in at + .4%. The annual rate of construction spending is now approaching $1 trillion dollars for 2004! Year over year, it is up + 9%, and this year, has been up 7 months in a row. June construction spending was revised upward, from slightly negative, to flat.

Summary- With the economy moderating in it's growth rate, and inflation pulling back, things look good for the housing market for the balance of this year. Why? Moderating growth and friendly inflation numbers are good for bonds, which means mortgage rates should remain soft, if not go lower. From current interest rates, all the housing market really needs is for mortgage rates to move sideways in a narrow band, i.e., 5.75% to 6.25%. The housing market's best friend, affordable mortgages, is alive and well, and so is the housing market.

According to the Nat’l Assoc of Realtors, California has 4 out of the top 5 most expensive metropolitan areas in the entire country in which to buy a home. Nationwide, here are the top five metropolitan areas and their median home prices:
1. Orange County, Ca. - $655,300
2. San Francisco Bay area- $647,300
3. San Diego- $559,700
4. Honolulu- $451,000
5. Los Angeles- $438,400
Two other Cal communities placed in the top 20:
14. Sacramento- $308,600
15. Riverside/San Bernardino- $294,500

Through the end of July, a full 23% of all homes planned for LA county received building permits in the AV. It is estimated, that by the end of the year, a total of $500M worth of new homes will have been built in the AV in 2004. Although new home construction, statewide, is at 10-year highs, building industry officials say that it is still not enough to meet Cal's growing population.

With 7-10M people only an hour away by car, and much higher home prices in our feeder markets, the case for moving to the AV remains strong. "Growth is going to continue to come; We're (the AV) the only place left in Los Angeles County with dirt," Gretchen Gutierrez, executive director of the AV chapter of the Building Industry Association.

Why is the supply number is 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 its change and its 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.

Demand: August (187) land sales, put in another very strong month. Although strong, 187 land sales in August did break a streak of 5 months in a row of 200 or more. As you can see from the numbers below, 2004 is shaping up to be a very strong year in land sales. The challenging part of this market is finding property that is suitable for investment, meaning many listings are over priced, and unattractive from an investment point of view. One should always consider both location and price when making a buy decision. Going forward, it will be interesting to see if sales volume has peaked for the intermediate term, or if it can make another run above the 200 level. In the context of the big picture, the future growth of the AV, it matters little. Volume numbers above 100 provide a very active and liquid market, and currently, we are a long way from that level.
If there is a period of weakness that will provide the longer term investor an opportunity to pick up a few deals.

Demand numbers in perspective:

Land sales year to date- 1,648
Land sales pace for the year- 2,472
Land sales last year (2003)- 1,240
Average land sales (in 2004) per month- 206
Average land sales (in 2003) per month- 103
First 8 mo of this year vs. same period last year- + 107%
August 2004 vs. August 2003- + 70%

Strong volume shows that this market has strong conviction, which tells me this market has years to run, not just months. Increasing sales volume means that the number of participants, and the total dollars they are bringing into our market, has increased, and increased dramatically, vs. last year. In many areas, prices have had major moves. Investors, tired of stock market losses and volatility, are moving money out of stocks, and into real estate. This is a phenomena that has been going on since the second half of year 2000. From 1960 through 1980, real estate was the investment asset of choice. From 1980 through 2000, the stock market was the dominant investment vehicle. Is it real estate's turn to be the magnate of investment capital for the next 20 years, until 2020? From year 2000 until now, it has a very good start. Bull markets usually climb a wall of worry. All of this talk about a "housing bubble" fits that bill perfectly. The time to worry, in my opinion, is when no one is worried, and the talk of the "bubble" completely disappears.

Current Status: I now expect volume to move into a trading range of 150 to 200 + sales per month, which is still very strong sales numbers. Overall, volume is strong and is in bull market territory. Next year, these volume comparisons, 2005 vs. 2004, are not going to look nearly as good as 2004 vs. 2003. No matter, any month where we have over 100 sales still indicates we have an active market with strong interest.