January 7, 2003

Inside Veritas -
Article 1 - Treasury “Witch Hunt” Targets Michigan’s Builders
Article 2 - Building Remains Target
Article 3 - Price v Value May Suggest “Base” Interest Rate
Article 4 - Taxation and Finance - New tax revisions make year end review particularly important in ‘03
Article 5 -
Association News Update From Laura
Economic Update - Keeping “growth” in perspective
BS: Still about Nothing in particular
Housing Industry Update

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Treasury “Witch Hunt” Targets Michigan’s Builders

   Last year, Governor Jennifer Granholm’s attempt to close, what she referred to as, a loophole in the collection of the Real Estate Transfer Tax was thwarted by the State House. Now, it appears the Governor’s Treasury Department is attempting to circumvent the legislature and collect, at least part of, the revenues in question.
   At least two local builders (and some in other communities) have been hit by Treasury regarding the RETT, claiming the builders owe the 0.75% tax on the value of homes that were partially completed at the time of the sale of the building site.
   This is a misguided attempt at revenue enhancement for, at least, two reasons: First: A home not completed has no utility or value to the buyer, as it cannot be used as a residence until a certificate of occupancy has been issued. Therefore, a partially completed home has no more value that the land it is built on.
   However, the real question regarding this issue relates to the intent of “Proposal A.” Proposal A was designed to be revenue neutral, as the 2% increase in sales tax was to offset the cuts in property and income taxes. The RETT was designed as a method to gain revenue from sales of Real Estate, which are not subject to the sales tax, under the premise that the seller of a home received the benefits of Proposal A without a direct offsetting tax increase on that benefit.
   New construction, on the other hand, took a direct hit from the sales tax increase, as roughly 50% of the cost of a home comes from the final purchase of materials and products. Therefore, a builder would have paid Proposal A’s additional 2% sales tax on those materials and products which would be equal to, roughly, 1% of the home’s actual construction cost. So, while an existing home sale is taxed at 3/4%, Proposal A’s offsetting revenue, if applied to the actual home (minus the site) would be in the neighborhood of 1.75%.
   What’s even more outrageous in regard to this issue is the fact the builder and/or developer doesn’t even receive the full benefits of Proposal A that are enjoyed by the homeowner who sells his property. After all, the developed site, along with the home throughout the building process (and prior to sale if completely built) isn’t entitled to the homestead exemption, meaning the builder is paying 24 mills (for schools) to the state instead of the 6 mills a homeowner pays.
   Individual builders who have been following common practice for since 1993 are now in jeopardy, primarily because the state has a budgetary deficit. We’re looking at a couple of different remedies from both, one legislative, one legal.
   However, in the meantime, please call the BAMF Office and let us know if the Treasury Department comes knocking on your door!

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Building Remains Target

   How quickly people forget. It was just 22 years ago when Michigan, and particularly the Flint area, were in the midst of a virtual depression. Times really never got better within the local economy, as the loss of 55,000 GM jobs came much later. However, by the late ‘90s, the Flint area had its lowest jobless rate on record and local units of government that were financially strapped in the ‘80s, were flush with cash.
   What brought about this dramatic turn-a-round? The housing industry received the credit. Not only did its growth build tax base throughout Genesee County, its expansion created the opportunities for families to conveniently live in the area, despite working outside the county’s borders.
   Not only did government officials laud the impact of housing’s growth, the media, particularly the Flint Journal, frequently focused on the benefits derived. But then, along came the “future,” so evident in the past two years. Anti-growth sentiment reached new proportions and even some of the strongest supporters of growth began pandering to the anti-growth community.
   Last year, everything came to a head. We ended a countywide moratorium only to be hit with a local one. We saw our new governor form her Land Use Leadership Council to focus on Sprawl, then received the erroneous report on local sprawl by a complete incompetent from Minnesota. And, by year’s end, we found the Journal had gone to the “dark side” on both issues.
   As 2003 progressed, we were even challenged on the Michigan Energy and Building Codes, as we no longer had the protection from an administration that understands the value of growth and development.
   Quite frankly, in many ways, ‘03 was an even more challenging than 1982, when the housing industry came to a virtual standstill. And, I’d like to say it was merely an aberration. However, you can rest assured it isn’t. In fact, it’s actually an introduction of “things to come.”
   By the end of ‘03, we found Builders were being targeted in an outrageous attempt by the Granholm administration to circumvent the legislature to help the (now) cash strapped state meet its obligations. This will be one battle we’ll be fighting, as we look for a remedy. And, we’ll continue to be under attack from the anti-growth activists, who blame sprawl for all of society’s ills (and that was before Detroit was ranked as the nation’s “fattest” city), along with their “champion” in the Governor’s Mansion.
   Local government fee challenges could easily raise their heads again as municipalities attempt to follow the state’s lead in making up for lost revenue sharing, and the specter of more stringent state and federal regulations may be on the horizon.
   What’s most evident in ‘04 is that home building needs friends in Lansing, Washington, and on Municipal boards and councils. It already has many enemies at each level.
   An area of primary focus this year will be to make friends at all levels, and one method of making “friends” is to raise our level of political activity in this election year. Our opponents are organized and politically active ... we must be too.
   Over the first five months of this year, we’ll be focusing heavily on the impact of government on the future of your business ... and, we’ll be asking for your help in preserving this industry. So, lets quit being “targets,” and put “friends” behind the government’s weaponry.

Barry

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Price v Value May Suggest “Base” Interest Rate

  With last month’s lead article, we referred to the discrepancies between median price and actual appreciation of existing single family homes, primarily because home price levels were distorting the actual increases in home values. While the media tends to focus on selling prices, Americans get a false sense of rates of appreciation.
   In recent times, as low interest rates made homes cheaper to finance, buyers bought more house for the money, so median prices soared. However, the actual growth of home values declined. The chart above compares the growth in median prices, with the actual rise in home values (measured by the Office of Housing Enterprise Oversight’s House Price Index [HPI]). The HPI, unlike the median price index, compares growth in values of “apples to apples” as it measures financial on the same property continuously and, it tell a truly notable story.
   As you can see in the chart, median prices and the HPI grew at nearly the same rates in 1998 and ‘01. Interestingly enough, the average mortgage rates for both years were just under 7%.
   When mortgage rates jumped in ‘99 and 2000, home values jumped 6.4% and 8.1% respectively, but medians were up just 3.4% and 4.7%. But as rates plunged in ‘02 and ‘03, we experienced a complete reversal, as prices were up 8.4% and 9.9%, while value growth moderated at 6.1% and 5.6%.
   As we’ve frequently noted, the incredible growth in prices in the past 2 years has been in response to mortgage rates raising the level of affordability. However, the data from the 6 year period suggests there may actually be a base market interest rate, which is currently at 7%.

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Taxation and Finance ---- New tax revisions make year end review particularly important in ‘03

   With year-end fast approaching, this is an excellent time for a final analysis of your financial and tax planning to ensure you and your business take advantage of the numerous tax breaks available in the new, as well as older, legislation. It is vital to regularly digest and review pertinent financial and tax records.
This review should include analysis of the following:
* Cash Flow Schedule (listing of income and expenses)
* Asset/Liability Listing
* Insurance Policy Listing
* Financial Goals Statement
* Checklist for Financial Planning Review
* Financial Goals Statement
* Other Relevant Information

   An annual review is especially important this year in light of the changes that have taken place in the markets and the revisions to the income tax laws by the $350 billion Jobs and Growth Tax Relief Reconciliation Act of 2003, as well as the continuing temporary phase-out of the estate tax laws.
   To arrange your year-end meeting, please contact your financial and or tax professional.

R, P & T

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

 Treating Saddam Like a (mad) Cow?

   It was really quite a surprise waking early Sunday (12/14) to find the seemingly endless TV coverage of the arrest, lice check & oral exam of Saddam Hussein on every network not running an early morning infomercial ... But the real shock set in Tuesday (12/16). That’s when Cardinal Renato Martino, who heads the “Vatican Justice and Peace department,” criticized the military for treating the former dictator “like a cow.”
   The reference reminded us of the suggestion of a U-M Flint psychology professor back in the early ‘70s. Teaching criminal behavior, and the inability of the Criminal Justice system to alter such behavior, suggested we begin putting criminals in zoos. We tend to think Saddam would bring more people to the National Zoo than all the giant pandas China has to donate.

Mayor Symbolizes City?

   Only 2 years after 300 pound Kwame Kilpatrick was inaugurated Mayor of Detroit, Motown was declared the “fattest city” in America. Though some may consider that ironic, we wonder if it’s merely prophetic, and may hold hope for Flint. After all, the Vehicle City elected a multimillionaire .. check back in late ‘05.

“Seinfeld” Briefs:
   Jerry was at the Whiting last month. When asked why he came to Flint, he reminded the audience that he was just here for one night in December, but they obviously made a bigger commitment. He then quipped, “perhaps I’m the one that should be asking that question.”
# # #
   Don’t know if Mr. Seinfeld took view of those “Vehicle City” arches downtown, but the Journal’s Andy Heller did, analogizing with the question, would Battle Creek tout itself as “Cereal City” if Kellogg left town? Well, some think arches are appropriate for Flint; if they’re golden that is. After all, McDonald’s still hires a lot of people in the Flint area.
# # #
   Regarding Ralph Nader’s talk about entering the ‘04 presidential race, Newsweek noted “this once great man has turned into a clueless egomaniac.” Well, “clueless egomaniac” we can understand, but “once great?”
# # #
   Welcome to reality John L! After a pathetic performance in the Alamo Bowl, MSU head football coach John L. Smith noted his disappointment that few “Spartan” fans made the trip to San Antonio. Unfortunately, not many students attend MSU with plans to head to a “Bowl Game” over the holidays. If bowls were important, they would have studied in high school so they could have gone to U- M.
# # #
   Which reminds us: When leaving MSU, Nick Saban said he couldn’t compete with U-M when recruiting in the state, let alone the Midwest. Now his LSU Tigers are co-national champs, and Nick’s got a salary of $2.2 million + $1.

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Association News and Events by Laura

  

Don’t miss the first General Membership Meeting of 2004, set for Wednesday, January 21 at Bonaparte’s. It begins, as always, with social hour & hors’ d’oeuvres at 6:00 p.m., with the business portion of the evening to start at roughly 7:15. We’ll be formally installing officers and directors at the beginning of the event, followed by the presentation of awards for ‘03. Then, we’ll focus on the year ahead, including guests which are not confirmed as of this morning (we’re just back in the office from the holidays check the website: www.bamfhome .com/ for the confirmations).    Most important for the year is how this organization will meet challenges outlined throughout this issue of Veritas. Plan to attend and be part of the solution to these challenges!

One event that already appears to be shaping up is the Spring Parade of Homes. We’ll be holding an organizational meeting for both ‘04 Parades at Bonaparte’s, just prior to January’s General Meeting, starting at 5:00 p.m. We’ll set the details (dates, hours, etc.) for both events that evening.

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Economic Update: Keeping “growth” in perspective

  Now that the Commerce Department’s confirmed the economy actually grew at an 8.2% rate during the 3rd quarter, it becomes more evident that, at least from a statistical perspective, the U.S. is in a full blown recovery. After all, the output of goods and services rose at its strongest rate in nearly 20 years, while most other data continue to look good.
   But perhaps more indicative of economic growth is last Friday’s, incredibly upbeat, manufacturing report from the Institute of Supply Management (ISM), showing the fastest (one month) expansion of the manufacturing sector since the end of 1983. The ISM’s Purchasing Management Index rose from a strong 62.8 in November, to 66.2 (any number above 50 means the sector’s growing), representing its 6th consecutive month of growth. However, the index’ growth doesn’t mean all that much, since it’s been “UP” during most of the past two years. What caught our eye was the Employment Index registering at 55.5 after hitting 51 in November.
   Despite several months of manufacturing growth, the employment index had been in continuous decline since October 2000. So, after 37 months, we experienced, at least, a 2 month turn-around. And, the ISM report came on top of last month’s “jobs” report showing, though anemic, employment rose during the two preceding months.
   Add to that a rally in stock prices and continued growth in the index of leading economic indicators, along with the reports of fewer Americans filing unemployment claims and, it’s quite evident that the economy’s back on track.

But Don’t Pop the Champagne Cork
   While the final half of ‘03 was clearly strong, the 21st Century economy still has a long way to go to make up for its dismal beginning. Growth is less than half of its late ‘90s rate (see chart - left) while stock values continue to lag well behind their "turn of the century" levels. Furthermore, despite the recent evidence of an employment upturn, the number of the nation’s non-agricultural jobs declined by more than 2.7 million between February 2001 and July ‘03 (the 328,000 gained from Aug. through Nov. means we’ve lost 2.2 million jobs since January ‘01). While the average growth in employment was more than 3 million jobs annually from ‘97 through ‘00, yearly averages since show annual losses of nearly 500,000. And, since ‘00 the workforce is up approximately a million, putting us roughly 2.4 million jobs short of maintaining the year 2000’s level of employment.

GDP, Productivity & Employment
   With the economy was booming at an 8.2% clip, just 77,000 jobs were created in the 3rd quarter. Like growth, productivity was also at a 20 year high, rising 9.4% during the period. And, for the 24 months ending 9/90, productivity averaged 5.5%, the best 2 year period since 1953. Furthermore, cost of employees per unit of output dropped 5.8%, meaning the continuation of growth will not, necessarily, bring about a corresponding rise in employment. Stock Market Indices
   While the Dow Jones Industrial average showed better than 16% growth in 2003, the NASDAQ Index soared more than 40%. However, the DOW remains 11% below its level of four years ago, when it hit 11,723 in January ‘00, while NASDAQ ended '03 at 61% below its peak in March of the same year.

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Housing Activity Update:

   It was ‘Deja Vu’ (all over again): Despite headlines noting sales of both, new and existing homes fell, this time in November, the month was another exceptional period for housing, whether we look at it from a national or local perspective.
   First, the rate of housing starts surged above the 2 million unit threshold for the first time in decades. More notable was single family activity breaking the previous month’s record, as builders began construction at a rate of nearly 1.7 million, bringing 2003’s eleven month average to 1.486 million, up 9.6% from 2002’s record breaking level. Furthermore, looking at the past 15 months, we find only 1 where the rate fell below ‘02’s year end record.
   And, while home sales continued their retreat from all time high levels, they remained well above the previous year end records. For example, the National Association of Realtors reported that sales of existing homes fell 4.6 percent for the month. But they remained above the 6 million unit level for the fifth consecutive month, and keep the year to date rate at 6.07 million, that’s still 9.1% above the “year end” record set last year.
   And, while new single family sales fell to their lowest level in the past 6 months, they continued well above last year’s record level. In fact, the 1.082 million unit sales’ rate during November raised ‘03’s annual rate to 1.08 million units, a full 11% above that ‘02 record.

Local Area
   As we posted on the web two weeks ago, Housing Consultants’ data showed Southeast Michigan activity up 8.4% (rentals excluded) and local activity up 6.9% above 2002 levels for the January through November period. The federal report remains close as the total “Metro-Detroit” area up 6.9% for single family, while the Flint subsection now up 11.4% ... however, note in the chart (right) that, while the Flint area’s single family permits are at their highest level of the decade, total permits are at their lowest with only 216 rental permits issued.
   What’s interesting, in reviewing Housing Consultants’ data, is Mundy Township’s new numbers. With 234 permits already this year, it’s 40% beyond 02’s year end figure of 167. At the same time, Grand Blanc Township is 160 units below its ‘02 year end, putting it down 34.4% with one month to go.
   While the 16.6% of the county (the area within Fenton, Mundy and Grand Blanc Townships) is running roughly 100 units down from ‘02’s level, solid growth in Burton, Swartz Creek and Flint Township, along with a surge in growth in Vienna Township has given the Flint area the year to date growth it seems to be experiencing. We’ll be anxiously awaiting the final year end data.

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