Veritas

   It happened again last month. The familiar voice of the man identifying himself as “Presi-dent” of a Detroit area financial institution was telling the radio audience, for the fourth time that morning, “Alan Greenspan lowered interest rates. Now’s the time to refinance your home before he raises them back again!”
   Well, the “President” may have peaked some interest in refinancing, but was there any validity to his premise? Not according to recent history according to the charting of the Federal Funds’ rate (set by the Federal Reserve) in comparison with the average 30 fixed mortgage rates since ‘94. In fact, if there’s any relationship evident at all, the data suggest we may look at mortgage rates as an oracle of Federal Reserve action.
   For example, the chart to the right shows the movement of rates for Federal Funds and 30 year fixed mortgages during a stimulative period from Sept. ‘98 through June ‘99. During those months, the Federal Reserve cut rates by 3/4 point, then held at 4.75%, while Mortgage rates moved in the opposite direction, rising 0.85%.
   Prior to the Federal Reserve’s action in October ‘98, the Federal Funds’ rate had remained at 5.5% for 17 months. During that period of Fed stability, mortgage rates fell from 8.1% to 6.7%. However, when the Federal Reserve cut rates in October and November, mortgage rates slowly moved upward, and continued in that direction, peaking at 7.94% in August after the Fed finally raised rates to 5% in late July.
   Mortgage rates dipped slightly over the next 3 months, while the Fed raised the Funds’ rate to 5.5%. Then, the Funds’ rate dipped in December, and mortgage rates went on the rise again. For the first five months of 2000, the Federal Funds rate rose 1%, while fixed mortgage rates rose six tenths, peaking at 8.5%. Then, as the Federal Reserve raised another 1/4%, mortgage rates began their decline, falling to 7.4% by the time the Fed responded to last fall’s declining economy by slashing the Funds’ rate by 1/2% in December.
   The 28 months charted, from September ‘98 to late December ‘00 weren’t unusual. Since the beginning of ‘94, the Fed Funds’ rate rose 17 times, and fell just 5. On the heels of those 22 adjustments, mortgage rates followed the Federal Reserve’s direction only 7 times.
   However, during the seven year period, the Federal Reserve reversed direction just four times: July ‘95; March ‘97; October ‘98; and July ‘99. And, prior to each change, mortgage rates moved opposite the Fed’s previous direction for at least six months.
   When the Fed dropped rates in 1995, it followed a seven month period when mortgage rates fell from 9.2% to 7.6%. And its ‘97 increase followed 6 months when mortgage rates rose from 7.6% to 8.2%. The ‘98 cut followed a six month, 0.4% decline, and the 1999 rise came after seven month, 0.9% jump in mortgage rates. Even the Fed cut late last year followed a 7 month, 1.1% decline in 30 year mortgage rates.
   In January ‘94, the Federal Funds’ rate was 3% and the average fixed rate mortgage was 7.06%. Near the end of ‘00 (prior to the Fed’s cut), the Fed Funds’ rate was at 6.5% and the average mortgage rate was around 7.2%. The differential fell from 4.06% to 0.7%. And, during that period, mortgage rates followed the direction of Fed Funds’ changes just 30% of the time.
   Mortgage rates respond to bond yields and real estate market conditions, not the Fed. If anybody out there knows of a direct Federal Reserve impact on mortgage rates, please call 810-603-2200.

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Business News & Issues

An interesting note in the Wall Street Journal told that “a Public Workers’ union turns organizing efforts to private contractors.” Apparently the American Federation of State, County and Municipal Employees (or AFSCME), often losing its battle against privatization, has turned its attention toward organizing private sector employers. Their goal is evident from a statement made by an AFSCME spokes-man: “Bring contractor wages higher so they can’t compete as easily on price for government jobs.”
When one looks at all the jobs bid out to private contractors, it’s easy to see the potential effect organizing could have on segments of the housing industry, particularly when it comes to infrastructure building contractors, consultants, etc.

   Michigan’s restaurant and bar industries won a critical appellate ruling last week, when a three judge panel of the state Court of Appeals upheld the Marquette Circuit Court judge who struck down the city’s ban on smoking in restaurants. The ban, and its subsequent overturn, were closely watched by regulated industries concerned about local units of government created ordinances more stringent than state law, and seeking legislation to preempt such municipal activity (like development of a single residential code for all of Michigan).
   The Marquette ruling approximately 2 years ago, along with the single state code and the elimination of residency requirements for Municipal employees created the backdrop for the Municipal League’s Home Rule ballot initiative, that was overwhelmingly defeated last fall.
  What’s interesting about this issue is how a city, and their anti smoking supporters, attempt to push their will on private sector establishments under the guise of “public health.” Yet, like the anti sprawl community, they put no credence in consumer desires.

   There was some good news out of Washington last Friday with the Bush administration’s proposal to suspend the Clinton ban on road building and logging in a third of the nation’s federal forests. The government filed a proposal in Federal Court which sought to postpone a scheduled hearing on Idaho’s request (the state’s governor is a former HBA E.O.) for a preliminary injunction to keep the ban from going into effect.
   The ban, which would cover 58 million acres of forests, was supposed to go into affect in mid March. However, Bush put off its effective date until May 12, so he had time to review it.
   So, the environmentalists are in a tizzy ..... Logging in public forests; drilling in Alaska; abandonment of promise to curtail carbon dioxide emissions! Bet they’re glad that Ralph Nader made the difference in Florida.

With all the negative news about “car sales”, it was fascinating to see that sales of cars and light trucks rose to an annual rate of 17.4 million last month, up from a surprisingly strong 17.1 million in January. These figures followed forecast expectations of 16 million units for the year.
The vehicle sales’ data, along with the recent upward tick in retail sales and home sales, appear to run paradoxically to the negative consumer confidence data ... which makes one think that the death announcement of the consumer may be somewhat premature.

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How much power over private business is legit?

   How far does government’s authority over the private sector extend? According to some forces claiming to be public health advocates, it should be able to prohibit legal activity in a privately owned venue, no matter what the owner wants.
   The recent ruling allowing smoking in Marquette’s restaurants, and the response to it, shows just how powerful some advocates of proper behavior will go.
   Whether one is a smoker, or loathes smoking, anyone in a regulated business should cheer the Michigan Appeals panel ruling against the Marquette’s ban on restaurant smoking.
   Quite simply, the City outlawed smoking in all restaurants within its corporate limits. And, as would be expected, owners and their trade organization, sued the city and won in court.
   The ban is utterly ridiculous, and may even have some 5th amendment implications. After all, since another restaurant could open right outside the city limits and allow smoking, there could obviously be a forced diminishing of city restaurants’ sales, and ultimately their value. And personally, I’d love to see a “takings” suit on the issue.
   But that aside, let’s look at the logic of Marquette’s defenders which, not surprisingly, include the Detroit Free Press. In its Sunday editorial, this cryptic bastion of government authority wrote that “local officials have a better handle on what residents want,” than the state. Of course, the local version of PRAVDA doesn’t want to give credit to the business owner to know what his (or her) clientele want.
   Then there’s the American Lung association spokesman who said “this is not a freedom of choice issue, it’s a basic health issue.”
   Not a “freedom of choice issue? Let’s look at the situation from a point of reason. To my knowledge, no one is forced to go to a particular restaurant. Also, roughly 20% of all Michigan restaurants currently ban smoking, so choices are available. But neither the Free Press nor anti-smoking zealots believe in choice. Instead, they wish to spread their will on everyone.
   This issue is so similar to the Sprawl issue, it’s almost frightening. The opponents of sprawl readily admit that sprawl is market driven, so the only way to stop it is government prohibition ... an interesting term at that since it worked so well in the 1930s.

Barry

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MRC Delay: New Target - 7/31

Shortly after we went to press with the March 5th issue, we received a note, from MAHB lobbyist Lee Schwartz, explaining that Henry Green had just announced a delay in the target date for the Michigan Residential Code to take effect. The new Target Date is July 31st.
The delay doesn’t come as a major surprise since it seemedsomewhat ambitious to have a code book, complete with building, electrical, plumbing and HVAC codes, written and published by the end of May ...

Code note: We’ve been told the “egress” window in basements’ issue has been solved, and Michigan builders will not be forced to comply with that section of the International Residential Code ... So, there’s an even greater optimism that our industry’s efforts (stair geometry, energy, et. al.) on the single state code will be paying substantial dividends in terms of housing construction costs.

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

From the Wall Street Journal’s editorial page: “Remember the Stephen King-inspired movie series about a Midwestern town where the children are all controlled by some malevolent force in the corn fields? Well, that’s as good a description as any for the grip ethanol has on American politics. And now the cornfield has got George W. Bush too.”
The editorial followed Presidential speeches during the taxaloosa tour through Iowa and Nebraska where Mr. Bush felt it necessary to restate his support for the “tax credits that underwrite his Midwest corn vote.”

In the desire to maintain a better informed public, Canadian TV has instituted a news program that makes the movie “Network” appear tame. Sunday on CNN, Bernard Kalb told about the changes in News’ delivery from Walter Cronkite to Chris Mathews, then showed a censored version of Canada’s new “NakedNews,” which is now being viewed by 6 million Canadians every morning (we’re taping Channel #9 in case their showing it too). According to Kalb, female reporters begin their 15 minute newscast fully dressed, then disrobe to total nudity by the show’s conclusion.

Following President Bush’s reversal on carbon dioxide and the likelihood of the continuance of global warming, Chris Colin on Salon.com wrote a number of reasons to welcome it, the best of which follows: “The bleeding heart liberal elite — Most of them live on either the East or West Coast. Once the flooding begins, they will be washed out to sea. They probably never learned to swim since they most certainly spent their childhoods petting kittens, hugging trees or ice skating.”

The NCAA tournament’s first weekend’s passed, and there’s a good chance of a MSU/Duke final ... think about it! In ‘97 the state’s “Mr. Basketball” went to Duke, and was player of the year in 2001. The runner-up went to State ... both stayed four years. Wouldn’t it be fitting? Go Green

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Association News and Events: 42 Parade Models; HQ deadline March 30

By the time the Parade of Homes’ deadline had passed an additional nine homes were entered in the May 12th through 27th event. The 42 homes are entered by thirty-seven builders (three builders have two, while one has three models), as the spring event will stretch from a mile south of the Saginaw Co. line (2 homes in Vienna Township) into Livingston and Oakland Counties.
As has been the norm for the past several years, the Grand Blanc area leads in the number of entries with 14, followed by the Flushing area (9) and Davison (8). “Fenton” and “Swartz Creek” have four each.
We’ll list all Parade builders in the April 2nd Veritas. If anyone desires a complete list prior to that date, give us a call.

The Spring issue of Housing Quarterly will be in the mail by May 7th. The final deadline for advertising contracts and copy is next Friday (March 30) so, if you plan on advertising and haven’t sent in your contract, ad or copy, please do so immediately.
We’re currently set for a 100 page magazine, but could add more black and white pages to accommodate members if requested ...

Reminder! This is the final mailing of the “Classified” Directory forms (yellow sheets in the center of this issue)... the directory will be published in April and we need the forms by the 6th to assure inclusion.
Again, when each directory is printed, we always receive several calls from companies not listed ... don’t be left out!

   MAHB’s “Capitol Day” is just a week away. On March 27th, association members all around the state will descend on Lansing, beginning with an 8:00 a.m. breakfast featuring the House of Representatives’ Speaker and Minority Leader.
   After breakfast, participants will meet with legislators, then join more for lunch ... last year more than 80 legislators were in attendance (despite many going to Comerica Park for opening day). If you would like to attend, call Barry at 603-2200, and BAMF will even pay your $25 registration fee.

   Chuck Breidenstein, will be back, and bringing his brand of business information in an interesting and entertaining presentation at the April 11th General Membership Meeting (Wednes-day at Walli’s East). Now with NCI Associates and Builder’s Professional Services Group, the former director of education at MAHB will highlight the final meeting until fall ... (however, we will be holding a series of regional meetings during the late spring and early summer months).
   As is necessary since the closing of the Beechtree, reservations for the meeting are critical, so please call the association office by Wednesday, April 4, by 5:00 p.m.

Economic Update: How big will tomorrow’s rate cut be?

   By the time you read this column, the Federal Reserve will have cut the Federal Funds’ rate somewhere between 50 and 100 basis points. They’ll be able to do it because inflation’s (at least at the wholesale level) has settled down after last month’s jump, and the Consumer Price report won’t be out until Wednesday. But most importantly, the Fed must do something to reverse the pessimism that’s been accelerated with last week’s plunging stock market.
   What’s fascinating about last week’s sell off is that it was partially fueled by a report that the Fed would not cut rates by more than 50 basis points. According to a number of media reports, Wall Street was counting on a 3/4 point rate cut, and the thought of a mere 50 basis points was too much of a psychological downer. Now, despite a consensus of economists predicting the half point cut, this writer would be surprised if it’s less than three quarters, and won’t be shocked if it’s a full point.
   Other than the stock market, the economy’s not looking all that recessionary. In fact, even the University of Michigan’s consumer sentiment index pointed up for the first time in several months.

Employment
Once again, the economy created far more jobs than expected in February as the unemployment rate held at an historically low level of 4.2%. U.S. employers created 135,000 jobs last month according to the Labor Department, about 60 thousand more than analysts had anticipated. And, coupled with January’s 268,000, it means that job creation is at its strongest level since early last year.
The “jobs’ report” was so strong, it convinced most analysts that the Fed would refrain from a 3/4% rate cut, which ravaged stock prices in last week’s selloff. Strong retail and service sector hiring offset a 94,000 job decline in manufacturing. (Construction industry employment rose by 16,000).

Producer Price Index
After rising 1.1% in January, prices at the wholesale level settled down during February, rising a modest 0.1%, in line with expectations. Furthermore, the core rate of wholesale inflation, excluding energy and food, actually fell 0.3%.
Of local interest may be the fact that declining prices for cars and light trucks were credited with driving the core rate downward.

Economic Notes:
Even as the economy was losing steam in last year’s fourth quarter, worker productivity grew at a 2.2% rate during the 3 month period. However, despite the solid productivity data, unit labor costs shot up, rising 4.3%, in a departure from the trend toward subdued labor costs. However, since production was slow during the period, it’s more than likely that fixed costs played a major role, and with the strong productivity numbers, actual per unit labor costs will subside when manufacturing activity picks up.

Housing Industry Update

In the 3/5/01 issue, this column opened with the National Association of Realtors’ report stating “in tandem with the slowing economy,” sales of existing homes fell 6.6% in January ...... Well, as Gilda Radner’s Emily Vitella character from the early Saturday Night Live episode’s would say, “NEVERMIND.”
On March 7, the NAR revised their January estimate upward, announcing that, for the month, existing homes sold at an annual rate of 5.13 million units, a 3.8% rise from December’s 4.94 million. The NAR noted that the revised data serves “as a message that all major housing measures have consistently out performed other sectors of the economy.”
The mistake was the result of a software defect.

Last Friday we received the February report from Housing Consultants, showing permits are down 11.6% in Southeast Michigan for the first 2 months of the year in comparison to ‘00. When rentals are excluded, we find this year’s running 16.4% below last.
Locally, Genesee County was six units below it’s 2000 level, at 213 permits. Macomb County was off 28%, while Livington’s numbers were down 88% (29.2 excluding rentals). Only Lapeer showed an increase, up 15 units to 56 authorizations.

   The NAR raised its forecast for existing home sales for the year stating that “the resiliency of the housing market in the slowing economy, coupled with the sustained decline in mortgage rates, means housing will be stronger than (the NAR) earlier believed. With their release, the trade group revised its forecast to 5.07 million units, less than 1% below 2000’s level, which would make 2001 the 3rd “highest year on record.”
   Regarding “new housing,” the NAR forecasts a rise of 1.1% in single family sales, to a level of 920,000 units, and a mild decline of 1.1% in starts, to 1.59 million. They also expect the median existing home price to rise 4.2%, to $144,800, while the “typical new home price is expected to rise to $173,600, up 4.5% from 2000.”
   NAHB’s Housing Market Index (HMI) rose two points in March, as “favorable mortgage rates have helped boost home builders’ assessments of current home sales, as well as their sales expectations for the next six months.”
   The HMI, based on surveys of member builders during the early part of the month rose for the second consecutive period, with the gain taking it to 59 (any score above 50 means more builders see conditions as favorable than unfavorable). The one component of the monthly index that declined in March is the index relating to traffic of prospective buyers, which fell four points to 40. The component gauging current sales was at 67, while the component relating to anticipated sales over the next six months came in at a solid 68.
   The current HMI reading is the highest since November.

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