January 5, 2004

Inside Veritas -
Article 1 - Despite Fed; Spring warnings; '04 rates held at historic lows
Article 2 - Will the Top 10 Builders Control 40% of the U.S. Market by 2010?
Article 3 - Existing Market Activity
Article 4 - Taxation and Finance:‘04 Tax Bills: Breaks for Individuals
Article 5 - Can You Build "Affordable" Housing?
Association News Update From Laura
Economic Update - Auto sales speak volumes
BS: Still about Nothing in particular
Housing Industry Update
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Despite Fed; Spring warnings; ‘04 rates held at historic lows

  Since early ‘02 we’ve been hit with seemingly endless forecasts of the “end” of low mortgage rates. And, this past spring, it appeared those forecasts could finally hit!
After all, the economy had experienced exceptional growth in the last half of 2003, the Federal Reserve was set to raise federal funds’ rates and the government was running record deficits. So, when 30 year fixed rates jumped nearly a full point from March to June, it looked like the forecasts were materializing. But, as ESPN’s Lee Corso would say, “not so fast!” As has become the modern day norm, as soon as the Fed raised rates, bonds and mortgage rates went in the opposite direction. While the Federal Funds’ rate was rising 1.25% during the final half of ‘04, mortgage rates fell back to their historic lows (5.7%) and remained there through year's end.
So, when Freddie Mac reported their year end average rates, 30 year fixed came in at 5.84%, nearly identical to ‘03’s record low since the agency began charting rates in 1971, which was a primary factor in keeping home sales at record levels (page 3). To show the impact of 2004’s mortgage rate decline, we’ll look at existing home costs. In mid ‘00, a median priced home ($139,000) took $939 per month for principal and interest. Last August, a $188,000 median price took $975 ($888 when indexed for inflation) or, 5.4% less for a home worth 20.4% more (in real dollars). However, if rates had remained at late June’s level, the $975 would have supported a loan on a home selling for $168,900. In other words, the dollar’s financing value is 10% greater since the decline began.

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Will the Top 10 Builders Control 40% of the U.S. Market by 2010?

During the “holidays” I came across an article from Realty Times (3-3-04) that had a direct relationship to the analysis in last month’s Veritas that questioned the validity (or, perhaps the value) of “new” home sales’ data. Titled, “Big Builders Gobble Land, Market Share,” the article’s base came from comments by Ian McCarthy, president of Baezer Homes, which was noted as the “nation’s 6th largest builder.”
At a Utah conference, McCarthy’s credited with claiming the “ten largest companies will be ‘erecting’ 4 of every 10 houses by the end of the decade.” The gain will come, according to McCarthy, in part from acquisitions and mergers, but mostly because of the “competitive advantage” that large (public) builders have over their local and regional competitors. And, he makes the following points that public companies:
· Have the edge in nearly every facet, from assembling great amounts of land to integrating superior technology;

· Can raise 10 year money to make a 3 year commitment; smaller builders can only maintain 1 year financing and it often takes three years to get government approvals to develop land;

· Purchase great volumes of building materials direct from manufacturers, rather than going through the “traditional distribution system.”
Realty Times defined McCarthy’s prediction of market share as: “The top 10, which doubled its market share in the last 5 years, jumping from about 11% of all ‘sales’ in 1997 to 23% in 2003, will all but double it again by 2010.” Well, it’s that statement that brings us, full circle, to our analysis of sales’ data last month, as we surmised the reason for the incredible new home sales figures relate, as much, to the market share of developers/builders as they do to the overall strength of the market.
A decade ago, the ratio of new homes sold to housing starts was 59%. Today it’s 73%. But it’s not that a higher per cent of homes are being sold; it’s due to which homes the census counts; homes built on lots sold by builders.
Last year’s 23% of all “sales,” in reality, represented roughly 250,000 homes (or 16.6% of starts). However, if we look only at major metropolitan areas, the 10 were probably well above 23%.
What’s probably more significant is the actual growth in numbers. The Top 10’s numbers in ‘97 were 88,500 sales, meaning their actual increase by 2003 was 161,500 units, or 182%: And that, more than market share, shows the impact of public building companies (and why their stock prices are up so dramatically). Furthermore, if we look at North American markets, the numbers jump again.

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Existing Market Activity

 The low interest rates noted in our lead article were credited by the National Association of Realtors for the highest monthly sales rate on record in November. The NAR reported existing homes sold at an annual rate of 6.94 million during the month, representing the 17th consecutive month sales held above the 6 million unit level (data first hit 6 million in July ‘03; and its held there ever since). The realtors numbers came on the heels of data showing new home sales fell dramatically during the period.
November’s figures suggest we’ll end up over 6.6 million for the year, meaning last year’s all time record of 6.1 million units should be beaten by 9.8%. And, as is evident below, Flint area & Michigan sales are running ahead of last year (3.3% state; 4.6% local). While state prices are up (3.5%), the local average price is off $2,818 (2.1%), suggesting a significant segment of the southern county’s market is being recorded by Oakland and/or Livingston Co. realtors.

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Taxation and Finance:‘04 Tax Bills: Breaks for Individuals
by Rachor; Purman & Tucker CPAs

 There have been important new tax laws that have passed Congress during this fall's pre-election period. Two major tax laws have been approved: the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 . Both new acts have important effects on your personal tax return. They also affect many individuals as small business owners and as investors in multinational corporations. This letter outlines the changes that impact your personal tax situation and recommends some initial steps that you might take to maximize your tax benefits.

Working Families Tax Relief Act - ’04

Child credit. Parents of children under 17 can continue to claim a $1,000 child tax credit for every child through 2010. Without the new law, the child credit would have dropped to $700 per child in 2005.

Marriage penalty relief. Married taxpayers filing jointly will continue to benefit from full marriage penalty relief. Through 2010, joint filers will pay tax at double that of single filers for the 15 percent rate. For 2005, this means having the high end of the 15 percent tax bracket pegged at $59,400, rather than $53,450. The change in the standard deduction for married couples filing jointly is equally as dramatic, $10,000 in ‘05 instead of $8,700.
The 10% tax bracket's upper limit for married taxpayers filing jointly stays at $14,000 ($14,600 inflation indexed) for 2005 rather than dropping to $12,000. For single taxpayers, it stays at $7,000 rather than dropping to $6,000.

American Jobs Creation Act of 2004

If you run a small business, many benefits in this new law will show up on personal tax returns. A broad-reaching manufacturers deduction (even reaching service-intensive businesses), S corporation reform helping family businesses, and an extended accelerated "Section 179 expensing" deduction are among the more important small business provisions. Farmers also share in additional tax breaks.

Coming In January: Several notable provisions in the Families’ Tax Relief Act of 2004 will have a direct impact on individual tax returns. In next month’s issue we’ll take a look at the changes in deductions for vehicle donations, SUV purchases incentives and, the provision that allows for “Sales Tax” deductions (as an alternative to deducting state and local income taxes).

Can You Build “Affordable” Housing?

The nation’s largest home builder can! At least according to a Wall Street Journal report last month that focused on the booming “Mexican” housing market.
Pulte Homes Inc., the Bloomfield Hills (aka ‘Grand Blanc/South’) based firm has taken U.S. style sprawl to a former corn field situated “10 miles from downtown Queretaro, in central Mexico.” At a price of just $39,000 (U.S.), local residents, who earn the equivalent of $14,000 annually (on average) can purchase a new Pulte model, like those pictured to the right (and, they don’t even need to have their labor shipped across the border).
After ten years of economic stability (at least from a “3rd World” perspective) the nation’s mortgage market has been revived, and the federal government’s worked to increase opportunities and incentives for home ownership. The result’s been a wave of demand expected to materialize in (a relatively small group of developers) building 450,000 units this year. Of course, not all units are of the luxury “Pulte” style. Mexican developer “Sadasi SA” is building 2 story models in the $23,000 range, making us wonder: How much are permit and tap-in fees?; and, Is there a Wal-Mart close by?

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

Florida's "Festivus for the Rest of Us"
How could this column possibly ignore the story out of Bartow (Florida) that was on the CNN web site two days before Christmas. Public officials in the Polk County town warned that the display of a nativity scene on public property could open the door to other religious and not so religious displays ... Well, they were undoubtedly correct.
After the Polk County commission voted 4 - 1 to allow the Nativity across from the courthouse, as well as making the area a “public forum” open to any type of display. So, along came the “Seinfeld Fan Club” with the “Festivus” sign, honoring the make believe holiday created by Frank Costanza, George’s mildly psychotic father, on one of the shows Holiday episodes.

Beware of "Fat Guys" with Camera's
As if the pharmaceutical industry hasn’t had enough problems over the past few months. Merck, Phizer, and Johnson & Johnson all had to deal with damage causing drugs.
But now the industry’s in real trouble. Word is out that our own Michael Moore may be targeting pharmaceuticals for a new documentary. Word has apparently gone out to company employees to refrain from talking to the native Davisonian. But we can imagine that someone will opt for the fame that goes with a role in a Michaelmentary!

"Seinfeld" Briefs:

We couldn’t help but laugh at Oracle CEO Larry Ellison’s comments in reference to HIS home town NFL franchise, the San Francisco 49ers. After finally succeeding in his “hostile” takeover of “PeopleSoft,” Mr. Ellison let it be known that he wished he could take over the team which he referred to as the “worst” managed franchise in the league.
“Worst?” We in Michigan have to laugh at someone so concerned about a couple of losing seasons. What about the Montana, Young and Rice days? ... 3 Super Bowls and all. We’re stuck in a 41 year period of “Ford” management, when mediocre 9 - 7 teams are recalled with fondness. And, to add insult, when they dump a coach for a bad year, the Lions hire him — who’s got the “Worst” run team?
# # #
And finally, with the ‘04 election history, we’ve noticed a lot of focus on the coming “Presidential” race ... the one to succeed President Bartlett (Martin Sheen) on “West Wing.” Current odds: Alan Alda (2 to 1); Jimmy Smits (4 to 1); Tim Matheson (8 to 1).

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Association News and Events by Laura

  

New Members' Applications Received KEM-TEC Land Surveyors, Mel Joseph Sponsor: Barry Simon Hanschmann Masonry, Michael Hanschmann Sponsor: Dave Lucas Welcome New Members !

At January’s General Membership meeting we honor our previous year’s leadership and welcome our leaders for the current year. While many Officers and Directors remain in office, the focus is on the incoming and outgoing Presidents, who commit time, which is often at a premium, to our industry. On January 19th we’ll be recognizing Mark Nemer for his efforts on all our behalf over the past several years, but particularly in 2004. And, we’ll be welcoming Dave Crawford, who assumed the Presidency on January 1, and hear of his plans for the association in the coming year. Also, by that evening, we hope we’ll have the final data on local housing activity for 2004 (which could be surprisingly strong if the government’s data on page 4 [through November] is accurate). So plan to join us on the 19th and see what your association is up to in 2005! # # # While conditions may not be right for Golf, the association’s other highly anticipated event’s (Exhibitors’ Night) set for February 16th. We’ve sent reservation forms to previous exhibitors. Reservations are open for new exhibitors on January 17th, and will also be available at the January 19th meeting. # # # Parade Builders: While the Spring Parade will most likely open Saturday, May 7th (day before Mothers’ Day), we will hold a meeting this month to finalize all details. Look for your meeting notice by e-mail (during the week of January 10th).

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Economic Update: Auto sales speak volumes

The economic news over the past 30 days has, for the most part, been positive. Consumer Confidence was up to its strongest level since summer, rising a surprising 9.7 points in the final month of the year. Also, manufacturing continued on the rise as the Supply Managers’ Index showed faster growth, and durable goods orders climbed 1.6%.
Furthermore, after a five month losing streak, the Index of leading indicators was reported as moving higher during November. And, we learned the economy actually grew faster than reported in the 3rd quarter as Gross Domestic Product was revised upward to 4%.
However, in mid December we also found that Michigan’s unemployment rate jumped to its highest level of 2004 as “higher-than-expected layoffs in auto manufacturing took hold.” And that, unfortunately, took place despite the fact that vehicle sales actually rose in ‘04.
Americans purchased more than 6.9 million cars and light trucks last year, which seems like a positive. But a look at the final sales data show the problem we’ve been noting for several years. As industry sales rose 1.4%, “Big 3” sales fell 1.7%. And while the only American companies, GM and Ford, experienced sales declines of 1.3% and 4.5% respectively, Toyota (10.5%) and Nissan (24.1%) experienced big gains. Which brings us to the point made in December’s lead story: “since mid ‘00, Michigan lost nearly 200,000 jobs in manufacturing,” despite the fact that “U.S. auto manufacturing jobs held their own” from ‘99 to ‘03.
The problem? While Toyota, Honda & Nissan build cars in the U.S., they don’t employ many people in Michigan. And, the auto jobs created are by those companies, not the “Big Three.” So, as their collective share of the market roars up- ward (2.2% to 26.3% in ‘04), Michigan lags behind in automotive job creation.

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Housing Activity Update:

While it’s apparent that new housing activity will break ‘03’s records when final data are reported in spring, there were a few concerns that came to light with the release of November’s numbers by the Department of Commerce. First, there was the large (11.7%) decline in single family housing starts. But the starts’ decline was attributed to “wet weather” by NAHB. Also, we’d add that permits were up from October, and nearly 33.1% ahead of November ‘03.
Year to date, one family starts are up 106 thousand units, but the sector that’s really soaring is in buildings with 2 to 4 units. Those units (mostly condo) are up a whopping 23%, and make up 12% of multi-family units as senior “baby boomer” housing continues to impact the industry dramatically. In ‘03 2-4 unit structures made up 9.8%.
Also for November, sales of new homes fell 12% from October. However, one should take into account that October sales were the 2nd highest on record and, November’s 1.18 million unit level was well above ‘03’s all time record of 1.086 million. Furthermore, year to date sales are up 9.9%, suggesting a new record in the 1.195 million unit range at year’s end.

State and Local
Though the numbers seem a bit high in comparison to other data, the Census Bureau says single family permits in the Flint area are up 5.8% year to date, in comparison with ‘03. In fact, the 2,015 permits so far would mean we’re looking at a new single family record (see chart). So, we’ll wait anxiously for final data from Housing Consultants and with the Flint Journal’s annual survey later this month.
The Census report also shows Michigan with 42,180 units from January through November (see above), suggesting single family activity rise for the 3rd consecutive year. And, with a relatively strong December, the state may well break the record for single family starts set in ‘99 (45,400 units).

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