March 17, 2003

Inside Veritas -
Article 1 - Newly Published OFHEO Data Highlights Impact of Proposal “A”
Article 2 - Business News & Issues
Article 3 - MAHB’s Policy; The Irony of it All
Article 4 - Taxation and Finance - Promotional Expense Deduction Limit
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - Weak jobs' data shakes confidence
BS: Still about Nothing in particular
Housing Industry Update

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Newly Published OFHEO Data Highlights Impact of Proposal “A”

   As Michigan’s state government faces a nearly $2 billion financial crisis while focusing its attention on slowing growth, it’s all too easy for its leaders to forget Michigan’s past. After all, it wasn’t too long ago when the state’s homeowners (along with housing professionals) were enduring the pain of under valued property and virtually declining home values. Then, during the 1990s, Michigan’s homeowners experienced the strongest rates of appreciation in the nation, as the state reaped the benefits in enhanced tax revenues.
   These issues came to light once again, at the beginning of the month, when the Office of Federal Housing Enterprise Oversight (OFHEO) published its House Price Index for the fourth quarter of ‘02, because included in the new data were the annual appreciation rates of all states, regions, and Metro-areas since the agency began keeping data in 1980. And, what we found, particularly as it relates to Michigan, was particularly intriguing.
   For example, in the first quarter of 1985 the value of a home in Michigan was likely less than in the first quarter of ‘80, despite the fact that inflation, measured by the Consumer Price Index, was up 31%. If we index values for inflation, we would find that a home actually depreciated by 24% during that period.
   At the same time, the average American home’s value was up 24.5%, substantially better than Michigan’s, but still 5% below the CPI’s growth. However, by the end of 1985, the rate of appreciation for the average U.S. had already exceeded the CPI’s rate of growth since 1980. Michigan’s homes failed to reach that point for another ten years.
   To put this in perspective, the chart to the right compares the growth in value of a $50,000 home at Michigan’s rate, with the rate of the nation as a whole ($50,000 was the median price of a Midwest home in 1980’s first quarter). By the 1st quarter of ‘85, the national rate of appreciation took the value to $62,250. But in Michigan, the likely value was $49,780, 20.5% less.
   Over the following six years Michigan’s homes closed the gap dramatically, but still lagged well behind the national rate. By the fourth quarter of 1990, the Michigan home was worth $74,245, up 49% since early ‘85, while the national rate of appreciation (37.4%) during the same period brought an $85,538 value. And three years later, the gap was below $9,000, but still remained at 9.7% in late 1993.
   However, over the following three years, as the national rate was growing just 8%, Michigan’s home values soared 23.3%, pushing the state’s accumulated appreciation above the national average by the fourth quarter of 1996. And, by the final quarter of the millenium, the “Michigan” home worth $50,000 in ‘80 was valued at $124,030, $9,500 (8.3%) above a home that appreciated at the U.S. average rate. So, what drastic development could completely offset thirteen years of lackluster appreciation in three short years? How about Property Tax reform?
   Throughout the ‘80s, Federal Government data consistently showed the effective property tax rate in Michigan’s metro areas over 3% of home value, more than double the national average. The impact on home prices was devastating. For example, the monthly payment for financing and taxes, with an 80% conventional mortgage, was $708 in Michigan for the $74,245 home in 1990. The monthly cost for the $85,538 home nationally? $697!
   In other words, the Michigan homebuyer was spending more than the national homebuyer, but was getting 13.2% less value for his money. So, what we recognized at the time was that comparative prices were artificially held down because the home purchasing value of the Michigan dollar was retarded by the disparity in property tax.
   Subsequently, with the passage of Proposal A in 1994, property taxes were slashed to, and in many cases below, the national average. With the tax disparity removed, along with lower mortgage rates going into effect, homes were allowed to recover from depressed price levels without an increase in monthly costs to homebuyers.
   For example, by the fourth quarter of 1995, our sample Michigan home’s value had recovered the dollars lost against inflation, and was valued at $93,915. But monthly taxes and conventional finance costs were just $635. So, with property tax relief and lower interest rates, a home that appreciated 26.5% over five years, actually cost the buyer 10.3% less at the new price (25.4% less if indexed for inflation).
   So with mortgage rates falling to the 8% range on the heels of property tax relief, along with strong economic growth throughout the state, it’s little surprise that Michigan’s homes experienced the strongest appreciation in the nation during the post Proposal A ‘90s. However, beating the nation’s rate by 97% (50.7% to 25.7%) is a clear indication of how critical a role tax reform played.

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Business News & Issues

   With vehicle sales running 4.6% behind last year’s level, it didn’t seem as much of a surprise when Ford announced a 17% cut in production (from ‘02 levels). But this year’s sales data show that Ford is one of two major companies (Honda’s the other) with higher ‘03 sales than than the first two months of ‘02. GM, on the other hand, is admitting to cutting production 10% from last year, but that is from a level when the company was running at nearly full capacity in rebuilding depleted inventories.
   For the first two months of ‘03 we find Ford and Honda experiencing solid gains in market share with GM being losing 2.2 percent. We also find Toyota continuing to gain on Chrysler, narrowing the gap of 4.3% for ‘02 to 3.8% in early 2003.

As we’ve written much regarding health insurance costs in recent issues, we couldn’t help but take note of a March 11th Detroit News article regarding the fact that more employees are contributing to their health costs as the “cost of insurance benefits skyrockets.” The article relies on the 2002 health benefit survey by the “Kaiser Family Foundation,” which found the average cost of the health care contribution by a family was up 16% last year, to $174 per month. The cost was just $52 a month in 1988.
And, the article notes the economic impact, since families raising spending on health care don’t have the same funds available for consumer items ... so, again, is it any wonder why consumer confidence remains so stagnant?

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MAHB’s Policy; The Irony of it All

   There was a somewhat ironic note in last month’s publication of the MAHB Governmental Affairs Update (GANUP), focusing on the “Approaching Storm” due to the likelihood that land use will “dominate the debate” in the current legislative session. The 1-30 edition included the 13 point “MAHB Land Use Philosophy,” which included the following statement: “Fair and broad-based ways to underwrite the cost of infrastructure investments must be used, ways which complement the sense of belonging to a community, not undermine it by pitting newcomers against existing residents.”
   Of course, financing of infrastructure expansion is, perhaps, the primary issue in the sprawl debate. The anti-growth community claims new sewer and water line expenditures drain public resources, while those of us on the pro-growth side show example after example of how development more than pays its own way.
   And, from a local perspective, we can hang our proverbial hat on the County Capital Improvement Fee (CCIF), where we supported the county’s finance plan to create the sewer and water capacity that’s necessary for continued growth.
   So, upon reading the GANUP, I sarcastically e-mailed its author, “thanking the MAHB for its support of Genesee County’s position” on the CCIF. After all, it was obvious the County was in line with MAHB philosophy in solving the sewer problem.
   Well, historically, my sarcasm seldom sits well with our state association, and this instance was no exception. So, it was little surprise when I subsequently received word, through a third party, that the philosophical statement had nothing to do with the county’s situation, and had, in fact, been written “five years ago.”
   For irony’s sake: Guess who was PRESIDENT of the MAHB 5 years ago? None other than Mike Tobin, who filed the suit against the county’s “fair and broad based underwriting” of the cost of infrastructure funding.

Barry

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Taxation and Finance ---- Promotional Expense Deduction Limit

   A recent court of appeals decision affirmed a tax court decision which held that expenses incurred for promotional activities were essentially entertainment expenses, subject to the 50 percent deduction limitation.
   The court reasoned that although the expenses were incurred by the taxpayer to publicize the taxpayer's business, these activities did not make the taxpayer's product directly available to its customers or provide specific information about the product. The general purpose of the activities appeared to be to generate public interest in the taxpayer's upcoming events and were not instrumental to the taxpayer's business.
   While expenses that are generally considered to be entertainment are subject to the 50 percent entertainment expense deduction limitation, certain expenses generally considered entertainment but somehow instrumental to the conduct of taxpayer's business do not qualify as entertainment and are not subject to the 50 percent deduction limitation. For example, a fashion show offered by a clothing designer to store buyers would be considered integral to the taxpayer's business and not considered entertainment. On the other hand, a fashion show offered to the spouses of its buyers would not be considered necessary for the taxpayer's business and would be considered an entertainment expense, subject to the 50 percent deduction limitation.
   Because construction contractors are involved in an industry which frequently incurs promotional expenses which may be subject to the 50 percent entertainment expense deduction limitation, it may be a good idea to contact your tax advisor to discuss the impact of this ruling and how it affects the tax reporting of your entertainment/promotion expenditures.

R, P & T

Sewer and Water Update (from previous issue)

   As we reported the "8 month nightmare could soon be over"...then, as we posted at www.bamfhome.com last week, the County Board supported the Drain Commission's bonds for the Western Trunk line. So, it's just a matter of time until the moratorium's officially over. It could come as early as this week...so, check the website for updates!

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

It ain't the fifties, but shelters make comeback

   Those of us old enough to re-call the ‘50s when “fallout” shelters were the rave can’t help but be intrigued by today’s options in 21st Century “safe rooms.” In the proverbial “old days,” we were told to find shelter from radiation, keep a transistor radio handy, along with enough food for two weeks, and we’d be able to emerge to a society of mutants. Today, we have “folks shelling out $3,000 to $50,000 for one (safe room), even when it’s just a closet,” according to a Wall Street Journal feature last Friday.
   Although the market remains a small one, some enterprising builders are entering the business, almost like the insulation companies that emerged in the early ‘70s.
   Beware: If you’re thinking about shutting off the outside air to protect yourself from chemical or biological attacks, recall this morning’s news of an Israeli mother and her two children who suffocated while asleep in a room designed for safety.

Nothing like a cultural war in the U.S.

   Can’t help but note the reaction to the “Dixie Chicks” after singer Natalie Maines said she was “ashamed the President of the U.S. is from Texas” in an anti-war statement in London last week. Shortly thereafter we find the “Chicks” being boycotted by their Nashville based audience while “Country” radio stations are going so far as to bulldoze their CDs.
   Yet, on the other hand, the Hollywood/New York group of activists (Streisand, Sarandon, Sheen, Penn) can make whatever anti-war statements they want, with complete impunity.
   What’s fascinating about this phenomenon is it’s relation to elective politics. All one had to do was look at the Gore v Bush states, to clearly observe the cultural divide between the two coasts and “Nashville.”
   What’s unfortunate is that Ms. Maines got caught up in the recent acceptance of her version of “Country” by traditional popular culture. She likely forgot that she and Ms. Streisand don’t share the same base audience, and her statement was likely to haunt her for years to come. But, that’s where one learns that responsibility comes with success.

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Association News and Events by Laura

  

42 Models Entered by Final Parade Deadline As of the March 10th deadline for Parade of Homes participation, there were 42 homes entered in the May 10 through 25th event (the same as last year), suggesting we’re looking at another major housing promotion. As we reported in the March 4 issue, the Fenton/Linden area is, by far, the leading venue for Parade participation with, at least, 12 of the models. On the other hand, only 6 models are situated in Grand Blanc Township, which is roughly half the number of a normal spring Parade.    A list of participants is available to members by calling the association office. Housing Quarterly Deadline Coming March 31    Final call for Housing Quarterly magazine advertising, as the 96 page Spring issue will be set for mailing an distribution the week prior to the opening of the “Parade.”    Also, any member wishing to submit an article for publication most do so by month’s end. NAHB Dues Increase    As announced in the March 4 issue, NAHB raised its dues by $10 as of April. BAMF’s Board of Directors voted to raise dues to $470 to cover the additional NAHB expense.

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Economic Update: Weak jobs’ data shakes confidence

   When the Labor Department issued its February employment report, it was clearly one of the weakest in months. Not only was the jobless rate up 0.1% to 5.8%, but the 308,000 jobs that were lost during the month were the most since the immediate aftermath of Sept. 11, 2001.
   But what may be most concerning is that the number of jobless who’ve been looking for work six months or longer rose to 22.1%, the highest level since recession plagued 1992. With the exception of one month in ‘92, we have to go back to the deep recession of the early ‘80s to find that high a percentage of six month (plus) unemployed.
   Yet, what caught Veritas’ eye was the unexpectedly high (0.7%) rise in hourly wages. Although most economists, as a group, paid little attention to the factor, it reminds us that overtime is much less expensive than hiring, particularly when health benefits are involved.
   For several months we’ve been noting how the manufacturing sector has been in a period of growth (now it’s 11 of the past 14 months) but has continued to cut employment. Well, what’s more disturbing, is a “CNN/Money” report last Thursday, titled “U.S. Jobs Jumping Ship ... Cheap offshore labor is not just for manufacturing any more.” It noted that, in a survey of 145 companies, “Forrester Research found that 88% of the firms that look over seas for services claimed better value for money, while 71% said offshore workers did better quality work.” An analyst for the firm said that, over the next 15 years, “3.3 million U.S. service industry jobs ($136 billion in wages) will move to countries like Russia, India and China.” In other words, what we’ve been observing in manufacturing is a clearly developing “event” in the service sector as well.
   So, there remains a storm cloud over the future of employment in America, one that can’t help but affect the psyche of the U.S. consumer. And, while we still depend on the consumer for two thirds of America’s economic activity, we find the economy in the proverbial “Catch 22,” where labor costs are far outstripping the growth in prices. As long as those costs can’t be recovered, look for employment to continue to lag. And, when employment lags, consumers remain reluctant to increase spending.

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Housing Industry Update

State’s home building activity off to strong start

   At the end of last month the Commerce Department’s housing permit report showed Michigan activity for January 2003 at nearly an identical level to January ‘02, which was the strong-est for single family activity, and second strongest for total units, since we’ve been monitoring in ‘95. The report put single family permits at 2,202, with multi family activity at 324 units. On the average, the state’s been authorizing 1,876 one family units in January, putting ‘03 roughly 17.4% above an average start.

Local home values were clobbered in early ‘80s

   The lead article in this issue highlights the OFHEO’s recent posting of quarterly house value data for each quarter since the beginning of ‘80, regarding the explosive appreciation of Michigan’s homes in the post Proposal “A” ‘90s. However, there was another section directed at Metro areas showing just how badly the Southeast Michigan housing market was battered in 1982.
   While a few housing markets in the state (particularly on the west side) were still showing a sign of a pulse, Flint and Detroit virtually “flatlined.” Between the fourth quarters of 1980 and ‘82, homes in the two areas lost 9.4% and 14.6% of their values respectively, according to the agency’s data.
   However, from the end of ‘93 to the end of ‘99, their homes experienced rates of appreciation of 47.8% and 54.5%, which led Michigan to the strongest gains in home values of any state during the decade.
   Of course, the ‘90s data is of little surprise since these Metro areas received the biggest cuts in taxes from Proposal “A.”

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