A. Housing Prices Altering Economic Recovery
B. Of Stocks And Bonds
C. Large Cap REIT Performance
D. Equity REIT Performance
E. Mortgage REIT Performance
F. Realty Corporations
G. Real Estate Mutual Funds (REMFs)

A. RATES AND HOUSING PRICES COULD ALTER OUR RECOVERY
Largely ignored over other indicators, the importance of the residential lending and brokerage business to our economy may be much better understood in the coming months. The continuing refinancing and home equity boom has lowered mortgage payments and pumped a great amount of money into the economy. Many people have refinanced their homes multiple times this year, which is unprecedented. And, as U.S. Treasures edged up last week - with plummeting stock prices, Iraq tensions and increased economic concerns - mortgage rates fell to their lowest levels in over 44 years. With increasing speculation that the Federal Reserve will lower rates soon, mortgage rates may inch down even more in the immediate future. This is keeping the housing markets fairly healthy and avoiding significant price erosion in most major markets.

But many housing experts are nervous that some markets could be declining soon perhaps even cruising for a housing bubble. An article in the Wall Street Journal, on Oct 10, 2002, "Time to Cash Out of Real Estate, Too?" explained that many investors are reducing their real estate exposure and rolling out of REITs, especially those in offices and apartments. The article suggests that it may be a good time to sell a home. It stated that $3.46 billion has flowed into real estate mutual funds this year compared to only $302 million last year and that an increasing number of portfolio managers, strategists and others are now cutting their allocation to real estate. In particular, it mentioned that the factors that contributed to the rise in real estate, historically low interest rates and a stock market bubble, are temporary and that some investors are starting to get back into stocks anticipating a market bottom and a sector rotation.

While many individuals and investors have sought haven in one of the last few asset classes that remains fairly strong, eventually, home prices will top out. And, there is little doubt that as mortgage rates eventually begin to increase, home prices will reverse their upward trend. However, it is doubtful the housing market will have similar percentage declines that occurred during the collapse of the dot com bubble. Since most economists are predicting stable interest rates for one to three years, they do not see a collapse of the residential markets in the near term. Nor do most still predict a double dip recession. However, if rates were to increase significantly, for example from 6% on a fixed rate mortgage to over 8%, it could still decrease property values by about a quarter in some markets. This is far less than the stock market losses in the last couple of years, but could still cause a surge in foreclosures since many people have equity of 25% or less in their homes.

Such a decline could erase over $2 trillion in housing values and trigger another economic setback. If such a housing loss occurs, and if the stock market does not make back some of the $6 trillion lost in the last couple of years, it would create a double whammy upon household wealth. Without strong retirement funds and limited home equity, many baby boomers would be more financially challenged in retirement. This could also place a much greater financial burden upon our government and we could find ourselves in a second or even a third recession this decade.   Top

B. WEAK EARNINGS TEST EQUITY BOTTOMS, TREASURIES STAY STONG
Earning reports for the third quarter were full of more negative surprises than positive ones. In particular, analysts continue to slash earning prospects for many companies, especially those in technology. Corporate earning turnarounds may take much longer than a couple of quarters - maybe over a year or two in some sectors. In addition, the dock strikes on the West Coast, which were estimated to cost the U.S. $1 to $2 billion per day over 10 days, is still not resolved. It will take weeks, and maybe well over a month, for the shipping industry to return to normal. There could also be work slow downs and more difficulties before a new labor contract is accepted. This could further increase the economic toll on U.S. businesses, especially during the crucial Holiday retail period. Unemployment is still rising, consumer confidence continues to be weak and the Conference Board survey (measuring economic confidence of CEOs) has dropped significantly in the last month.

With so much bad news, and so few bright spots, many economists and investors are hardly surprised that stocks are testing 5-year lows and Treasuries are strong with rates that are at lifetime lows for most Americans. This is the first time since the depression years in the late 1920's that bonds have outperformed stock performance for two consecutive years. Although this may suggest a turnaround, some argue that further stock declines are likely. In a recent newsletter, the well known bond manager with PIMCO, Bill Gross, argues that the DOW may decline to 5,000 before it heads back up, and that bonds will still perform well over the next couple of years. We expect some stock rallies to occur, but whether they can be sustained is questionable until the Iraq situation is resolved and corporate earning improve.

From President's Bush's national address on October 7th, it appears he is determined to take action against Iraq. While, such a strong position may be required to negotiate an acceptable arms inspection agreement, it appears that the U.S. is becoming intent on invading Iraq, regardless of International sentiment. The largest obstacles may be cost and a time frame that are acceptable to Congress, rather than a U.N. approval. We doubt an invasion will occur within the next month, so the uncertainty will continue to place greater pressure on stocks and should keep higher grade bonds and Treasuries strong.

In short, the good news is that inflation will probably stay in check, the Iraq situation may be closer to closure, the Federal Reserve may lower rates fairly soon, stocks will find a market bottom and, without a strong economic rebound, interest rates will probably stay fairly firm and divert a housing price bubble in the near term. The bad news is that the Iraq situation may not be near closure and could be dragged out until next year and cause unexpected negative consequences. Also, there will probably be more high profile corporate collapses and layoffs and we may take a double dip recession that leads to sustained economic weakness longer than anyone anticipated.

Although most people would like a strong economic rebound, if it causes interest rates to rise significantly, it could be setting the stage for a real estate bubble that could force us into another recession in just a few years. It appears that the economy is more delicate than we may realize, creating economic situations in this decade that are much different than economics of the 1990s.   Top

C. LARGE CAP REIT PERFORMANCE
Large Caps in September had a decline of -4.9% with all but three of the stocks having a negative performance. Their price performance so far this year is even. The best performer for the month was General Growth Properties (GGP) and Simon Debartolo Group (SPG), increasing 2.2% and 0.4%, respectively. The laggard was Equity Residential Properties Trust (EQR) down -14.3%. The best performer year-to-date (YTD) was General Growth Properties (GGP), up 32.7%. The laggard YTD was Trizec Properties, Inc. (TRZ), losing -30.9%, respectively. YTD, Large Cap REITs were even in September, about 6% less than the broader REIT index. (Please see Large Cap REITs.)   Top

D. EQUITY REIT PERFORMANCE
Equity REITs in September were down slightly more than in the previous month and had a monthly price loss of -2.6%, reducing the year-to-date (YTD) gain to 6.08%. Only two of the 14 groups showed a monthly gain. The top performers were Retail Malls & Centers, up 0.55%, and HealthCare, which posted at even. The laggard was Hotels, dropping -9.72%. For the year, all but four groups are still showing gains. The top performing groups were Retail Factory Outlets, up 38.3%, followed by Retail Regional Malls, up 16.95%. The laggards YTD, were Hotels and Apartments with price declines of -9.44% and -5.29%, respectively. The best individual REITs for the month were National Golf Properties (TEE) and LTC Properties, Inc. (LTC), gaining 15% and 12.8%, respectively. The worst monthly performers were Patriot American Hospitality (WYN) and Golf Trust of America (GTA), losing -47.7% and -37.6%, respectively. The best performers YTD were Chelsea GCA Realty, Inc. (CPG) and Konover Property (KPT), gaining 41.4% and 39.3.8%, respectively. The worst performers YTD were Golf Trust of America (GTA) and Prime Group Realty Trust (PGE), down -71.8% and -47.9%, respectively.(Please see Equity Gainers and Losers.).   Top

E. MORTGAGE REIT PERFORMANCE
For September, Mortgage REITs decreased -4.13% and still show a strong increase YTD of 7.48%. All of the groups showed a negative this month. The best performing Mortgage REIT group for the month, but still in the negative, was Commercial Mortgages down -3.81%. The best individual Mortgage REITs for the month were BRT Realty Trust (BRT) and Impac Commercial (ICH), gaining 6.6% and 4.2%, respectively. The worst monthly performers were American Residential Inv. Trust (INV) and Novastar Financial, Inc. (NFI), losing -28% and -24%, respectively. The best performers YTD were Dynex Capital (DX) and CRIIMI Mae, Inc. (CMM), gaining 111.4% and 94.8%, respectively. The worst performers YTD were Impac Commercial (ICH) and Arizona Land Income Corp. (AZL), down -21.3% and -20.9%, respectively. (Please see Mortgage Gainers and Losers.)   Top

F. REALTY CORPORATIONS
All 14 of the Realty and Housing Corporation groups in September were negative. For the month they had a decrease of -10.35%. The overall price decline for this sector YTD was -13.95%. The best group for the month was Developers with a loss of -3.81% and the worst group was OnSite Technology, off -27.3%. The best performing group for YTD was Tech & Net, still up 28.7%, because of a strong gain last month. The worst performing group YTD, OnSite Tech, was down -59.6%. The best monthly Realty Corps were Grubb & Ellis Co. (GBE) and Hallwood Realty Partners. (HRY), gaining 47.1% and 32.2%, respectively. The worst monthly performers were SpectraSite Holdings (SITE) and Insignia Financial Group (IFS), losing -66.7% and -53.1%, respectively. The best performers YTD were LendingTree (TREE) and Amerihost Properties Inc. (HOST), up 149.8% and 97.6%, respectively. The worst performers YTD were SpectraSite Holdings (SITE) and Homestore.com, Inc (HOMS), down -98.1% and -91.7%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top

G. REAL ESTATE MUTUAL FUNDS (REMFs)
For September the overall average return for 137 funds was -3.52%, with none of the funds showing positive returns. Kensington Select Income, showing a negative return of -0.61%, was the best monthly performer. Overall returns for REMFs this year is still positive, however, with a gain of 3.37%. Several REMFs have double digit returns with the best performers YTD including Alpine Realty Income and Security Capital European up 13.57% and 12.03%, respectively. (Please see REMFs.)   Top

Stock Changes - There were no changes for September.

Note: In reporting group percentage changes, stocks that were under $1 are excluded from our calculations. If a stock is under $1 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded.