March 4, 2005

Inside Veritas -
Article 1 - Incredible Numbers Show Housing Impact
Article 2 - Energy Code Victory
Article 3 - Existing Market Activity
Article 4 - New Housing Activity
Article 5 - GM; Ford Problems Continue: Losing Sales & Market Share
Association News Update From Laura
Economic Update - Fastest Growth Since 1999
BS: Still about Nothing in particular
Housing Industry Update
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Incredible Numbers Show Housing Impact

Tuesday morning I received an e-mail titled “Dollar Dynamics” from Byrne Benson of Housing Consultants,
showing that new housing in Southeast Michigan in ‘04 was valued at an incredible $6.6 billion, and that
excluded the value of the 2,200 rental units authorized. Benson put those number is perspective, by comparing
it to the annual sales data from 21 well known Michigan companies with receipts ranging from $6.2 billion
(Consumers’) to $1.3 billion (Dominos). To name a few others, we have: Borders ($3.7 billion); Lazy-E-Boy ($2.1);
Steelcase ($2.6); Federal-Mogul ($5.5); and Spartan Stores ($3.3).
But the sales numbers only tell a part of the story. For example, Benson notes the Board of Realtors maintain
at least 2 existing home sales are generated by a new home sale, meaning that the 24,300 new sales in the
area generated an more than 48,000 existing sales. Well, when we look at Realtor’s sales data (see page 3) for
our region, we find a $187,300 average price, resulting in volume over $9 billion. So, we can show that new,
owner occupied hous- ing activity in the nine county region generated over $15.6 billion in economic activity in 2004.
Now, we must also keep in mind that the Southeast metro region is historically responsible for roughly 50% of Michigan housing activity, and around 53% of its new residential value. Furthermore, last year, it also had 53.7% of existing
home sales’ activity.
So, what we can’t help but find ironic, and somewhat disheartening, is while the state (and local units of) government will virtually bend over backwards to facilitate major corporations (like the ones noted), they continuously target the
home building industry with impediments to growth. And, what’s even more disturbing, is the failure by state government to realize its dependence on the home building industry. So, we took these new numbers and attempted to come up
with a state tax impact, first with new construction, then with the resale impact.
We began with the sales tax that’s paid on materials, likely generating $198 million. Next, we looked at the Real Estate Transfer tax and, realizing some homes are exempt, we came up with $39.6 million. Then, we went to Michigan’s
school tax (noting 24 mills are collected while the property’s being built), and estimated a figure of $37.5 million, which doesn’t speak to the appreciating $19.8 million that goes into the state fund on an annual basis as a“homestead”).
Next, we looked at income tax generated from the 58,750 worker years (jobs) generated by the 24,000 + units, finding an additional $79 million, totaling at least $354 million in direct taxes (excluding SBT). And that doesn’t even refer
to fees.
Next, we looked at the 48,000 sales generated on existing homes, first finding transfer tax revenue of $67.4 million. Then, we can find roughly $22 million in income tax paid off of real estate commissions. Finally, we looked at the likely
rise in taxable value when a home is sold, breaking the protections of Proposal A. While this varies per home, we can see a likely increase of over $18,600 per home, resulting in an additional $5.4 million in the first year.
Of course, this doesn’t even take into consideration the $7,000 spent on furniture, landscaping, etc. after the transaction.
So, on just the Income, Sales, Property and Real Estate Transfer taxes, we’ve got $448.9 million to the state alone, meaning revenue generated across Michigan (on the same tax basis) were over $855 million.
Now, we wonder, how many of those popular companies generate that kind of revenue?

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Energy Code Victory

As most of you are aware, the industry celebrated a major victory on February 24th, when Ingham County
Circuit Judge Joyce Draganchuk ruled in favor of the Michign Association of Home Builders’ motion, granting
an injunction against the state, thereby preventing the enforcement of the new energy code. When new
information on the situation is available, we’ll immediately post it in Veritas Update.

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Existing Market Activity

With new methodology up-dating its system of sales data gathering, the National Association of Realtors said existing homes sold at a 6.8 million unit rate in January, down slightly in comparison with December. At the same time, it’s
revised data had last year’s sales at 6.784 million, 1.6% above the figure first reported in January.
Its revisions also raised the levels of sales the two previous years by a combined 148,000. However, that’ doesn’t mean their data was that far off. The difference primarily relates to the inclusion of condos. In fact, single family sales were
actually revised downward (roughly 10.6%) each year since 1999.
So, with condos in the mix we find they accounted for 12.6% of the January market.
Condos have long been separated in reporting housing activity, but have made
up a growing share of the market in both new and existing activity.
(Note: We began adding condos to our local data in 1994.)

Housing affordability rose in the 4th quarter, but remains well below its level near the end of 2003. The “Realtors” Housing affordability index hit 131.8 at the end of the year, meaning the typical U.S. household had 131.8% if the
income needed to purchase the median priced existing home. Of course, the big problem with the index is that most households with median income live in areas where the median price is well beyond the average earner.
The fourth quarter median in-come was projected at $55,239 and could afford a home costing $247,100 according to the NAR, significantly higher than the national median price, which was at $187,000 in metro areas.

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New Housing Activity

We never place much emphasis on activity reports for December through February for a number of reasons. There’s the obvious relating to weather conditions, where one month’s disastrous numbers can show up in soaring activity for the
following month. And, there are alterations in building procedures, such as code changes, which on occasion bring about furious rates of permit activity prior to the changes going into effect. So, when single family housing starts soared
above 1.7 million in December and 1.76 million in January (what appears to have beaten the all time [pre December] record by 4.9%) we didn’t get particularly excited.
Nor, should we be too upset with the headlines noting the exceptionally large (9.2%) drop in new home sales in January.
As Dave Wilson, President of NAHB, responded to the sales report, “it’s important to avoid a knee-jerk reaction,” since the weather (unusually snowy conditions in Northeast and Midwest regions of the nation) was a “major factor in the decline.”
What we can find significant in the Commerce Department’s release of January’s sales estimate is the revision of December’s data. December sales were revised upward by nearly 11%, taking last year’s total to 1.2 million units, breaking the old record (set a year earlier) by 10.5%, which brings us to the real “New Housing” story of this century. As you can see in the chart in the right hand column, new home sales closed the ‘90s consistently in the 880 thousand unit
range, after setting an all time record (885,000) in 1998. But after mild declines the following two years, barely broke the 900,000 barrier in ‘01 then soared by an average of 100,000 for each of the following three years.
In the past two years alone, sales have climbed from 973 thousand, to 1.2 million, a rise of 23.3%.
But, once again, we shouldn’t get carried away with these figures either. As we’ve written in recent issues, much of the rise in new home sales is a reflection of the rising market share of big “builder/developers,” (only sales of home & lot count) so we can assume their collective share of the ‘04 market experienced another dramatic rise.
To put this all in perspective, ‘04’s “sales” equaled 74.6% of single family starts. Back in ‘99, “sales” equaled just 67.6% of starts. That percent alone accounts for a 112,000 rise in ‘04.

GM; Ford Problems Continue: Losing Sales & Market Share

Earlier this week we came across an article we wrote in July ‘02, regarding auto market share, noting: “Toyota continued to close in on Chrysler, narrowing the gap to 4.3 points. The gap last June stood at 4.7 points.” That note caught our eye again because late last month Toyota announced it would likely add 2 more assembly plants in North America by the end of this decade.
The announcement was significant as it would likely mean an additional 9,000 auto jobs. But, it was also significant because of the Japanese auto maker’s continuing rise in the U.S. market. In fact, Toyota’s become SO American its actually active in NASCAR’s truck series (and has even recruited former star NASCAR driver Darrell Waltrip to promote its trucks).
Which takes us back to the July ‘02 article. At the time, Toyota had recently broken the 10% market share barrier, and held 10.4% of the U.S. market during the first half of the year. Well, as is obvious from the chart to the left, its share has continued to grow, at roughly a point per year, since that time.
But what’s also notable is, despite a further closing of the gap between it and Chrysler, the latter’s market share has not only held, but has risen since it was at 15% nearly three years ago. Instead, Toyota (along with Nissan) have been taking their share from GM and Ford in- stead.
While our nation’s two largest vehicle builders have lost roughly 5% of the U.S market from ‘02 to ‘04, and are continuing in that direction for the first 2 months of this year, Toyota and Nissan continue to pick up the slack.
While General Motors expected to get nearly a third of the market after‘02, it’s running at barely a quarter of the market in ‘05. And Ford, which expected to be around 24%, is struggling to get to 20%.
And, while the two saw their total sales decline last year, Toyota sales were up 10.4%; Nissan up 24.1%. So, while GM and Ford recently announced cuts in 1st and 2nd quarter production, Toyota’s talking about adding U.S. capacity.
Unfortunately, it’s highly unlikely that new capacity will come to Michigan, explaining why auto sector manufacturing jobs are up since 2000, while the state's manufacturing jobs are down 200,000.

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

We weren’t lying when we said it last month!

Concerned about a post Super Bowl America, with no hockey and declining interest in
NCAA basketball, we noted the future wasn’t all bleak as we could look forward to
“Michael Jackson’s trial, with 1,100 reporters on hand to report word by word
testimony for the next 6 months.” Well, they’re only into opening arguments, and
we find out the trial may be having a bigger impact on the nation than previously
anticipated. It turns out that Jay Leno, ironically on Mr. Jackson’s witness list,
has asked the court to rule that his Tonight Show monologue won’t be subject to the
judge’s gag order. Leno filed the request this morning, following his Wednesday
night opening that included about seven minutes making fun of Jackson’s witness
list. And, with the tinseltown elite, from Liz Taylor to Kobe Bryant, to be
potential witnesses, Leno might be forced to go without any monologue material
until the trial’s conclusion. A great country or what?

Michigan Dems keep talking “trash”

On the floor of the state house of representatives, there’s more “trash” talking
than on a South Central L.A. basketball court. Of course, the “trash” our reps are
babbling about comes from Can- ada, and has become the new target of Demo-crats
looking for a popular issue. Without any thought of the impact on business, Dems
want to raise the dumping fee by more than 3,400%, claiming it will raise at least
$130,000 million to promote recycling ... but really to make it too costly for
Canadians (the exchange rate and all). But, what the proponents (apparently
including the former Michigan Attorney General — now Governor) is that they’ve
admitted it would raise money beyond the cost of regulating the industry ...
therefore becoming a tax, and subject to a vote of the people under the Headlee
Amendment ...
However, it couldn’t even go to a vote, since it would be a tax on services,
which is also non available to Michigan’s public spenders.
So, you wonder why we’re forced to keep a close eye on our elected “officials?”

“Seinfeld” Brief:

Wherever we’ve gone this week we’ve found people laughing at the Flint area
media’s new focus on Public servant “perks,” particularly theater passes in Flint
Township. Now, we wonder when they’ll focus on all that free coffee Police drink
at 7-11; Those $500 military discounts given out by auto dealerships; and those low
priced versions of MS “Office” for teachers only?

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Association News and Events by Laura

New Members' Applications Received Rivershyre Development R.J. Zaher Sponsor: Larry Corbett The Wired Group Jeremy Turpen Sponsor: Ted Macksey WJA Bldg & Development William Albro Sponsor: Marvin Riley Echelon Enterprises Carroll Strange Sponsor: Jim Peabody Homeland Builders of MI. David Friedrichs Sponsor: Barry Simon Welcome New Members !

The March General Membership meeting (March 16th) will begin with our cocktails & hors d’oeuvre extended hour (6 p.m. to 7:20), with the business meeting beginning at 7:30. Please join us (along with our sponsor, KSI Kitchen and Bath) ... and, we ask that you let us know if you can make: Please RSVP by noon Thursday, March 10th). While we’ll feature reports on our up-coming promotional events; we also ex- pect to know more regarding the court action on the energy code. And, we’re looking at announcing additional programming by Monday, which we’ll highlight in Veritas Update on our web site at www.bamfhome.com/. Parade of Homes: Currently we have 41 entries in the May 7 - 22 event, and expect a few more by the final deadline which is coming March 8th. Obviously the larger than normal numbers mean we’ll have another exceptional promotion, which will, in all likelihood, include Detroit media. From the early entries, it appears the homes are well scattered around the county, with heavier than usual participation in the Davison area. However, it still appears that the majority of the homes will remain in the south third of the County. Housing Quarterly magazine should be complete by the first of May, and will likely have 96 pages. We’re changing the layout ever so slightly to allow for more full color advertising and editorial, which should make the Spring issue the most attractive yet. Advertising deadlines are fast approaching ... if you plan to participate, let us know ASAP. BAMFHOME.COM: What’s been fascinating is that, since the October, web site traffic’s continued at rates near parade month levels, averaging 4,900 visits per month and 16,000 page views. While Parade Month page views are in the 55,000 range, visits during May & October were in the 5,200 range. To put that all in perspective, in ‘03 we visits

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Economic Update: Fastest Growth Since 1999

The Commerce Department’s revised update for 4th quarter Gross Domestic Product showed the economy grew at a rate of 3.8% for the period, significantly stronger than the 3.1% previously estimated. The upward revision was primarily due to stronger business fixed investment, which rose 14% (the original estimate was 10.3%).
Perhaps more critical, due to inflation fears in recent weeks, is the GDP’s in- flation component came in at a relatively mild 2.5%, and at 1.6% for the core rate (less food and energy). Still, inflation was well above third quarter levels of 1.3% and 0.9% respectively.
The 4th quarter numbers put growth for the year at 4.4%, the strongest annual rate since 1999. And, it represents the 7th consecutive quarter with growth remaining at 3% or better (remember in the ‘90s when the Fed believed growth above 2.5% was “unsustainable” without inflation?).

Manufacturing Growth Continues
The Institute for Supply Management’s Index showed manufacturing activity in February grew for the 21st consecutive month, registering 55.3% for the month (recall, a number above 50 represents growth for the period). However, the level was slower than the 56.4 registered in January. And, it noted that both producers and customers’ inventories had declined during the month, which hopefully suggests greater activity in the near future.
Furthermore, the “Employment Index” grew for the 16th consecutive month, but also at a slower rate than during the previous month. The jobs’ index came in at 57.4% which, though down from January was stronger than December.

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Housing Activity Update:

Housing/Business Briefs: Home Values; Gov’s new Health Costs?

Normally we would have begun this issue with the Government’s House Price Index, which was released
Monday for the fourth quarter of last year. Actually, it presented a similar picture to recent reports, with the
average 12 month rate for the U.S at 11.2%, and 23 states showing double digit growth in, what’s proven to be, the
accurate measure of home values.
As has been the rule since the end of ‘99, Michigan found itself in the bottom 10 percent, with a statewide rate
of 4.44%, as “Flint” was slightly higher at 4.54%, while “Detroit” was only at 3.17%. Kalamazoo (5.5%) and Lansing
(5.3%) led the state, while Saginaw came in at 2.38%.
Once again, Nevada led the nation for states (32.4%) as Las Vegas was first for Metro areas (36.2%).
For our full report on year end appreciation, the spring issue of Housing Quarterly will be ready around May
1st.

The government will likely pay 49% of all health care costs by 2014, according to a “Wall Street Journal”
article February 24th. The analysis gives the primary reason as the reflection of Medicare's new prescription drug coverage. According to the article, beginning in ‘06, an additional hit of $67 billion will fall on
Medicare for Drug spending. So, ultimately, the government will cover 49% of all
health costs by 2014, up from 46% to- day. However, the government’s share of
health care’s been rising at roughly 2.5% per decade since 1970. Under the
premise that the baby boomers will all be on the Medicare rolls by 2014, one
would expect the 49% to be more like 52%, even without the prescription drug
increase, and substantially higher with it. But then again, who would even
expect a federal agency to underestimate its costs.

The numbers may not sound like much, but homes selling for more than $10
million or more rose by 10 (to 28) in ‘04. However, with an average price of
$15 million, that’s the equivalent of 2,400 median priced homes.

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