Veritas

After years of artificially depressed prices Michigan’s residential real estate has rebounded so strongly since the passage of 1994’s “Proposal A,” it now leads the nation in its rate of appreciation. So indicates the Federal Government’s House Price Index (HPI) for the 4th quarter of 1999, published by the Office of Federal Housing Enterprise Oversight (OFHEO). Reviewing HPI data we find that single family home prices in Michigan have risen 43.6 percent since 1994’s fourth quarter, providing the state with its number one ranking. A year ago, Michigan ranked 4th for ‘93 thru ‘98, behind Utah, Oregon and Colorado.
Michigan’s five year rate of growth in housing values was two-thirds higher than the 26.1 percent rate experienced by the nation as a whole. And, last year alone, Michigan home values gained 9.1 percent, well above the the national average of 6.4 percent (a fifth place ranking for the twelve month period). A year earlier, the state ranked eighth at a 5.1 percent rate for 1998.
Because it measures the growth in values of individual homes with multiple mortgage transactions over the past 20 years, the House Price Index is free of market distortions that plague most other indexes. So, it ultimately presents an exceptionally accurate picture of actual appreciation rates for existing homes throughout the nation. The data from the fourth quarter’s House shows Michigan’s home values grew 154.5 percent since 1980, fifteen percent faster than in the nation as a whole (134.5%). But the 20 year growth in prices only tells a small part of the total story. What’s far more significant is the comparison of Michigan’s prices before and after the final day of 1993.
Through the 4th quarter of ‘93, the average Michigan home experienced a 66% percent rise in value. During the same period, the nation’s rate rose 83.5 percent, 27 percent faster.
Then, from the end of ‘93 through the fourth quarter of 1999, while the nation’s prices were growing by 28 percent, Michigan’s home prices exploded, growing over 53 percent during the six year period, nearly double the national rate.
To put these appreciation rates in perspective, take a home purchased for $50,000 in 1980. At the national rate of appreciation, the home would have been valued at $91,750 by the end of 1993. However, if the home were purchased in Michigan, its likely value at that time would have been just $83,000.
Since 1993, Michigan’s turn-a-round has been nothing short of dramatic. By the end of last year, the home that had appreciated $33,000 over the previous 14 years, experienced an increase in value of $44,250 during the six year period, taking its likely selling price up to $127,250. At the same time, a home that continued to appreciate at the national average, gained $25,500 in value, taking its price to $117,250.
In other words, not only did Michigan home owners recapture the comparative loss from fourteen years of anemic appreciation, they surpassed the national average by 8.5 percent in less than half the time.
What brought about this dramatic turn-a-round? It’s no coincidence that the explosive growth in real estate prices took place after the property tax cuts in Proposal “A” passed in March, 1994. Prior to its passage, most Michigan home owners paid property tax rates that were double the national average. The comparative cost disadvantage meant that Michigan home buyers received far less value for their housing expenditures.
For example, the buyer of a median priced ($50,000) home in 1980 would have paid $466 each month to finance the purchase at the mortgage rate of 13.75%. And, property taxes at the average national rate would have added another $63 to the monthly cost for a total of $529.
However, if the home was bought in Michigan, the higher property tax rate would have required roughly $134 per month, raising the payment to $600 each month, 13.4% higher than the average American would have paid. In fact, the $600 monthly payment would have financed the purchase of a $57,500 home at average U.S. tax rates, meaning that the property tax rates had effectively devalued the home purchasing power of the Michigan dollar, by 15%.
Once Michigan’s property tax rates were reduced, in line with the national average, the purchasing power of the home buyer’s dollar recovered, and so did the state’s real estate values. At the end of 1993, the appreciation rate of 66% since 1980 failed to keep pace with inflation, which had risen 75.4% over the fourteen year period. Since the end of ‘93, however, while homes have appreciated by 53%, the rise in the Consumer Price Index (CPI) was barely above 15%. So, from 1980 through ‘99, Michigan real estate gained 154.5% in value, while the CPI was up 104.4%.
Other States: For the past five years, Michigan was followed by Colorado (41.5%); Mass. (38.6); Minn. (37.7); and Utah (35.2). The biggest surprise may well be the anemic showing of Texas (22) and Florida (21), both well below the U.S. average, not only in the past five years, but since 1980 as well.

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Business Briefs: With local industry impact

Sales of new cars and light trucks surged 11.3% in February, as General Motors lead the rest of the auto-makers to a record sales pace that, if continued, would bring some 17.5 million sales for the year. GM, which saw its share of the domestic market rise to 31.1%, experienced its best February since ‘88, with more than 465,500 units sold, up 16.2% from February of ‘99. The nation’s largest auto manufacturer even outsold Ford, the industry leader, in the light truck market.
However, Ford also experienced record sales for February with sales rising 3.7% from the previous month to set a new record.
GM’s success last month is partially attributed to its $500 “loyalty coupon” (which was even extended to all members of NAHB). Daimler-Chrysler sales also set a February record as cut-rate financing led to an explosion of minivan sales, which were up 26% from a year earlier.
Wheat and soybean prices were at their lowest level in 13 years; soybeans and cotton were at their lowest in 25; and direct government payments to farmers hit $22.7 billion last year, a new record. Now we find that farmers will be hit by drought in the Midwest, including lower Michigan. Is it finally time for Department of Agriculture aid to help developers purchase farmland?

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Finally, that NIKE factory makes sense

I’m writing this on Monday morning, roughly an hour after the opening segment of ABC’s “Good Morning America,” featuring Tamarla Owens (the mother of Kayla Rolland’s killer), her attorney and her “advisor” (Sam Riddle). Prior to the segment, I had no intention of making any reference to the Rolland tragedy. However, now, I can’t contain myself.
Why? Because their was Riddle, one of my favorite “Flint characters,” telling a national audience that the blame for the shooting falls on “Michigan’s welfare system” which (get this) forces poor people from depressed Flint to provide “cheap labor for rich Oakland County.” In other words, according to Riddle, the Clinton/Engler plan to bring welfare recipients into the workforce is responsible for Ms. Owens’ being thrown out of her home, leaving her son in a “crack house,” and turning Flint into the equivalent of a third world country where citizens are shipped across the border daily to perform menial tasks, then shipped back at night.
So, who is Sam Riddle and why is he one of my favorite “characters?”
Well, I’ve known Sam for 37 years, first as a three year senior at Flint Southwestern; then as an assistant to Don Riegle; then the Prosecutor’s office; a couple of stints as a political candidate; as an advisor to Michael Moore; as the neighborhood watch leader in the 12th and Saginaw area near our old office; and finally as Geoffrey Fieger’s campaign manager in 1998. After being fired by Fieger, who publicly questioned Riddle’s mental stability, Sam seemed to disappear from sight, only to resurface last spring in, of all places, Littleton, Colorado, as the “spokesman” for the Shoals family, whose son had been murdered at Colombine High. And, who did he bring to Colorado as legal counsel for the Shoals’? Why Fieger, of course!
So, it really wasn’t much of a surprise to find Sam as an “advisor” to Ms. Owens. After all, we’ve already seen at least five attorney’s (including Fieger) involved in the case. What’s unique about Riddle’s involvement goes beyond his new style of “ambulance chasing.” It’s his thought process, as evidenced by his placement of blame.
In the mode of his former colleague, Riddle attempted to turn the Rolland tragedy into a new “Roger and Me” episode, analogizing Flint as this 3rd World Country which, ironically, reminded me of Moore’s attempt to bring a NIKE factory to Flint. NIKE, notorious for abuse of cheap labor, may have been sold on Flint if Moore had taken his old advisor to meet the chairman...and, had that been successful, could Kathie Lee have been far behind?
The absurdity of it all is that Riddle’s (like Moore’s) self interest needs the ‘80s, not the reality of the Flint area in 2000. And, so long as they can weasel their way into the spotlight, the ‘80s will continue to tarnish Flint's image.

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Effective Income Statements
by Rachor, Purman & Tucker, CPAs

Are your income statements providing you with a reliable measurement of your firms’ operating performance? You might be surprised by this question; but frequently company managers receive data that is insufficient for sound decision making. For example:
· Operating statements prepared on a cash basis may be highly effective for measuring cash flow, but they fail to reflect the true results of operations because they do not reflect sales and expenses that have not been paid.
· Key elements may be missing from the income statements. For example, sales may be reported only on a net basis. The information would be far more meaningful if statements reported gross sales less returns and allowances, as well as net sales.
· Lapses in insurance coverage may result in significant risk exposure which which may not be reflected in insurance expenses or elsewhere in the income statement.
· Since the income statement may report on a number of business activities or projects that are producing revenue for your business, good results in one area may actually obscure poor results in another. Projects should be identified separately and the results for each project should be measured separately to determine their contribution to the income of your business.
· Individual income statements generally fail to provide a valid measure of business progress unless a series of statements are compared and trend analysis is performed.

In short, to help you obtain reliable information about the results of your operations, you must: (1) use a method of accounting that truly reflects the economic events affecting your business; (2) maintain a chart of accounts that provides adequate detail about the revenues obtained and expenses incurred in operating the business; (3) have cost measurement systems that provide revenue and cost data by project; and (4) obtain operating statements with sufficient frequency to enable you to measure the trend of revenues and expenses and changes in the growth momentum of your business.
The knowledge and skill of your CPA is a major factor in the accuracy, reliability and usefulness of the accounting data you are ale to obtain and analyze for effective decision making.

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It’s still about "Nothing" in particular

There’s been some rather fascinating talk on the “News” networks regarding a real “plot” behind higher gas prices. It relates to the Clinton/Gore administration’s desire to slow urban sprawl, and satisfy other segments of the environmental agenda.
The theory suggests that the administration could have effectively lobbied Saudi Arabia, Kuwait, and other OPEC allies to raise production at a much earlier date, but failed to do so due to the likelihood that high gas and oil prices would: cut down on urban sprawl by making long commutes too costly; make it cost effective to fund projects for solar, wind and electrical powered motor vehicles; and, at least, cut down on the American craving for those “gas guzzling” SUVs.
Of course, as we all know, politics always wins over policy, so a more likely scenario goes like this: Before gasoline prices hurt the economic expansion, OPEC, under pressure from that Clinton/Gore administration bends on oil production (as is already evident in today’s news). Prices at the tank, already down a few cents, continue to fall during the summer. Gore takes partial credit since, after all, the Clinton administration had another foreign affairs “suc-cess.” And, equally critical, by fall prices will likely be down some 15% to 20% from their peak.
The lower prices turn the PPI and CPI downward, and we have an expansion nearly ten years old with no signs of inflation, by November 7th.
Plot? Perhaps ... but a very different set of motives.
Which is the fiscally conservative party? In one of last month’s issues we noted how the GOP was attempting to raise the cost of Clinton’s farm bail out plan. Then, last Wednesday, it was announced that House Republicans nearly doubled a budget request from the administration, taking it from less than $5 billion to $9 billion ... Subsequently, in this political year, they also gave the President his requested rise in the minimum wage, but tied it to a tax cut that Clinton is sure to veto.

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Association News and Events: Parade; Land Development Council; & more

Well, the final deadline’s passed and, unless there’s a delayed “check in the mail” that was postmarked on Friday, we’re at 42 homes for the Spring Parade, a solid number but well below the record of 49 models in 1998. Four builders have multiple entries.
As has been the rule for the past several years, the Grand Blanc area leads in entries with 16, followed by the Fenton/Linden area with eight; Flushing/ Flint Township with eight; and the remainder in Davison, Swartz Creek, and Clio.
The Parade opens Saturday, May 13th, and runs until Sunday, May 28. The next critical date is April 8, when five week inspections will be performed. At that time, all homes must be drywalled and sanded....larger homes must be trimmed.

John Daly, the new director of the Genesee County Road Commission, will be among the guests at a Land Development Council meeting set for Tuesday afternoon, March 28th, at the association office. The meeting will begin at 3:00 p.m., and should be over by 4:30.
Daly will be accompanied by Dennis Grylicki, Director of Engineering and Mike Mansfield who heads traffic engineering and permits.
Although the primary focus of the meeting is geared to the Road Commission, we’ll deal with additional topics in the open section of the afternoon.. .....any association member is welcome to attend.

The Michigan Association of Home Builders has scheduled Capitol Day for Tuesday, April 11th, and calls on members to spend the day in Lansing and set up meetings with their legislators ...... the event will include a kick-off briefing and lunch at the capitol. The cost is $25 per member (how-ever, BAMF will cover members’ costs) ... if you are interested in attending, give Barry a call at 603-2200 before the end of the month.

We’ve scheduled another Builders’ Council meeting for Tuesday, April 18th, at 3:00 p.m. The agenda will be similar to the one on President’s Day .... We’ll have a special mailing to home builders during the first week of April and further details will also be published in the 4/4 Veritas.

The deadline is coming up for Housing Quarterly advertising. All ads and payments must be in by April 1st.
It appears that HQ will have at least 96 pages. Due to exceptional demand, we have already extended the number of full color pages to 24 (norm-ally we only have 16). So, we still have room for a few color ads for those who want them at $1,150 for a full page. Partial page full color may also be available at approximately 50 percent above the Black and White rate...call 603-2200.

Economic Update: Economy starting to slow? Wait says Fed

The economy must be starting to slow. After all, it only created 43,000 jobs in February according to the monthly Labor Department report, well below the 384,000 positions added the previous month.
Furthermore, the unemployment rate actually rose to 4.1 percent, while hourly wages were up a mild 4 cents, or 0.3 percent. Add to that the fact that factory orders, orders for durable goods and new home sales all fell in January, and many analysts began the quotes that we have the beginnings of a possible slowdown in effect. But do we?
Less than a week after the February employment report came the release of the Federal Reserve’s “beige book” report for March, showing the economy with signs of “appre-ciable expansion,” led by consumer spending that shows no indication of slowing and robust manufacturing output that continues to create demand for workers (factories added 26,000 jobs since the beginning of the year).
So, let’s look at the data of the past two weeks and see who’s right.

Employment
We already noted that job creation was down and unemployment up in February. But the data was likely distorted, as much by January’s exceptional growth as anything else. For example, a 26,000 decline in construction jobs last month followed a building boom induced rise of 116,000 a month earlier. Also, service sector employment barely rose following the previous month’s 142000 job surge. And, don’t forget, the Census Bureau still has 500,000 new employees to hire by April.

Leading Indicators
If there’s a slowdown coming, there isn’t much to indicate it will be here in the next three to six months. The Index of Leading Economic indicators rose 0.3% in January, hitting a record high of 106.4. The only “worrisome” number on the index was the slight decline in factory orders for consumer goods, noted at the beginning of this page (which was directly related to a lower rate of retail sales’ growth for the month).. ......however, that was long before retail sales data for February was released.....

Retail Sales Surge
Perhaps the strongest indicator of the continuation of strong economic growth is that the sector responsible for 2/3 of U.S. Economic activity, consumer spending, reestablished itself in February. Following a temporary lull in January, retail sales surged last month, rising 1.1%. And, excluding auto activity, sales rose 1%.
The significance of the exclusion of auto sales relates to the fact that, in January, when vehicles were removed total sales actually fell 0.5%.
Auto sales led another big month for durable goods, as they were up 1.4% on top of January’s 2% rise.

Productivity Revised
4th Quarter productivity was stronger than first reported, up 6.4% rather than the original estimate of last month. As a result, total labor costs fell 2.5%, far more than the 1% decline initially reported.

Consumer Confidence
Takes a minor hit The Conference Board’s monthly index of consumer sentiment found that higher interest rates and soaring oil prices are having some impact on the confidence of the American consumer. The board’s survey for February showed that the outlook of U.S. households fell nearly 3 points, from 144.7 to 141.8. However, the effects of low unemployment and rising wages kept confidence at its 3rd highest level since 1968.
Since the report has historically been a great indication of consumer demand, its strong level caused many economists to adjust their 1st quarter GDP estimates upward.

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