June 2007

Inside Veritas -
Article 1 - 'Meet the Members' Barbecue New Event set for June 20th
Article 2 - Why the Government and Realtors' Price Reports Conflict + Mortgage Rate Activity
Article 3 - Home Sales' data left nation's economists 'dazed & confused'
Article 4 - Big "TWO" Vehicle Sales Surge in May
Article 5 - Taxation and Finance by Rachor; Purman & Tucker CPAs
Are Dues a Deductible Expense?
Article 6 - Jeeps & Rams with the "GM Discount?"(from previous issue)
Association News Update
Housing & Economic Briefs: Existing Sales; Prices; continue decline
BS: Still about Nothing in particular
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'Meet the Members' Barbecue New Event set for June 20th

During the recent Membership Drive training session there was talk about getting together in the summer the way the association did years ago ... See who’s busy ... meet new members ... get together in an industry/social environment for the kind of networking that’s normally restricted to the General Membership meeting schedule.
Thus, we’ve put together a special event to kick-off summer with the first “Meet the Members” Barbecue, set for the association parking lot on Wednesday, June 20th, the final day of “spring.”
Festivities start at 5:00 p.m., and will run through 8! Members and Guests are all welcome with NO charge for either.

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Why the Government and Realtors’ Price Reports Conflict

When the National Association of Realtors released its Metro-politan sales’ price report for this year’s first quarter it was hardly a surprise that prices were down 1.8% on a year over year basis. After all, we’ve been reporting declining prices for two years, and declining “price levels” for the past nine months.
So, why did the government’s house price index (HPI) show a rise in price levels of 4.25% just two weeks later, when it covers the same basic markets? And, which one’s correct?
For years we’ve noted the distortions in the Realtors’ median price levels in comparison to the actual growth in home values, as they don’t take market conditions into consideration. Price levels can rise dramatically merely based on more higher end homes being purchased in a strong market, despite relatively little change in prices of actual homes.
Well, the HPI eliminates this distortion by measuring changes in price of the same properties, over an extended period of time that can date back to 1980. But the HPI is limited to Fannie Mae and Freddie Mac based sales and appraisals, which eliminate a significant part of the over all housing market.
For example, in 2005, nearly 40% of all home sales in the nation were for investment or vacation purposes, hardly something that would show up in the Freddie or Fannie records. So, while many of those homes, particularly in places like Florida or Las Vegas experienced sharp drops in prices, they never show up on the HPI.
As you can see in the chart, some of the areas with largest discrepancies between median and HPI were places with an historically high rate of second home purchase.
In the recent issue of Housing Quarterly we noted the impact of slower sales in Florida and California on the nation’s price levels as the high priced states lost a combined 3% share of the nation’s market last year. Well, much of the activity in those two states is completely ignored in the HPI.
Realistically, both measures are correct, though it seems that even the declining prices in the Realtors’ report are somewhat understated. However, there is something positive to be taken from the HPI, at least as it’s related to the “owner occupied” market. It suggests that homes purchased for the traditional purpose of “shelter” continue to hold their values, at least in markets outside California (and, of course, Michigan). And, last year, that represented roughly 64 percent of all homes sold.
Note: Michigan retained its position at the bottom of the HPI (year over year) but for the 1st quarter (alone) California, Nevada, Florida and Massachusetts all lost more value than the Great Lakes’ State.

Mortgage Rate Activity

(6-1-07) As you can see in the chart, rates were on a sharp incline for the last half of May, reaching 6.42% in last Thurs-day’s Freddie Mac report. Then, on Friday, bond prices fell sharply (as they have nearly each day for two weeks), with 10 year treasuries closing at just under a 5% yield, which was somewhat surprising after the weak (.6%) GDP report.
So, look for rates to remain on the rise in Thursday’s Freddie Mac report. But also recall that a year ago rates were at 6.6%, and climbing to 6.8%.

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Home Sales’ data left nation’s economists ‘dazed & confused’

The day before the Memorial weekend’s New Home sales’ data caught the nation’s economic analysts by surprise. According to the Commerce Department, new home sales’ soared more than 16% in April, while prices plummeted nearly 11%, leaving the nation’s economic “brain trust” virtually dumbfounded. Many referred to the historic volatility of the data, or merely maintained that one month doesn’t mean a “trend.” Yet, had they bothered to look at the entire report, they may have recognized a significant alteration in the market that could easily explain the diversity in the data.
For the previous six months (October through March) the median price held in the $250,000 range prior to plunging to $229,000 in April. But during that six month period, 37.5% of all new homes sold were homes that were listed as “completed,” suggesting they were built for the market prior to the sharp decline that was evident in Spring of 2006.
To put that in perspective, less than 25% of new home sales from 2001 through 2005 were for completed homes.
What likely kept home prices up was that builders were discounting higher priced homes, which still sold at prices well above the “average” home, despite the discounts.
April’s surge in sales was almost totally limited to homes which were not even started prior to the sale being made. Or, in other words, they are homes being built for today’s lower priced market, thereby bringing down the median price. From ‘01 to ‘05, pre-started homes represented roughly 38% of all sales. But in those previous six months they accounted for 28.7%. In April, that share of the market was up to 33.7%, that is, if there’s any credence in the government’s report.
While we seldom put a lot of emphasis on 1 month, it does appear that the number of completed homes on the market is dwindling, and with it are many of the opportunities to take advantage of the recent “buyers’ market.”

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Big "TWO" Vehicle Sales Surge in May

U.S. auto sales appeared to rebound in May, led with a surge by the world’s two largest auto makers: Toyota was up 14% over May 2006, while GM jumped 9.5% over the same period. However, from an adjusted perspective, while total sales were up 5% from a year earlier, they were roughly the same rate as in May ‘06, as there was one more selling day this year.
What was notable is, for the fourth time in the past year, Toyota’s monthly sales beat Ford. And, as you can see in the chart, Toyota is currently the second leading auto maker in the U.S. approaching the midway point for the year.
Nearly every company showed gains last month -- that is, unless they were tied to Ford, which saw its sales drop 6.7% for the month, taking it down 12% for the year (Ford owned companies, like Volvo, Mazda and Jaguar also saw sales fall) -- suggesting the Lions may now be Ford’s ‘best’ performing company.
As you can also see in the chart, Chrysler (perhaps Cerberus Motors) is the only U.S. company that’s not lost market share this year. But, ironically, that company’s prospective owner already owns 51% of General Motors’ financing arm: Is this the only column that sees the potential for a ‘back door’ merger of the nation’s numbers one and four?
Anyway, as we hear so much about the “world economy,” there shouldn’t be all that much of a surprise that the nation’s auto market is beginning to look more like the world’s market as each month passes. Nor, should it come as a shock if the “world’s” number 2 (historically #1) company were to merge with a smaller firm to recapture its position of being #1.

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Taxation and Finance by Rachor; Purman & Tucker CPAs
Are Dues a Deductible Expense?

As a business owner or professional, you likely belong to several groups. While dues paid to professional organizations, civic clubs, business leagues, and chambers of commerce are usually fully deductible business expenses, the same can't be said for dues paid to a social or recreational club - even if you entertain customers or clients there.
Perhaps your firm pays for your club membership. If you are an employee, the firm can deduct the full cost if you report the dues as taxable compensation.
Another option for employer-provided memberships is to divide the dues expense into the portion attributable to business use of the club and the portion attributable to personal use. The business-use portion is a nontaxable working condition fringe benefit, and the personal-use portion is taxable compensation. With this method, your firm's deduction is limited to the amount treated as compensation.
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Editors’ Note: For those who missed the story in the Flint Journal, Rachor, Purman and Tucker, the Accounting Firm that’s been writing “Taxation and Finance” for nearly two decades, merged with fellow BAMF member Lewis and Knopf last month, and moved into the latter’s corporate offices in Gateway Centre.

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Jeeps & Rams with the "GM Discount?"

If there was any real “NEWS” in February’s auto sales’ announcements it was the “surprise” that GM’s sales rose above last February’s level (or, maybe) that Ford and Chrysler were back to their traditional ranks of #2 and #3 respectively.

However, in reality, it was the same old story: GM and Ford continue to lose market share (year to date); Chrysler’s holding at its recent level; as Toyota, Honda, and Nissan continue to capture a larger share of U.S. buyers.

What IS notable, however, is that Toyota is merely a half a percent out of holding the #2 position, and will, in all likelihood, rise to that historic height in the coming months.

The real auto news, as it will impacts regional economics, is Chrysler’s drag on its German owner, and Daimler’s admittance that it would like to sell the division. First, there was the announcement of cutting jobs and closing plants. Then came the word of “buyouts” of employees similar in nature to those carried out by Ford, GM, and Delphi.

But most notable were the musings, and apparent talks, of GM picking up Chrysler in exchange for GM stock. A decade ago the idea would have brought outrage with GM controlling an outrageous percentage of the market. But in the late 2000s, that percentage of the market would likely fall to the 35% range, not even close to what GM held on its own years ago.

Of course, there’s also talk of “Chinese” auto makers buying the division. Makes us wonder how NASCAR fans will adjust to the entry of “Godless Communism” into Nextel Cup racing?

Barry

Beyond Seinfeld: It’s still about "Nothing" in particular

This "off beat" sports' bit looks like it came from "Seinfeld"

In a “Seinfeld” episode (with sidekick George Costanza working as a traveling secretary to the Yankees) infamous owner George Steinbrenner heard rumors that Costanza was a “communist.” Was he upset that he had a commie on his staff? No Way. Instead he thought it would give him an edge with Castro in hopes of getting Cuban players out of Cuba (as well as cigars). So, he sent his token commie off to meet with Castro.
We couldn’t help but think of that episode when reading an AP report of Gus Dominguez, a “California based sports’ agent,” convicted on “nearly two dozen federal charges” after organizing two smuggling trips across the Florida Straits in 2004. The bounty? Five Cuban baseball players, including pitchers in the “Diamondbacks” and “Braves” systems. No mention as to whether any made it to the Yankees.

“Seinfeld” Brief:

Roswell (NM) has some of the same problems of Flint in the 1980s. It’s main industry (hosting aliens who crashed their spaceship) peaked in 1947. So, like the “Vehicle City,” Roswell’s looking at a theme park for salvation, based on its history. Thus, “Alien Apex Resort” could open as early as 2010.
Since Roswell’s economy is already tourist based on the UFO Craze, their planning the “Resort” as a “UFO-themed amusement park. The main attraction? “An indoor roller-coaster that would take passengers on a ‘simulated’ alien abduction.” Well, we guess that beats a two story high replica of an internal combustion engine.

Finally, how about 10 month old “Bubba” Ludwig, the youngest Illinois resident with a gun permit? Bubba’s listed at 2 feet, 3” on his permit (which he also uses as a teething ring).

Lawyer Controversy in Chicago

When Bar Associations decided it was O.K. for Lawyers to advertise, “CALL SAM” and “LEE FREE” became as well known Michigan phone numbers as TYler 8-7100 was in the ‘60s and ‘70s (Belvedere Home Construction for those of you too young to recall). Yet we can’t help but point to the Chicago Divorce law firm that caused a stir in the “Windy City” with the billboard (below) suggesting what awaits you after divorce. Makes us wonder when an enterprising lawyer will offer “free dating service” to all new divorce clients?



Barry

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Association News and Events by Laura

The Parade of Homes concluded on the Memorial Day weekend,and the preliminary reports were mixed, and hardly surprising. While most participants reported steady (and sometimes excellent) traffic, only a few reported sales (of course, there were several potential buyers that wanted to sell their current house first). What was clearly obvious is that large numbers of area residents would like to get into a new home. Equally as obvious is that much of the newer, existing home inventory (those built in the past 4 years) are competing with the new market. We’ll be holding a “wrap-up” meeting for Parade Builders next week at another Builders’ Initiative meeting in an attempt to get full details of their parade experiences. The association held a 1 Day membership drive on May 16th, and participating members brought in ten applications. We expect to introduce many of those new applicants at the Barbeque June 20th at the Association office’s parking lot. Annual BAMF Golf Outing Monday, August 6th, at Flushing Valley Golf Club 4 person scramble 10 a.m. shotgun start Sponsored contests Lunch anytime Awards’ reception still $100 per golfer Door Prizes Hole Sponsorships $125 - $175 Tee reservations being taken at 810-603-2200

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Housing and Economic Briefs

Existing Sales; Prices; continue decline

The rate of existing home sales fell below the 6 million unit level for the 1st time since the summer of ‘03 according to the National Association of Realtors’ April report as inventory climbed by 400,000 units. These data now mean inventories are up 23% from April 2006, which represents an 8.4 months’ supply of homes on the market at the April rate of sales. To put that in perspective, the average rate of inventory last year was a 6.5 months’ supply, which was up 44% from the 4.5 months’ level in 2005.
Over all, activity was down 10.7% from April ‘06, which is similar in numbers to the new home sales activity reported earlier by the Commerce department. However, new home inventory has been in decline since last June, while existing inventory continues to rise at new record levels.
Furthermore, as you can see in the graph below, April’s median price ($220,900) was below the year earlier price, representing the 10th consecutive month of year-over-year declining prices. It’s almost hard to believe that, as late as June 6, 2006, the NAR was still maintaining that prices would not decline on a year to year basis.

Realtors '2nd home' sales report very interesting

With Florida real estate in a crisis, we’d anxiously awaited the NAR’s annual report on vacation and investment sales for 2006. Since they represented nearly 40% of ‘05’s market, a strong downturn in second home activity could tell us much about the weakness or strength of the traditional (shelter) housing market, and just how steep last year’s downturn realistically was.
Well, they found vacation-home sales actually rose last year, but “investment” activity plummeted a whopping 28.9% to a total of 1.65 million. In all, the 2nd home sector of the market represented 36% of all home sales, nearly 4% below their level of 2005.
So, when we strip the second home market from total sales we find the traditional shelter market was down 205,000 units in ‘06, or just 4.1% (rather than the 9.9% drop in total sales). And, this may also explain why there’s such a drastic discrepancy in the Government’s house price data (which only measures Fannie Mae and Freddie Mac activity) that shows price levels still on the rise, with the realtors’ price data that shows declines in many of the same metro areas (story on page 2).

Michigan home prices still in decline on both scales

While only two Michigan metros showed up on the NAR’s first quarter price report (Grand Rapids [-3.1%] and Lansing [-1.2]), the Michigan Association of Realtors’ data for the quarter shows the state’s average price down 9% from a year earlier. For the same period, the Federal House Price Index (HPI) shows the state’s price level fell another 0.66% from last year’s 1st quarter, and holding its rank of 51st in the nation.
The HPI had Bay City (-3.1%), Wayne County (-3%), and the Flint area (-2.3%) in the bottom twenty of the nation’s markets. North “Detroit” (Macomb, Oakland) (-2%); Saginaw (-1%); Ann Arbor (-1.4%); were the other Metros with declining HPIs.
While none of this comes as a surprise, there was a particular item that did catch our eye, regarding the significance of that “2nd Home” market.
First, the big surge in sales in Detroit and Flint probably didn’t show up on the HPI since many of them were investment properties, thereby keeping their respective HPIs from falling further. Secondly, the areas taking the biggest hits (pricewise) in the state are in Northern vacation areas. Thus, they’re not likely to show up in the state’s HPI, which confines itself primarily to metros.
For example, we’ve heard about all the foreclosure sales of Detroit property, and find that the City’s sales are running at a nearly identical rate as last year. Yet the average price of city sales has declined to $47,600 from $61,900 in 2006’s first quarter (-23%). The likelihood that these purchases were made for investment is high and, thus would be most unlikely to show up in “Fannie or Freddie” data.
At the other extreme of the state, we also find prices down 20 to 35% in the eastern U.P., Antrim, Clare, Emmet (Counties) and the West Michigan Lakeshore, all reflecting a devastated “vacation” market and suggesting the state’s HPI decline’s even more understated.

Maybe 2006 wasn't all that bad after all

In a normal year, Genesee County has roughly 33% of Oakland County’s housing activity. This year, we’re around 50%. Un-fortunately, we’re also 35% behind our rate of activity in 2006 (74% behind ‘05).
Single family and condo permits in the 9 county Southeast Michigan region were off 48.4% through April according to data from Housing Consultants, marking the 3rd consecutive year of steep declines. But, what’s more unfortunate is that the regional economy continues to shed jobs, thereby diminishing the market, and threatening any likelihood of stabilizing in the foreseeable future. In fact, as is evident in the chart, job loss actually gained steam this year as the region’s down 37,000 year to date.
Through four months we’ve had a total of
1,765 (non rental) permits issued across the region, down more than 76% from the peak of 7,429 in the first 4 months of 2004. Thus, for a little irony, you may wish to read the following “brief.”

Employment; manufacturing growth "vigorous"

Last week the Commerce Department reported the weakest GDP level (0.6%) since 2003. But, that was for the first quarter, and things sure look brighter in the second.
Friday we found that, not only did the U.S. economy create 157,000 jobs in May, but the nation’s manufacturing sector is experiencing a wave of growth, at least according to the monthly Institute of Supply Management report.
The growth in jobs, if it holds through revisions, suggests the nation’s creating employment at a rate of roughly 137,000 each month. But what was even more notable is the Labor Department finding the average workweek is up to 33.9 hours, which is virtually the equivalent of adding some 300,000 additional jobs in May.
But what really caught our eye was the Manufacturing report, as it suggests faster growth with: a growing backlog of orders; higher exports; slowing growth in imports; exceptionally low customers’ inventories; a decline in manufacturers’ inventories; and quickly rising new orders. These all suggest continued growth for the sector in the near future.
But there was also part of the employment report that we can’t ignore. Despite housing’s downturn, construction jobs were flat, holding at their April level, which seems highly unlikely, taking us to the next brief.

"Highly unlikely" or virtually impossible

For decades we’ve supported housing growth by noting its impact on job creation, using the NAHB formula of 2,448 jobs in construction and for every 1,000 single family homes, including 1,280 directly in construction. In ‘06, single family housing starts fell 250,000 from 2005. Thus, if the data have any validity, residential construction employment should have declined 320,000.
However, according to the BLS there was a rise of 257,000 jobs in the home building sector.
Through April, single family starts are at 373,700, more than 28% below the same period back in ‘05. Yet, according to the BLS, construction employment is running about 63,000 ahead of that period ... perhaps that’s the problem: It must take 6.8% more to build 28% fewer homes?

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