Cautious is a good word to describe our forecast for the rest of 2011 and into 2012. We think the market will see some small declines over the next year but we also think there are good values for homeowners and investors with a long term view of the market. Interest rates remain low and affordability is high.

Owner/occupants can purchase for about what it would cost to rent a similar home. Investors can see a 5% to 6% yield as compared to less than 1% for a bank CD. Both groups stand to benefit from significant upside potential as real estate values improve in the coming years.

One of the market's down sides is in California's budget problems. Closing an

1. Housing inventory numbers remain relatively stable. The supply in the Yuba-Sutter area is currently 2.7 months.

2. Sales activity remains relatively strong. Yuba City is seeing 50 to 70 single family home sales per month. The housing recession of the 1990's saw only 30 to 50 sales per month.

3. Renters can purchase homes with a small down payment using 30 year, fixed rate financing and experience total housing costs less than or not much more than the cost of renting.

4. Investors can achieve neutral cash flow with a 20% to 25% down payment using 30 year, fixed rate financing. Alternatively, they can receive positive cash flow in the 5% to 10% range on all cash purchases

5. Interest rates the last five years have been at their lowest levels in at least 40 years. Today's rate for a 30 year fixed rate loan is about 4.25% and the 15 year fixed rate is 3.25%.

6. Very low bank CD rates are causing many investors to look at real estate as an alternative investment.

AS THE ECONOMY IMPROVES, WE THINK THE NEXT SIX FACTORS WILL CAUSE A SIGNIFICANT INCREASE IN HOME PRICES.

7. Historically, California's population has increased by about 500,000 people per year. This results in between 230,000 and 250,000 new households being formed each year in California. According to figures from the California Building Industry Association, there were under 23,000 new single family housing starts in California in the last 12 months.

8. Approximately 85% of college graduates move back home after graduation according to a CNNMoney.com article from November 15, 2010. This represents a significant source of pent up demand for housing as the economy improves and graduates find jobs.

9. The Mortgage Bankers Association reported on 4/7/2010 that "1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million..." explaining, in part, the sluggishness of the rental and housing market as financially strapped families move in with friends and relatives. This group represents another source of pent up housing demand when the economy recovers.

10. Nationwide, foreclosures began surging upwards in 2006 and 2007. FHA prohibits loans to people whose foreclosures are less than 3 years old. An ever increasing number of foreclosed homeowners are becoming eligible to purchase homes again.

11. California has an extremely cumbersome and expensive planning process. It takes about two to three years of studies and planning to get approval for a new subdivision. It won't be possible to create new building lots over night when the market starts to rebound.

12. Government fees remain high and will limit new home construction. These fees are being collected to pay for sewer and water connections, building permits, new parks, fire stations, police stations, schools, levee repairs and other community wide improvements. Builders are even being charged a fee that goes into a special fund for “affordable” housing. Forcing builders to pay high fees to cover a wide array of community wide improvements associated with a growing population discourages new home construction.