February 6, 2004

Inside Veritas -
Article 1 - Vehicle Sales Tell Different Story
Article 2 - Building Remains Target (previous issue)
Article 3 - Price v Value May Suggest “Base” Interest Rate (previous issue)
Article 4 - Taxation and Finance - Supplying a Company Auto to Employees
Article 5 -
Association News Update From Laura
Economic Update - Growth strong; but those markets?
BS: Still about Nothing in particular
Housing Industry Update

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Vehicle Sales Tell Different Story

   Unfortunately, the good fortune experienced by America’s builders in ‘03 wasn’t passed on to the country’s automakers. While the American “Big Three” were selling 337,500 fewer cars and light trucks in 2003 than during the previous year, their Japanese equivalents (Toyota, Honda and Nissan) saw their numbers rise 267,000 units in the U.S. market.
A year ago we wrote that “GM’s market share rose for the 2nd consecutive year (in ‘02),” making it the “first time since the mid ‘70s it raised its share of the domestic market 2 years in a row.” Well, last year GM saw its share fall back to 2001’s level, 28.3% (from 28.7% in ‘02). GM sold 125,000 fewer cars and light trucks last year, in comparison to 2002, while total domestic sales for 2003 were 162,000 units below the previous year’s level.
Of course, GM was not alone, with fewer sales and lower market share. Ford’s sales were off 140,000 units, as its market share slipped from 21.6% to 20.1%; while Daimler/Chrysler’s share dropped from 14.4% to 14.1%, on a 72,500 unit decline.
So, with the “Big 3” down more than double the 162,000 total sales decline, someone had to experience a pretty solid expansion: And, with little surprise, Japan’s “Big 3” filled the void. While Toyota sales were up 110,000 units (+ 6.3%), Honda’s were up 102,000 (+ 8.2%), and Nissan, with what may have been the best advertising campaign of them all, saw sales shoot up by 55,000, a 7.4% rise. Toyota’s market share jumped to 11.2% in 2003, from 10.4% in ‘02; Honda’s to 8.1% from 7.4%; and Nissan’s to 4.8% from 4.4%. So, while America’s “Big 3” saw their share drop 2.2%, Japan’s “big 3” saw theirs rise 1.9%.

Regarding Car sales: While it’s not unusual for Toyota (or even Honda) to sell more cars than Daimler/Chrysler, last year the 2 largest Japanese companies combined, for the first time, to sell more cars than Daimler and Ford combined (1.816 million to 1.812 million). In fact, Toyota and Honda raised their share of the “Car Market” from 22.5% in ‘02 to 23.8% last year ...
And, Regarding Trucks: While the American companies remain dominant in the truck market, Toyota and Honda increased their combined share from 13.5% in 2002 to 15.5% in ‘03.

No turnaround in January: While total U.S. vehicle sales were actually up in the first month of ‘04 (+ 3.3% in comparison to January ‘03), Chrysler was the only member of the “Big 3” to experienced a significant improvement. In fact, GM had a 0.3% decline in market share and Ford lost 1.8%, while Chrysler was gaining 1.1%.
Toyota sales were up 20.4%, giving it a 12.8% share of the market, just 1.6% away from becoming the # 3 company in the U.S. market. And, while Honda lost 0.3% of the American market, it gave it up to Nissan, which experienced a whopping 30.7% increase in sales, and a 1.3% increase in market share.

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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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BAMF Members' News

  BKR Depuis & Ryden recently announced that two of its associates, Kurt Jennings, CPA, and Lonnie Maxwell-Cook CPA, recently earned the “Construction Industry Technician (CIT) Certification.” The certification program was developed by Clemson University and offered locally through the Construction Association of Michigan
# # #
Detroit Door and Hardware announced leadership changes last month: Daniel Brodzik was promoted to “Senior Vice President of its Hollow Metal Door & Hardware Division; while Douglas Hawkins joined the company as the division’s Vice President - Contract Sales.

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Taxation and Finance ---- Supplying a Company Auto to Employees

   Buying or leasing an auto for the use of your employees ought to be an uncomplicated transaction from the tax viewpoint, but it's not. The plain fact is that the company auto creates more tax complications than almost any other type of business asset. That's why it's imperative for you to formulate an overall strategy with a tax expert, one that yields the maximum in tax savings, while keeping your paperwork and administrative burden at a minimum. This strategy will take into account the special rules that apply to your deductions for the company auto, the tax consequences of an employee's personal use of a company auto, and the payroll implications of such personal usage.
As a general rule, your company can claim depreciation deductions for the full cost of a purchased vehicle (provided it’s not a "luxury" car), or fully deduct the lease cost if it rents the car (so long as the value of the employee's personal use is treated as “fringe benefit income”).
The employee's personal use of the company auto creates a separate category of tax complications. That's because the value of the employee's personal mileage must be treated as non-cash fringe benefit income that is taxable to the employee, but not deductible by the company (its deductions consist of depreciation or lease deductions and operating costs). There are four separate ways to value employee personal mileage, and each of them carries its own rules and conditions. Three of the four methods require detailed record keeping of business and personal usage.
The fringe benefit value of personal use of the company auto generally is subject to federal income tax withholding and FICA tax. However, your company can elect not to withhold federal income tax if it properly notifies affected employees of this choice. In addition, your company can choose to treat the company car as having been used entirely for personal travel. This option will greatly simplify the company's record keeping burden, but usually will create extra taxable income for your employees.

R, P & T

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

The Party of Jefferson? (sure) & Jackson? (hardly!)

   Democrats often criticize both Presidents’ Bush for their aristocratic family background. Or, as former Texas Governor Ann Richards suggested, they were “born with silver ‘feet’ in their mouths.” But, when party leaders seek their President, being an aristocrat is, apparently, no longer a vice! Just look at the major endorsements in the ‘04 Democrat nominating race. No prominent national democrat figure has endorsed anyone other than John Kerry (the presumptive nominee) or Howard Dean (who already set the record for campaign implosion). And, what do Mr. Kerry & Dr. Dean have in common with George W. Bush? Northeastern family, wealth, prep school, and of course, Yale (see below).
Yet, there is a different type of aristocrat prominent Democrats are willing to back. One not born into wealth, but earned its trappings through marriage (if you can call it that). But remember, those willing to anoint Hillary, made her Arkansas bred husband earn the nomination the old fashioned way.

“Seinfeld” Briefs:
   Here’s one that will come as a shock: The Flint Journal reported that Flint has the 6th highest percentage of Doctors trained in foreign countries. 57% of local doctors (538 in total) received their medical degrees outside the U.S. The average for Michigan is 46%. Which brings one to ask, where would the housing industry be without them?
# # #
Talk about “sibling rivalry.” Look at what Janet Jackson had to do during the Super Bowl half time show to elevate herself above brother Michael for just one day of news coverage.
$ $ $
Regarding Ms. Jackson’s performance, Jay Leno spoke for millions of Americans when he showed his concern for the Jacksons. He openly hoped that Janet’s performance wouldn’t damage the family’s impeccable image.
# # #
The “boolah, boolah” nation? On January 20, 2009, the U.S. will celebrate an historic event. It will mark the 20th anniversary of graduates from one institution serving as the nation’s CEO. And, on that date, the reign will likely be far from over because, not only do George H.W. Bush, Bill Clinton, and George W. Bush hold degrees from Yale, so do John Kerry and Hillary Clinton. Yes, while U-Ms (Michigan & Miami), Ohio State, and USC alums may dominate the NFL, their ultimate goal is to win the Super Bowl and pay a visit to a Yale grad (who probably never beat Harvard) at his Pennsylvania Ave. home. Go Figure!
# # #
By the way: What famous Michigan man went to Yale? It shouldn’t be a surprise that Gerald R. Ford got his law degree in New Haven, meaning that after Kerry and/or Hillary, 5 of the last 7 (or 6 of 8) Presidents will be Yalies!

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Association News and Events by Laura

  

What’s become the Association’s best attended evening of each year is set for Wednesday, February 18th, when the annual “EXHIBITORS NIGHT” opens at 4 pm at Bonaparte’s. The evening, which runs thru 7:00, includes the special buffet of burgers, brats, pizza and salads, along with complementary beer, wine and soft drinks. But the real highlights of the event are the products and services displayed by participating exhibitors (36 set as of this morning, and more expected). Note: As always, many of the exhibitors will be donating door prizes, and drawings are held from 5:00 p.m. until closing. It’s an event you won’t want to miss, so mark in in your planner, and RSVP by Thursday, February 12th (603.2200)! # # # PARADE OF HOMES: From the calls to the office and conversations with builders, it appears we’re looking at a bigger than usual ‘04 Spring Parade. And, due to the expected participation, we’re already working at locking up some prime billboard locations, to go along with the heavy television and radio schedules we historically run. Remember, the first deadline is coming February 16th for the May 8 through 23 promotion ... if you don’t have a parade contract and wish to participate, call the office asap!

Also, contracts for Housing Quarterly magazine were put in the mail last week. Although we’re still nearly 2 months from the final advertising deadline, we still have the problem on limitation of full color advertising opportunities, as we begin laying out the magazine in early March. Although we’re usually able to adjust, there have been times that we couldn’t accommodate advertisers wanting full color ads. So, if you’re thinking of advertising, particularly in color, let us know at your earliest possible convenience. # # # A committee of the Board of Directors is currently working toward putting together a series of new home marketing educational sessions. We expect to set the first in early March, and plan to announce full details at “Exhibitors’ Night.” # # # Yesterday afternoon the “Land Development Council” held its first meeting of the year with our guest, County Drain Commissioner Jeffrey A. Wright. Look for a report on the meeting in Veritas Update at www. bamfhome.com

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Economic Update: Growth strong; but those markets?

  While the first report on growth in last year’s 4th quarter was solid, and manufacturing continued its recovery, and even consumer sentiment showed an upward tick, the financial markets decided to fall into their all too frequent melancholy state. Why? Because the Federal Reserve announced that it may not hold rates steady for a long period of time. With the announcement, stock prices fell and bond prices plunged (the latter recovered some later). And when the first estimate of 4th quarter growth wasn’t as strong as previously forecast, stocks plunged.
However, the fact that growth was slower (4% rather than the 4.6% forecast) means the Fed is far less likely to do anything, that is, other than hold at its almost ridiculously low rate.
Perhaps most notable in the GDP report was that consumer spending, which had surged 6.9% in the 3rd quarter, grew just 2.6% in the fourth. However, 2.6% growth, at a time there’s virtually no inflation (and coming on the heels of nearly 7% growth) is actually quite solid. Furthermore, at the time the GDP report was issued, the University of Michigan’s “consumer sentiment index” rose to 103.8 (from 92.6 in December), its highest level in more than three years.

Manufacturing’s growth continued
For the 8th consecutive month, the nation’s manufacturing sector continued its recovery according to the Purchasing Management Index by the Institute of Supply Management. More notable than the current expansion, we can find indicators suggesting the expansion will continue. First of all, manufacturers’ inventories are still contracting. But more significant is the report that their customers’ inventories are “too low.” Those items, along with the continued growth in the number of new orders, suggest demand will continue to grow, at least in the near future.
Furthermore, growth in manufacturing employment continued for the third consecutive month. If you recall, we frequently reported that, even when total activity was on the upswing, its employment index contracted for a period of 37 straight months.

Wage Inequality Growing
A recent Labor Department report showed that Americans in the bottom 10% of the nation’s pay levels saw their pay, when adjusted for inflation, fall 3% in ‘03 from the previous year. On the other end of the spectrum, those earning in the top 10% found their pay (when adjusted) was unchanged from ‘02.
From 1996 through 2000, as the highest paid workers found their real wages rising at a 2.1% annual rate, the lowest paid experienced a 2% increase. However, since ‘01, that upper 10% had annual real wage growth of 1.5%, while the lowest 10% had a mere 0.2% annual rise. (Think that won’t be an election issue?)

Federal Budget
A major reason for the panic that beset the financial markets when the Fed mildly suggested a potential shift in policy, may relate to the government’s fiscal condition. Now that it’s evident we’re looking a more than half a trillion in deficits, and knowing Fed Chair Alan Greenspan’s history as a fiscal conservative, anything that remotely suggests he’s thinking about taking action could be taken as a warning he’s fed (no pun) up. And, then again, why shouldn’t he be?
In a Wall Street Journal editorial, a chart was shown noting that discretionary spending during the Clinton Administration grew at 2.5% annually. During the current Bush administration, it’s been rising at a 4.2% clip.

First Health Care Cost figures
Health-care spending rose to $1.6 trillion in the nation during 2002, reaching 14.9% of Gross Domestic Product. The data, from the Federal Government, means we spent $5,440 per person, up 8.3% from the previous year.
Prescription drug spending surged 15.3% during the year, accounting for 16% of the overall health-cost increase. And, showing the trend of passing of health expenses, out-of-pocket drug spending rose 14.4%, versus 10.9% in 2001.

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Housing Activity Update:

  What seemed apparent since late spring became reality last month. As preliminary and final housing data from 2003 began filtering in, it was obvious it was a banner year for housing activity at the local, state and national levels. Nationally, new home sales set a new record for the 3rd consecutive year, single family housing starts smashed their previous year’s record by 10.3%, and existing home sales broke the 6 million unit barrier, soaring 9.3% above ‘02’s record setting pace. In Michigan, single family housing activity jumped back near 1999 levels. And locally, permits for single family and condo units rose 9.7% above their ‘02 level, passing 2,000 units for only the second time since 1971.
It’s the local growth that may have been the only surprise, because the year began slowly. But by the middle of April, it was evident that activity had recovered, and the industry was already ahead of the previous year, despite the sewer and water moratorium’s slowing development of new projects. So, by the time we hit the 4th quarter, we were anticipating the breaking of the 2,000 unit plateau.
What was more notable is the fact that the industry grew dramatically, despite its heaviest growth community (Grand Blanc Township) falling 139 units, or 30% below its ‘02 level. However, the negative figures were more than made up for by rising activity in Mundy Twp (+77), the city of Burton (+55), and Vienna Twp. (+54). Flint, Flushing and Richfield Townships, along with Swartz Creek, also experienced double digit growth.
Also notable was Mundy Twp. replacing Fenton Twp. as the second leading municipality in the county.
Of particular interest to local builders is the evidence that the market share of the seven large regional building companies, active in Genesee County, experienced diminished numbers and lower market share. In ‘02, the regional builders combined for 20.3% of the permit activity; last year it was down to 16.9%.

National Activity
What more can one say about the U.S. housing industry that hasn’t already been said. It’s continued at an incredible pace since the early ‘90s, and virtually broke record after record since. Look at the chart to the left: Record single family housing starts in ‘99, ‘02 & ‘03; new home sales’ records in ‘98, ‘01, ‘02 & ‘03. Or, look to the chart on the right: Records in ‘98, 99, ‘01, ‘02 & ‘03.
But, in reality, the actual num-bers are far more staggering than recent annual records. In 1996, realtors broke the 4 million unit barrier for the first time. Just seven years later they sold 45.2% (1.9 million) more homes.
And, in 1997, builders broke the 800,000 sales barrier for the first time since the 1970s. Last year they beat that level by 34.8% (280,000 units). But look at the following data: In ‘97, total (new & existing) single family home sales were at 5.19 million; last year, they hit 7.19 million (the 2 million rise equaled 43.6%).

Michigan Activity Neared ‘99’s Level
Michigan’s housing activity had been on a steady decline since the turn of the century ... that is, until last year. Single family units fell from 45.4 thousand in ‘99, to 41.7 thousand in ‘02. However, last year’s preliminary figures suggest we were back up to 44.4 thousand in 2003.

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