March 5, 2004

Inside Veritas -
Article 1 - 4th quarter existing home prices plunge while home values soar
Article 2 - Warning! OSB Price Replay?
Article 3 - Auto Sales: Still the Same Old Story
Article 4 - Taxation and Finance - Audits — New IRS Audit Initiatives
Article 5 -
Association News Update From Laura
Economic Update - Like that manufacturing “jobs” data
BS: Still about Nothing in particular
Housing Industry Update

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4th quarter existing home prices plunge while home values soar

   Since mortgage rates fell below the 7% level in late ‘01, rises in home prices have consistently eclipsed the actual increase in home values. That is, until the end of last year, when prices and values went in opposite directions.
   Two weeks ago, the National Association of Realtors reported the median price of an existing home in the nation’s metropolitan areas grew 6.6% since the fourth quarter of 2002. However, in comparison to the 3rd quarter, prices were down 3% at $171,600.
   Then, on March 1, the Office of Federal Housing Enterprise Oversight (OFHEO) released its 4th quarter House Price Index (HPI) showing that home values appreciated 7.97% during the previous 12 months on the heels of a whopping 3.67% rise in the year’s final quarter, “or an annualized rate of 14.67% (In the 3rd quarter, median prices were up 9.9%; HPI up 5.6%).
   In previous quarters we’d frequently see median prices in many metropolitan areas that were more than double the actual rate of appreciation as measured by the HPI.
   For example, Los Angeles’ 3rd quarter median price rose 25.4% but its HPI was up 11.6%. Baltimore’s median to HPI ratio was 17.8 to 8.6; Denver’s was 7.4 to 1.4; and Daytona’s - 19.7 to 9.1.
   But for the 4th quarter, the extreme discrepancies were in the opposite direction. For example, Milwaukee’s median price was down 1.2% for the year, but its HPI was up a solid 7.83%. Or how about Akron, with prices off 5.3% and values up 3.5%; or Birmingham, AL with prices down 3.7 and values up 4.3.
   Along with milder price level rises, the Realtors also reported the 2nd strongest sales quarter in history during ‘03’s final three months. Although one quarter’s inconclusive, it’s likely that robust sales for the past six years, that drove prices up 44%, have pretty well saturated demand in the “move-up” markets in many of the most populated areas.
   Furthermore, with employment data and income growth lagging, it’s unlikely large numbers of buyers are capable of making commitments at high prices.
   So, it’s likely a market trend is developing, with activity at more affordable prices. And, if interest rates rise, look for that trend to accelerate.

Local: Michigan continued to lag well behind the nation, with 4.2% appreciation over the past 12 months. Flint was at 4.11%, while Detroit ranked 182 of the 220 metro areas at 3.62%. Interestingly enough, Saginaw was tops in the state, at 5.5%, followed by Lansing at 5.46%

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Warning! OSB Price Replay?

   Last July we were hit with a barrage of calls regarding the soaring price of OSB board. A number of builders who had bid homes in spring, were finding the increases were cutting their margins drastically, while others were “shell shocked” when pricing homes to bid.
   After rising 34% from January to May, OSB prices virtually exploded last summer, doubling from May to August. And, they continued to rise into November before falling back the final six weeks of the year.
As we approach spring of ‘04, the industry’s situation is similar in comparison to ‘03’s, according to Jeff Fuhs of PAL, a Midwestern lumber coop based in Grand Rapids.
   Fuhs explains that demand is, at this point, as solid as ‘03’s, and will likely remain so as long as historically low mortgage rates continue to stimulate record level housing starts. Fuhs says the higher prices of 2003 were a “pure result of supply and demand,” and notes that demand is showing no sign of weakening. To emphasize that point, he presents an update on prices, showing nearly a $5 (per 1,000 feet) rise per day since the 1st of the year. Well, if we look at building activity over the past 3 months, we find that it’s 11.5% ahead of the same period a year earlier. So, it’s hardly a surprise that demand for OSB is driving the price back toward ‘03 levels.
   In fact, Wednesday night, the Wall Street Journal posted an article on its website noting that, “according to Random Lengths, the composite price of structural panels has jumped 60%, to an all time high of $571 per thousand feet from $356 in December.” Furthermore, the “WSJ” noted that the composite price of framing lumber is already up 17% from December, at $384 per 1,000 board feet.
   So, we advise builders to remain is close touch with their respective lumber suppliers during the coming months in anticipation of rising prices. And, keep in mind, last year’s OSB prices doubled from May to August. If housing remains strong, it could easily happen in 2004.

Barry

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Auto Sales: Still the Same Old Story

  The Wall Street Journal article read, “U.S. car and light truck sales rose 4.8% last month,” in comparison to February ‘03, as “Japanese auto makers outperformed the overall market and Detroit’s Big Three.” While GM and D/C showed gains of 5.6% and 1.2% respectively, it was Ford’s turn to show a loss.
   However, that island nation’s “big 3” all experienced gains, led by Nissan (up 46%) and Toyota(+18%), with Honda at +7%). So, U.S. Companies continued to lose market share to Japan’s.
   For the first two months of ‘04, Big 3 market share fell to 59% (it was 60.4% at this point last year), while Japan’s hit 31.2% (v 28.6 in ‘03). And, while Daimler/Chrysler raised its YTD share to 14.6%, Toyota narrowed the gap in its quest to be “America’s #3” auto maker. The Japanese giant controlled 12.1% of the market, up from 10.6% a year ago.
   But the biggest gainer was Nissan, up 1.5% to 6.1%. In other words, Japan’s third biggest company had a 33% gain, well beyond Toyota’s 14.2% increase.

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Taxation and Finance ---- Audits — New IRS Audit Initiatives

   When you read statistics about the percentage of returns that are audited, you might feel justified in playing the odds that your business won't be among those selected by the IRS for scrutiny. But the numbers are very misleading, because the IRS is getting a lot smarter about how it chooses returns for audit and how its examiners conduct their audits.
   Over the past few years, the IRS has dramatically stepped up its efforts to study specific industries, and to educate its examiners about business practices, terminology, accounting methods, and common industry practices. It has also identified areas of inquiry that produce audit results.
   Examiners are told specifically to look out for certain red flags to get at what is really going on in a business or transaction. The result is examinations are now sharply focused on potential areas that will generate increased taxes, penalties, and interest. Fortunately, there is a positive side to all of this. The IRS has made public a number of its Industry Specialization Program papers and Market Segment Specialization Program manuals. These help us keep up on the areas that the IRS will be targeting in its audits. So far it has issued detailed audit guide information on a range of industries, from general ones, such as retailing, to more specific ones, such as construction contractors and special trades businesses. Much more information on specific industries is expected to be issued as the IRS continues to devote resources to the development of these programs.
   Another IRS initiative tries to improve compliance by meeting with representatives of various industries to work out understandings with them about specific tax problems. For example, the IRS and the food service industry have come to an understanding about properly determining and reporting employee tips. Employers that comply will face reduced IRS scrutiny on this issue. A review of your business practices with your professional tax advisor may help keep your returns from being selected for examination, or help you survive if your return is audited.

R, P & T

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

Growing Market: Senior Citizens “Living in Sin”

   In our continued desire to keep home builders fully aware of emerging housing markets, we thought we’d heard it all in relation to “housing trends,” until the Wall Street Journal published an article about “Seniors Shacking Up.” The article told how “senior citizens are now the most vocal members” of an advocacy group called the Alternatives to Marriage Project.
   The group is designed to protect the rights of live-in couples who aren’t bound in matrimony. And, we find that, at least in the 65+ age group, we’re looking at an incredibly fast growing segment of the housing market.
   That's right! While the President has proposed $1.5 billion to promote “Healthy Marriages,” with mentoring programs where older couples guide younger ones, we find census data suggesting that the number of older couples shunning marriage for “shacking up” has doubled in the past fourteen years. However, the article notes that social researchers believe those numbers are much higher. And it also notes that, as “free spirited baby boomers age, cohabitation is expected to soar further.”
   We don’t know how significant this market is, currently, in southeast Michigan. But, as we note below, Michigan is developing a “California Lifestyle.” So, we urge all to prepare to cater to this emerging market!

“Seinfeld” Briefs:
  
   We were kind of shocked to see the AP headline, “Passion tickets bear ‘mark of the beast,” but when we found the venue, it all made sense. The article noted that “the number 666 is appearing on movie tickets for (Mel) Gibson’s film at a Georgia theater, drawing complaints from some moviegoers.” Ironically, the theater in question is in ROME, GA.
# # #
   Now that last month’s note on the 20 year anniversary of a Yalie president (1/20/05) is a reality, we can now say Skull & Bones forever. Both, John Kerry and George W. Bush are members of that Yale “secret society” that some critics believe is part of an occultist conspiracy for world domination.
   Though we may not subscribe to the conspiracy theory (unless Oliver Stone produces a convincing movie on the subject), one has to find it odd that a society that limits its membership to 15 men each year could dominate the nominating process in both political parties ... and, the fact that it happened at the beginning of the new millennium (Gore’s nomination was from the ‘old’ millennium) gives even the most skeptical cause for concern.
# # #
   Had to note the Flint Journal’s editorial lauding Jennifer Granholm bringing her Health Conscious California mentality to Michigan’s overweight population (noting her anti-smoking crusade and trim figure) ... of course, with it nearing March 15th, we could paraphrase Caesar regarding her “lean and hungry look” and, “when she thinks too much, we know this woman can be dangerous."

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Association News and Events by Laura

  

New Members' Applications Perdue Construction, Jason Perdue Sponsor: Barry Simon Maple Creek Homes Corporation, Jerry Mansour Jr. Sponsor: Larry Corbett J & J Design Build Services, LLC, James Foster Sponsor: Jim Sabo Melvin Joslin Builder, Melvin Joslin Sponsor: Kathy White Emil Kovacs Custom Builders, Emil Kovacs Sponsor: Barry Simon Alexander Homes, Thomas Vitale Sponsor: Barry Simon

Spring Parade & Housing Quarterly    With the final Parade deadline of March 8th upon us, we can report that there will be 31 homes entered in this year's event (as of 3/4/04). The Spring Parade will open May 8th and run through May 23rd. The following Builders are entered: G.D. Builder Inc., Lausman Homes, Artisan Builders, J & J Design Build Services, Kenneth Lowe Builder, Tom Atwell Homes, Pine Hollow Custom Homes, Future Homes, Westminster Abbey Homes, DCC Development Corp., Adler Homes, J.M. Developments, Swank Builders, Maple Creek Developments, Alexander Homes, Keene Development, Bald Mountain Homes, J.W. Morgan Construction, SonRise Homes (2), Howard Enterprizes, Maple Creek Homes, Lexington Properties, Creekwood Homes, Mitch Harris Building Co (2), American Associates, Riske Custom Homes, C & L Homes, HRC Building Co & Woodside Builders.    Along with the Parade, Housing Quarterly magazine advertising is coming in strong. Since space is limited, we ask that you contact the Association Office asap if you're interested in placing an advertisement (810-603-2200)

March General Membership Meeting    Mark your calendars for Wednesday, March 24th, for our next General Membership Meeting to be held at Bonaparte's. PrintComm will be the meeting sponsor and we are still setting up the final details for the program at print time, but we are hoping to get a few of our State Representatives to join us that evening (no this is not a political meeting, but rather a way in which the residential construction industry concern can be heard by our Reps.) All members must call by 3/17/04 if they will be attending the meeting (810-603-2200) and please note all guest are 20.00 and should be paid at the meeting check-in table.

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Economic Update: Like that manufacturing “jobs” data

  Since employment in the manufacturing sector began to deteriorate in late 2000 (and with the sector so critical to Michigan’s health), we began following the Institute of Supply Management’s monthly “Manufacturing Index” closely. And, throughout the past two years, it was disappointing to find the sector’s activity often on the rise, with employment continuing to contract. However, by late 2003, with the sector showing continual signs of growth, we experienced a pleasant surprise in November, as sector employment turned up, after 37 consecutive months of decline. Then in February, not only did the upturn continue for the fourth consecutive month, it rose at its fastest pace since the end of 1987.
   Since the rise in the factory employment index hasn’t resulted in higher sector employment figures previously, we cautiously await tomorrow’s (Friday) Labor Department “Jobs” report. However, we suspect the numbers to show in a positive light, which may set off a barrage of optimism we’ve that’s been so long awaited.

Growth
   Last week the Commerce Department announced a slight increase in its 4th quarter growth estimate of 0.1%. This time, economists had anticipated that the revision would be negative.
   What was more important than the actual rise was what brought it about. In the original estimate, spending by businesses shot up 6.9%. However, the revision showed it rising 9.6%, as spending on equipment and software soared by 15.1%. And, a sustainable increase in capital spending seems to be just what the economy needs, as its more likely to result in rising employment opportunities.

Sentiment Highest in 3+ Years
   The other positive sign was the U-M sentiment index, showing consumers more positive than at any time since the end of the year 2000.

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Housing Activity Update:

  Well, if January is any indication, there’s little reason to expect a slowdown (of any significance) from 2003’s record levels of housing activity. Although most data that were released were below December’s all time record levels, the declines were not unexpected due to the extremely harsh winter. And, despite the harshness of that winter, most data were far ahead of January ‘03.
   For example, housing starts came in at a rate of 1.903 million, down from 2.067 million in December. However, the number was 4.1% above the January ‘03 rate of 1.828 million. (Single family’s rate was 1.537 million, up 1.9% from a year earlier).
   Even Michigan’s activity (where the winter was particularly harsh) was up slightly from last year. And, the local area despite a large decline from December, experienced a solid increase in January in its owner occupied sector. There were 91 units authorized during the first month of the year, in comparison to 73 in ‘03 (up nearly 25%), according to U.S. Government data. And, Housing Consultants’ data had Genesee County up 54% over the previous year, and the total Metro-Detroit area up 5.5% (although down slightly when rentals are included).
   Although we don’t put much faith in construction data until the end of the first quarter (at least regarding trends), it was notable that the coldest January in years appears to have had little, if any, impact on construction activity.

Sales
   While new home sales fell to an annual rate of 1.106 million units last month, which was 1.7 percent below December’s rate, they were a solid 9.6% above the rate of slightly over a million last January. But what was more notable is that the median price of a new home was at $197,000, up 8.4% from a year earlier. Furthermore, the rate of sales remained well above the year end record (set in ‘03) of 1.085 million.
   Existing home sales’ activity remained above the 6 million unit level for the 6th consecutive month at 6.04 million. And, like the rest of January’s data, was softer than December but well above January ‘03.
   However, what may be more notable, was the median price increase of just 5.4% over the previous 12 months. Since peaking in July, annual price increases have been steadily in decline each month.

Building Materials’
   Prices A couple of interesting items appeared in regards to prices of building materials, besides the OSB issue covered in this issue. A Wall Street Journal article told of the plight of materials manufacturers who have been able to raise prices only "slightly," due to expanding capacity in the 1990's to take advantage of the booming industry. So, these companies (GA Pacific, Johns Manville, Weyerhaeuser noted in particular) haven’t been getting rich despite the continued housing boom.
   The other item, told of the soaring rises in Lumber and, particularly, OSB, two items that aren’t in the position of keeping up with demand, and are experiencing almost daily price increases.
   But, both articles focused on one other point: The impact of consolidation in the building industry, and the emergence of building giants. These large companies buy in large volume, and subsequently lock in prices for months at a time. For example, Toll Brothers said they signed a twelve month contract for lumber in July at $302 per 1,000 board feet. The going price by mid February was $384, and is likely over $500 today.
   And, that’s from a company where the average price of a home has risen from $383,000 to $589,000 in just the past five years.

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