January 9 , 2006
Inside Veritas -
Article 1
- Annual Installation & Awards' Presentation; January 18th
Article 2 - Soft landing? Or, could U.S. price levels decline in the new year?
Article 3 - Housing and Economic Briefs
Article 4 - Existing Market Activity
Article 5 - Taxation and Finance by Rachor; Purman & Tucker CPAs
New Tax “Credit” for Energy Efficient Homes (from previous issue)
Association News Update From Laura
New Construction and Sales Activity
BS: Still about Nothing in
particular
Y-T-D Auto Sales Up (not for "Big 3")
Would you like to see a previous Veritas Issues?
Click Here
Annual Installation & Awards’ Presentation; January 18 th
The annual Installation of 2006 leadership and presentation of awards for ‘05 will highlight the first General Membership meeting of the year, set for Wednesday, January 18, at
Bonapartes’. As always, the evening be-gins with an open bar and hors d’oeuvres at 6:00 p.m., with the “business” portion of the meeting beginning by 7:30.
While there will be an update on a number of industry issues (including Energy Code developments), our primary purpose is to congratulate the outgoing directors, and introduce the industry’s leadership team for 2006. And, while
Dave Crawford will be presenting awards as “outgoing” president, he’ll also be installed as Secretary, along with 1st Vice President
Ted Macksey and our
2006 President Steve Steffey. (Bob Vance and Larry Corbett continue as 2nd Vice President and Treasurer).
We urge you to join us on the 18th, and ask that you RSVP by Thursday, afternoon, January 12th, if possible
Back To Top
As we entered the new year, real estate economists were talking about a “soft landing” for the housing market: Sales activity would decline slightly while prices would continue to rise, but at slower rates.
However, with the recent explosion in the cost of home buying there is reason to feel the landing won’t be so “soft.”
Throughout the past 2 years of “bubble talk,” one important fact seems to have escaped the discussion: That well into ‘05 American homebuyers were virtually paying less for their homes than buyers in 2000. However, the “real” cost of home purchasing has experienced a far more dramatic rise over the past year than price level increases would suggest. And, it’s those additional costs that now put home prices in serious jeopardy all across the U.S.
After peaking around 8.6% in late spring of 2000, fixed mortgage rates plunged almost 3.4 points over the next three years, lowering the cost of home buying so dramatically, a “conventional” loan on a median priced home cost roughly $825 in late 2003, the same as the cost three years earlier. Yet, the median price in late ‘03 ($175,000) was 22.6% higher than in ‘00. And, when we index for inflation the adjusted cost was $775, or 6.3% below the cost in late 2000.
However, the combination of a 23.4% jump in price levels, with a slight rise in mortgage rates in the next two years took a “conventional” monthly payment to $1,075 by this past November, meaning that, for the first time in five years, even the real cost of home purchase rose from its 2000 level.
Of course, as we’ve frequently noted, there was a big shift to ARMs as prices took conventional financing out of reach for many home buyers. And, ARM rates, which were at 3.4% in early ‘04, and 3.75% at ‘04’s end, climbed to 5.14% in late ‘05, with an even more dramatic impact.
The ability to finance at an extremely low interest rate, with less than the conventional down payment, allowed for even more expansion of the market, and drove prices even higher. So, buyers felt safe in taking these low interest ARMs, feeling their value was rising at a rate well above the cost of any potential rate increase when the term of the loan was over.
However, while the Federal Reserve’s rate increases since ‘04 had little impact on conventional rates, they brought serious consequences for ARMs, as rates climbed over 50% from winter ‘04 to fall ‘05. The cost of financing a median priced home ($170,800) on a 90% ARM was in the $700 range in early ‘04. The “cost” 1 1/2 years later was around $1,050. In other words, while the median price jumped 26.4% from the first quarter ‘04 to 3rd quarter of ‘05, the cost of financing (1 year ARMs) soared approximately 50%.
Now, not only is the cost substantially greater for a buyer, the cost of maintaining a home has already risen significantly for a number of homeowners already stuck with higher payments as their rates rose. And, it appears that many of them have put their homes on the market, as inventory has risen 31.6% since January ‘05 (see page 3).
Making the matter even more complex is the fact that a large number of homebuyers in many of the high priced areas of the country have taken out “exotic” mortgages (interest only; option payment) that have left them in a position where they must re-finance, with absolutely no equity. This is evident particularly in California, where median prices approach $550,000, affordable to just 14% of the state’s population on a conventional loan.
Furthermore, since regulators have put the exotic loans under heavy scrutiny, they’re unlikely to be available to new buyers.
(Note: California’s responsible for over 9% of U.S. sales)
The momentum for the incredible price increases of the past two years began during a period when costs were low. And, the rate of “appreciation” convinced many a buyer that, in a “worst case scenario,” their investment was protected by rising prices.
However, today’s costs may mean a lack of buyers (at least at current price levels) and, that can bring about a decline in median prices in many Metro- areas across the nation.
Back To Top
Housing & Economic Briefs
“Loss of 800,000 jobs from housing slowdown:” That’s the UCLA forecast in early December that made headlines across the nation.
Of course, as we’ve warned for years, the positive economic impact from housing’s growth (including 2.5 “jobs” per single family home) would be reversed by a downturn in the industry. Now, we’re finally seeing reports of housing’s decline being a likely “drag” on the economy.
In the early 2000s housing was often credited with being solely responsible for keeping the nation “out of recession.” And, it was further credited with responsibility for 25% to 75% of our economic growth in various quarters.
However, despite the industry’s economic value, it was continuously hit with barrages of regulations and mandated costs that hindered its continued growth. Perhaps, recognition of the impact of a downturn may bring a change in attitude.
While UCLA’s forecast points to 500,000 jobs in housing and 300,000 in financial services, we think it will actually be higher. A 15% decline in the new single-family sector, alone would relate to 625,000 jobs lost. And that would be the 4th highest level of single-family activity in U.S. history.
Overvalued Markets: While we don’t put much credence in “National City” bank’s quarterly analysis of “overpriced housing markets,” the media has a tendency to give it credibility. However, we do find its conclusions, at least, mildly amusing.
According to the report, 107 markets were (at least) 20% “overpriced” in the 3rd quarter, including Flint, Bay City and Holland. The study says the Flint area’s median price of $114,302 should, in fact, only be “$90,685,” meaning the area’s overpriced by 26%.
By the way: Naples is the most “overpriced” metro at 84% above its real value.
Mortgage Apps Plummet: A “Businessweek” report claims the “roof is falling in on the overbuilt mortgage industry.” Noting that applications for “purchase mortgages” have been on a steady decline since September, and plunged to mid ‘02 levels by late December, it says the Mortgage Bankers Association now expects originations to fall 18.6% in 2006.
Realtors still expect strong 2006: Mortgage Bankers aside, the National Association of Realtors are forecasting a relatively small (4.7%) drop in home sales this year, with expectations of a 6.84 million unit total. They’re also forecasting new home sales to fall by 4.8%, to a level of 1.25 million.
What we find more interesting is its projection for home prices, which will likely be up 13% for all of 2005. In ‘06 the Realtors look for a 6.1% rise which, considering the data in the article beginning on page one, seems quite optimistic. They also project a rise in median new home prices of 7.3% in ‘06, which conflicts with recent data we referred to on page four.
Manufacturing Growth Slowing again: The monthly report from the Institute for Supply Management showed the nation’s manufacturing sector in its 31st consecutive month of growth during December.
However, the ISM’s index fell, showing that growth was slower than in previous months.
Of course, we primarily look at the employment component of the report, which again shows expansion (which has been the general rule for the past two years). However, what’s notable is that the jobs’ expansion has finally begun showing up in the Bureau of Labor Statistics’ Employment data. According to the BLS, there were 34,000 more manufacturing jobs in November that in September. And economists expect this coming Friday’s (1-6-06) data to show an additional 5,000 factory jobs.
An interesting note on a housing downturn: While nearly everyone is projecting slower new home sales in ‘06, the nation’s largest builders are insisting they will continue to increase sales, as well as profits. How? By increasing market share.
In a report taken from the “Wall Street Journal,” Horton says it will continue to grow to a point where its numbers will hit 100,000 sales by 2010 (up from 51,000 in ‘05). Pulte expects to deliver 10% more homes in ‘06 than in 2005; and KB homes projects annual earnings to rise 20 to 25% in each of the next three years.
However, the most chilling message in the article follows: “Top 10 builders have a 25% share of the market, up from 10% five years ago, and the big builders are predicting they will exceed a 50% share within a decade.”
Unfortunately, these forecasts keep rising. It was just 22 months ago when Ian McCarthy (Baezer CEO) raised eyebrows with the claim of a 40% share of the market by the “Top 10” in seven years.
Back To Top
Existing Market Activity
Taxation and Finance
by Rachor; Purman & Tucker CPAs
Last Minute Tax Strategies
As the year end approaches, it’s a good time to engage in tax planning. We have compiled a “checklist” of actions that may help you save taxes if you act before year-end. Not all actions will apply in your situation:
1) If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale to minimize tax on your gains and maximize the tax benefit from your losses.
2) It may be advantageous to try to arrange with your employer to defer your bonus until 2006.
3) If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss for this year.
4) Consider using a credit card to prepay expenses to generate deductions for 2005.
5) You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
6) Business clients also should consider making expenditures that qualify for the $105,000 business property expensing option.
7) Self-employed individuals should consider setting up a self-employed retirement plan.
8) If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in charitable activities; the latter may yield a bigger deduction for you.
Back to top
Beyond Seinfeld: It’s still about "Nothing"
in particular
Anna Nicole/“W” Odd Couple ‘06?
John Marshall was the 4th Chief Justice of the Supreme Court, serving from 1801 to 1835. But we have to wonder what this appointee of John Adams would be thinking about the current Court’s “Marshall v Marshall,” where one of the “Marshalls” is better known as Anna Nicole Smith who, allied with the Bush Administration, is contesting a Federal Appeals Court ruling that cut her out of her late husband’s $1.6 billion fortune.
For those unfamiliar with Ms. Smith-Marshall, she’s the former Playmate of the Year who, at age 26, met her 89 year old husband while working at a Houston Strip Club the elder Marshall frequented. After Mr. Marshall died, a Texas Court gave all his money to Pierce Marshall, son of the Billionaire. However, it was reversed by a Federal Bankruptcy judge, that gave her $475 million. Then, a U.S. District Judge, while cutting the amount to $88.5 million, ruled “the court is convinced of (Marshall’s) love for her, and the ‘lady’ saved his life.” (Ironic since they married in ‘94, he died in ‘95).
However, what’s also ironic is the Bush Administration arguing in Ms. Smith’s behalf for two reasons: First, the court that cut her out of the inheritance ruled that “only state courts have jurisdiction over estates,” meaning the administration is supporting Federal jurisdiction over historic state powers; and Secondly, it’s challenge is to “states’ rights” ruling by California’s 9th Circuit Court of Appeals, an ultra liberal bench that historically draws the ire of Bush Supporters. So, when AP wrote “Ann Nicole Smith has a strange bedfellow,” it was pretty much “on target.”
Seinfeld Briefs:
Talk about GM “Product Placement!” The Sunday (12/11) Detroit News “front page” feature, “The FALL of FLINT” focused on the impact of the of General Motors’ jobs that already left, and the coming Delphi shutdown, on the former “Vehicle City.” With an apparent sense of irony, the article concluded on page 15A, followed by a two page spread touting GM’s year end “red tag” sale.
Anna Nicole loves this one: Don’t know how we missed the report (several months ago) about the CEO of Savvis Communications being in proverbial “hot water” with his company. After receiving the bill from his corporate credit card, accounts payable discovered a charge of $241,000 from a “Strip Club.”
Not to beat a REALLY Dead Horse, but we had to laugh at the supposed “Wayne Co. Friend of the Court” ruling about the “7-year old boy” with a long history of being beaten by his parents, grandparents, and aunt. After checking references and consulting child welfare officials, the judge gave “temporary custody to the Detroit Lions, who he firmly believes are incapable of beating anyone.”
Back to top
Association News and Events
by Laura
|
|
“Exhibitors’ Night” in February: It’s easily become one of the most successful, enjoyable evenings of the year as our annual Exhibitors Night “trade show” continues to grow, attracting over 240 members in recent years. In 2005 we had 38 exhibitors, and expect a similar number at the February 15th (Wednesday) event at Bonapartes’, for a special buffet (burgers, Brats, Pizza), complementary beverages (beer, wine, soft drinks), and drawings for some incredible prizes that are donated by exhibitors.
The evening begins at 4:00 p.m., running to approximately 7:00. While previous exhibitors have the first shot at their ‘04 tables, spaces not taken by January 16th are open to any member. Exhibit tables’ cost: $225 for a 6 foot & $275 for an 8 foot. Call Tracey, Laura or Barry at 810.603.2200 about availability.
2006 Parades of Homes: As in recent years, we’ll hold a meeting of interested builders prior to January’s General Membership Meeting to officially set parameters for these Spring and Fall promotions. Though these events are tentatively set to open May 13th & October 7th, with the fees and hours that were in effect last year, parameters have often been altered at these meetings --- so, plan to attend: 5:00 p.m. at Bonapartes’, January 18th.
Continuously evolving Veritas: This is now the third issue with the new printing process (viewable photos and graphics) and we hope you like it. If there are any items you’d like to see featured, let us know, as we’re always looking to up-grade its value to the membership. |
|
New Construction and Sales Activity
If there’s any fascinating data related to the housing market, it’s the following: While existing home prices soared 13.2% in the past year, new home prices rose just 3/10 of 1%. The median price of “new” homes sold in November 2005 was $225,200 (just $700 above Nov. ‘04), and that may be a “good” omen for the nation’s builders.
While the nation’s economists fret over the “bubble” bursting in the existing home market, an advantage is evident with new home construction, as builders can build for the market, while existing homes have little leeway. And, while the N.A.R frets over unrealistic seller expectations, new home sales’ activity suggests builders understand their markets extremely well.
Still, with that noted, sales of new homes fell sharply in November to an annual rate of 1.25 million. But that was from an all time high of 1.4 million in Oct-ober, and was also 6% above last November’s rate.
For the first 11 months, sales are running 7.3% ahead of ‘04, and matched ‘04’s year end all time record.
Furthermore, as you can see in the chart to the left, starts for single family homes took off in November, as their 1.8 million unit rate tied the all time record set in February, raising year to date levels to 1.61 million, up 7.5% from last year’s record.
Finally, there’s another group of data that we haven’t referred to since summer, but provide a critical look at the ever changing nature of the home building industry: A comparison of sales to starts. Year to date we find that sales are at 74.8% of single family starts, up 1.2% from last year, and a continuation of the direction evident since ‘00. Its significance is related to the rise of the builder/developer, as the Commerce Dept. only logs sales of lot plus home, ignoring homes built on the buyer’s lot.
In the ‘90s, only 63.3% of single-family starts registered as “sales.” That number jumped to 71.4% for the beginning of this decade, and grew at a rate of 1.2% annually since 2002.
Region/Genesee County
The local and regional market continued its decline in November, according to Housing Consultants’ monthly survey, with a further rise in the gap from ‘04. Through 11 months, Southeast Michigan is running 21.1% below last year for “non-rental” permits, with Genesee County now down 14.5%.
What’s notable here is a rapid deterioration in the fourth quarter as October and November data show we’re running 36% behind 2004 as a region, and a county as well. Washtenaw is the hardest hit county at a 36.7% decline, while Livingston, Macomb and Oakland are around 25% down. Obviously, our anticipated 18% decline for ‘05 was a bit too optimistic.
Back To Top
Y-T-D Auto Sales Up (not for “Big 3”)
Despite another weak month for auto sales in November (off 2.8% from 11/04), year-to-date activity is up nearly 140,000 units (0.9%). However, the nation’s two largest vehicle manufacturers have seen a combined slip of 296,000 units (4.1%), as their collective share of the market fell another 2.4%. GM sales are off 157,000, while Ford’s are off 139,000.
While GM’s announced cuts of 30,000 workers, Ford said it will close plants that employ 7,500 workers, roughly 6% of its North American work force. (While analysts expect closings of Atlanta, St. Louis and St. Paul plants, a Free Press story story notes a “secret deal” to save Atlanta, meaning the Wixom plant is at risk) ... and, that’s on the heels of Ford announcing 4,000 “salaried” layoffs for 2006.
All major companies reported declining sales last month, with just 2 exceptions: Toyota (+ 10%) and Honda (+ 10.8%); as Japan’s largest producers continued the assault to capture the U.S. market.
As we can see in the chart, over the past 2 years, GM and Ford lost 4.1% of the U.S. market, the exact share gained by Toyota, Honda, and Nissan.
Note: When we pull trucks from the mix and look at cars only, GM leads with 1.61 million, Toyota’s 1.16 million is 2nd, beating Ford by over 200,000 (21%).
Auto Industry Briefs:
Considering the sales’ update, it’s hardly a surprise that Toyota said it would build 100,000 vehicles at a Subaru plant in Indiana (and that’s is in addition to the opening a truck plant in San Antonio that will add 200,000 to its capacity for ‘06) .... Consumer Reliability Ratings: Of the 31 vehicles that earned the “Top” reliability rating, 29 were Japanese. Of the 48 that earned the “lowest” rating, 22 were American, 20 carried European nameplates.
Back To Top
Look Here for Previous Issues of Veritas