January 8, 2003

Inside Veritas -
Article 1 -Granholm’s dilemma: Can’t slow “sprawl” and balance the budget
Article 2 - GM gains market share again in ‘02
Article 3 - What’s with these local rentals?
Article 4 - Taxation and Finance - Crisis Management Plans for 2003
Article 5 - Sewer and Water Update - Sewer/Water Focus Shifts to County
Association News Update From Laura
Economic Update - Manufacturing sets off stock rally
BS: Still about Nothing in particular
Housing Industry Update

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Granholm’s dilemma: Can’t slow “sprawl” and balance the budget

   In late December, much of the front page verbiage in Southeast Michigan newspapers focused on the likelihood of Michigan’s new governor planning to target the “sprawl” issue with a “Smart Growth” agenda shared by many of the legislature’s GOP leaders. And, the speculation was well founded since candidate Granholm frequently spoke of “unchecked growth” as a threat to the state’s social and economic condition, while Senate Majority Leader Ken Sikke-ma (R-Grandville) bought in to the usual distortions regarding the costs of sprawl more than a decade back.
   However, as Governor Granholm neared inauguration, most of her comments related to the state’s budget crisis, and the “tough” decisions that would be necessary to find a solution ... and, there’s the “Catch.”
Much of the economic growth experience by the state during the 1990s was based on what critics, today, call “sprawl.” And any attempt to limit such growth will create a major drain on the state’s budget that’s looking as if it’s $1.8 billion short.
   It is somewhat reminiscent of Ronald Reagan taking the keys to the White House in ‘81, expecting to cut taxes and raise defense spending, while balancing the budget. Although it worked in the delusional minds of Jack Kemp and Art Laffer, it was a theory with no practical application. The same can be said for the belief that containing growth will pay budgetary dividends.
   What’s interesting about this dilemma is that, during the campaign, Granholm expressed a desire to assist the Flint area upon taking office. And, following up, set a “community meeting” for January 30th to “identify and prioritize issues vital to” the Flint area. What’s ironic is that the “Flint area” has been, perhaps, the primary beneficiary of “sprawl.”
   Recalling Fortune magazine’s statement “these are the best of times for Genesee County,” we need only look at a subsequent Flint Journal article noting that 42,563, or 22.7% of local workers’ jobs are outside county borders. And, that 22.7% earned 48.3% of the county’s income. Furthermore, while Genesee County’s population rose 5,600 during the ‘90’s, jobs for county residents jumped by 13,000 jobs, up 7.4% over the 10 year period.
   Add to that the fact that 278,000 are employed in the construction industry, and another 400,000 in construction related services, and one quickly understands the impact of the new “sprawling” developments on the state’s economy. So, with roughly 15% of the state’s jobs tied directly to development, this is hardly a time for the new administration to limit such growth.

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GM gains market share again in ‘02

   The headlines focused on incentives bringing strong auto sales in December. But the real impact of late ‘02 vehicle sales was GM’s rising market share, which may be more important than short term profits as it relates to the company’s long term goals.
   Total U.S. vehicle sales were up 14.3% last month in comparison to a year earlier. However, with the exception of Suzuki at 0.5% of the market, General Motors was the only company to increase its market share in comparison to 12-01.
   GM sold more than 470,000 vehicles, giving it 32.5% of the market, up from 27.3% the previous December. And, for the year, GM’s market share rose for the 2nd consecutive year, to 28.7%, a 0.4% increase. This was the first time since the mid 1970s that the world’s largest automaker raised its domestic market share 2 years in a row.
   Over all, sales for the year were off nearly 2% from 2001, down roughly 340,000 vehicles. But GM was down just 43,000, less than 1%. Ford was down 346,000 (8.7%), and Chrysler was off more than 60,000 (2.4%).
   Honda had an 3.3% increase, while Toyota inched closer to reaching the # 3 U.S. sales spot with a small rise over last year. With a 0.8% increase, its market share for the year rose to 10.4%, narrowing last year’s gap with Chrysler by another 3/10 percent (as Chrysler’s share remained flat at 14.4 percent).
   On another note, if we look only at Domestic built cars, both Honda and Toyota beat Chrysler by 160,000 and 110,000 units respectively. It makes one wonder what would happen if the government actually bought into the movement to enforce stronger fuel efficiency regulations?

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What’s with these local rentals?

   When America’s housing industry was recovering from the devastation of the early 1980s’ recession, multifamily building played a significant role in that recovery process. From 1984 to ‘87, multifamily starts were responsible for 37% of all new housing activity with over 650 thousand units per year.
   However, a drastic change in Federal Tax policy in 1986 made rental properties, both residential and commercial, all but worthless, bringing virtual end to apartment building except for Government subsidized units. Less than 170000 units per year were built from 1991 through ‘93.
   After the Clinton tax bill of ‘93 reinstated most of the real estate tax breaks cut in ‘86, apartment construction recovered to some extent, but only to about half of its mid ‘80s level, and seldom made up 21% of new housing activity.
   With the exception of 1999, rental units hadn’t made up 20 percent of Genesee County’s housing starts in any year since the early ‘80s. Then, last year, there was an explosion in rental permits (Census data suggests 1,550 units [45%]; Housing Consultants says 835 units [31%]), which gave housing its strongest year since the early 1970s. But from an economics perspective, the surge in rent-als is somewhat puzzling.
   Three recent events grabbed my attention (I’d say four if we include the fact that it’s Apartment developers that are suing the Drain Commission). First, I went to an “open house” at a project by an “affordable housing” agency and discovered that, while the subsidized rental rates were attractive, the nonsubsidized rents were more than the monthly payment on any home within three miles of the project. Secondly, I ran into a friend who works for one of the new, high rent complexes, who admitted that rentals were extremely slow.
   But what really got me was the third, a Flint Journal article about “Lockwood of Mt. Morris,” a “senior housing” complex on N. Linden Rd. The article read: “Rent begins at $935 (1-BR) and $1,035 (2-BR). A limited number of ‘income restricted’ units are available at $540 and $650” for incomes below $26,700. The problem is that $1,035 per month is what it would take to support financing and property taxes on a $140,000 home with just 5% down. And, prices in that sector of the county seldom climb above $70,000. It truly makes one wonder about the basis for decision making in some of these companies? Or, is it all a charade to make all units subsidized?

Barry

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Taxation and Finance ---- Crisis Management Plans for 2003

   With the new year upon us, it is a very good time for for firms to ensure they have a crisis management plan in place so that the organization can recover quickly from a sudden major disruption of its business caused by an act of terror or by a natural disaster. Here are some key considerations in developing a viable plan:
1. Place responsibility for disaster recovery in a senior executive.
2. Review, evaluate and update security procedures throughout the organization.
3. Maintain an off-site list of all employee addresses, phone numbers, family contacts and other pertinent employee information.
4. Review business insurance policies for business interruption, extra expense, business income, ordinary payroll and terrorism coverages.
5. Evaluate adequacy of computer file backup procedures and offsite storage of the data.
6. Establish and practice employee evacuation procedures.
7. Provide an emergency off-premises meeting site for managerial personnel.
8. Arrange for use of alternative data processing facilities in an emergency.
9. Explore the use of wireless communication systems.
10. Arrange for the use of alternative production and administrative facilities on a temporary emergency basis.

R, P & T

Sewer and Water Update - Sewer/Water Focus Shifts to County

  Despite the continual changing of positions by the plaintiffs in the suit against the Capital Improvement Fee, it’s become obvious that the courts move much too slowly to expect any timely relief on the crisis. That’s why it was heartening to hear Rick Hammel elevate the crisis to his first remarks after being re-elected County Board chair this morning (1/7/03).
   The county has the ability to provide the temporary relief necessary, with virtually no risk to its financial condition. So, that becomes the best avenue for a relaxation of the moratorium. A potential remedy is being looked at by county leaders at this time, and we hope there’s good news to report soon.

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

State to Mandate “Green” Brainwash Curriculum?

   When the snow melts and attention turns to golf in ‘03, there may be a proverbial “new kid on the block” hawking new equipment. As Nike’s image remains tied to “Tiger” Woods; and Titleist relies on Phil Mickelson and a vast array of PGA stars to push their lines of clubs and balls; there’s a ready made “super celebrity” to emphasize hitting power and precision ball flight for the new entry in golf market. The technology that guided .44 magnum bullets into a myriad of “bad guys” in the Dirty Harry movies will be available to improve your game, as “Smith & Wesson” clubs are headed to pro-shops.
   So, can we expect to see that former Mayor of a golf community and frequent player in pro/celebrity golf tournaments (Clint Eastwood) hawking S&W irons and woods? It could make for an award winning “Super Bowl” commercial ... tune in!

Once a “Meat Head;” Always a “Meat Head?”

   Back in the early 1970s, more than 50 million Americans were in front of their TV sets each Saturday evening to see Archie Bunker argue with his left wing son-in-law who he often called “Meathead!” However, as time went on, Rob Reiner (Meat-head) left the show and, according to the Story line, set out for California, the state Archie called the “land of fruits and nuts.”
   Now, Reiner’s a “big” movie director and activist who wants to be governor of those “fruits and nuts.” Recently he led a group of like minded Hollywood types in attacking Washington Mutual Bank for planning a development that would “threaten 5 endangered species and add to pollution.” Of course, we’d ask this would be governor how he proposes solving the state’s $30 billion budget crisis without additional growth like that proposed by Washington Mutual?

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Association News and Events by Laura

  

The first General Membership meeting of 2003 is set for Wednesday, January 29th, at Bonaparte’s, and will include recognition of last year’s leadership and the formal Installation of new officers and directors. Creative Wood Products will sponsor the evening. Due to continued hopes for a break in the Sewer/Water crisis (see above), we haven’t finalized the program for the evening. However, you can look for full details in the January 20 issue of Veritas. We ask that you RSVP for this meeting by Thursday, January 23rd.    There’s a Parade of Homes meeting set for Wednesday, January 15th, at which time we will set the dates and hours for the Spring and Fall events. All builders who may be planning to participate are invited ... the meeting begins at 3:00 p.m. at the association office.

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Economic Update: Manufacturing sets off stock rally
  

   Since the manufacturing sector began its perpetual decline in June 2000, one of the most closely watched economic reports has been the Institute of Supply Management’s (ISM) index of manufacturing activity. Each month the index tells us whether the manufacturing sector is expanding or contracting. Furthermore, the ISM presents an employment index for the sector, showing us if it (manufacturing) is hiring or laying off.
   As we reported last month, the sector had been declining since August, but even while it was growing the first half of the year, employment steadily was on the decline.
   On January 2nd, the ISM released its report for December, and the results were heartening. Its index of manufacturing activity spiked from 49.2 (mildly declining) to 54.7 (readings above 50 indicate growth). What was most interesting about the December was that most economists were expecting a 50.1 reading. So, the substantial rebound touched off a stock rally that lasted at least until this morning.
   In its December report, even the ISM employment index showed a significant rise, from 43.8 to 47.4, meaning layoffs likely declined from around 45,000 in November, to some 18,000, suggesting that December may have brought overall growth in jobs (report’s out Friday), and a likely decline in the unemployment rate to 5.9%.
   But the real significance of a manufacturing upturn relates to its potential impact on business spending. As often noted, consumer spending remained solid throughout the economic downturn, and even the “recessionary” period. However, spending by business, particularly capital spending, has been nearly non-existent. So, there’s hope that a continued upturn in manufacturing activity would spur capital spending. And, as analysts have been saying for months, a recovery won’t feel like a recovery until businesses make commitments to future growth by investing in capital equipment and new employees. Unfortunately, through November at least, most business spending has resulted from the replacement of old equipment, not capacity expanding new equipment.

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Housing Industry Update

New/Existing Sales stay at “record” levels

  New homes sold at a rate of 1.069 million units in November, breaking what was a previously unheard level of 1 million units for the 4th consecutive month, according to the Commerce Department’s monthly report late last month. Then, last Monday, the National Assoc. of Realtors said sales of existing homes for the month were at a 5.76 million unit rate, assuring another annual record for both indexes.
   For the first 11 months, existing homes have been selling at a rate of roughly 5.58 million, up more than 5.4% from last year’s record of 5.295 million. During the period, new homes sold at a 973,500 rate, roughly 7% above last year’s 908,000 record.
   The realtors acknowledge that sales will hit the 5.5 million mark when December’s numbers are recorded. However, they’re expecting sales to fluctuate at a pace between 5.2 and 5.4 million for most of 2003.

State/Local activity still solid in November

   Although the numbers weren’t as strong as October’s, Michigan had another solid month in housing authorizations during November at a rate of just over 50,000 units. Furthermore, not only was November’s activity well above 2001’s level (as expected on the heels of 9/11), it was above 2000’s level as well. In fact, the 2,927 single family permits issued were the third highest in the past 7 years, only exceeded by the State’s record years of 1998 and ‘99.
   Locally, the total region continues to run ahead of last year, with Ann Arbor and “Detroit” up substantially, with “Flint” down. The region’s single family permits are up 6.8% (slightly over 1,200 units), while the Flint sector is 8.5% (158 units). When multifamily units are included, the Flint sector’s down 21%, as the spurt in apartment activity that took place in 2001 was an obvious aberration (see page 3).

"Big Builder" Market Share Jumps again

   According to Housing Consultants’ November data, building permits for non-rental housing is up 6.8% (ytd) in Southeast Michigan, or 1,260 units. However, ever, the number of units credited to the twenty largest builders in the area is up 1,742 units, or 39.6%. In other words, 138% of the increase.
   To put that in perspective, while the 20 companies’ nearly 40% rise in activity took their collective market share to 31.2% (up 7.4 from 23.8% in 2001), the rest of the region’s builders experienced a 3.4% decline (from 14,032 to 13,550) as collective market share fell from 76.2% to 68.8%.
   A few months ago we referred to a Wall Street Journal article noting that publically owned building corporations expanded their national market share from 5% to 10% from ‘97 to 2001. Well, in 1998, the 20 largest builders were responsible for 19.6% of the single family and condo markets in the region. So, their market share’s climbed 59% in the past four years.

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