March 20, 2002

Inside Veritas -
Article 1 - Michigan's leadership in home appreciation values seems over
Article 2 - Business News & Issues
Article 3 - "Max Bickford" Educates America on Sprawl
Article 4 - Taxation and Finance - Early Withdrawal from Individual Retirement Accounts
Article 5 - Home Builders’ Liability Crisis
Association News Update
Economic Update - Recession annulled; focus on interest rates
BS: Still about Nothing in particular

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Michigan’s leadership in home appreciation values seems over
   During the final half of the ‘90s, Michigan’s home values were rising at a faster rate than those in any other state. From the fourth quarter of ‘94 to the end of ‘99, the value of the average home in Michigan rose 43.6% according to the House Price Index (HPI) of the Office of Federal Housing Enterprise Oversight (OFHEO), which charts transactions on individual homes over a periods of time, stretching back to 1980.
   During the same period, the value of the average American home grew 26.1%. So, for the 5 year period, Michigan homes appreciated 67% faster than the national average.
   However, starting with 2000’s third quarter, Michigan’s existing home appreciation began to fall below the national average, a trend that’s continued for 6 consecutive quarters. In the HPI for last year’s 4th quarter, released March 1st, Michigan fell all the way to 40th for the previous 12 months, with a 4.6% rate of appreciation, 33% below the nation’s average.
   But what’s more indicative of the quick drop-off in comparative appreciation is its 5 year rate. As noted, just two years ago, Michigan home values’ growth rate was the highest in the nation for the previous five years. By the fourth quarter of 2000, its 5 year rate fell to fifth; and in ‘01, it’s 5 year rate was the 10th strongest in the nation, and barely above the U.S. average.
   For the year, the District of Columbia led the way with a 14.9% appreciation rate, followed by R.I., FL, Mass. and NH, all above 10%. And, for the previous five years, DC, Mass., NH and Cal, led the way, with rates from 64.2% to 58.8%.
   Locally, Flint area real estate values grew 4.96% for ‘01, down from 7.2% a year earlier, while Detroit was at 4.82%, off from 7.4%.

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Business News & Issues

An Interesting Take on 9/11's Impact

   Though some of us contend the economy never went into recession (and government gross domestic product data support that position), others claim the recession began in March. Either way, there’s no question the economy was in a severe downturn in the third quarter. However, as the nation all but shut down in the days following 9/11, retail activity was back to normal levels by the month’s end.
   Then, an incredible surge in consumer spending emerged in mid to late fall, pushing 4th quarter growth well into positive numbers.
   A recent article implied that the reaction to the attack on 9/11 may have pulled the nation out of recession. In response to the attack, the Federal Reserve continued to cut rates (there’s reason to believe it was about to quit cutting), and the auto industry went into a panic (0% interest and all), which had an incredible stimulative impact on consumer activity and inventory depletion. The surge activity that resulted either ended, or prevented a recession.
   An interesting theory, but probably not what Osama bin Laden had in mind.

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“Max Bickford” Educates America on Sprawl

   If I’m watching TV at 8:00 p.m. on Sunday, I’m far more likely to see Homer Simpson’s portrayal of paternal dysfunction than an arrogant, 50 something, professor still trying to “find himself” in a college environment. But when I pushed the “power” button at 8:08 this past Sunday, I found four people arguing about developing a shopping Mall “on the glen” in Quinlin, the mythical setting for the CBS series “The Education of Max Bickford.”
   Yes, thanks to the NCAA tournament, my TV was tuned to #5, and I was able to view, what I anticipated would be, a story of evil developers destroying a pristine community, with Max (Richard Dreyfeus) saving the day for “small town” atmosphere. Instead, to my surprise, I saw a case study of an out of touch academic community attempting to push its will on a public it considers not smart enough to make its own decisions. And I viewed a clear display of the hypocrisy that continually motivates activists in similar decisions. But most of all, I watched a show that methodically drew the viewer, and ultimately “Max Bickford,” to the proper conclusion.
   Here’s the background: A developer wants to build a mall on a historically significant glen in Quinlin, a town with an exclusive women’s college, but without a major employer (the tire factory closed). The Town needed the jobs that would be created, and the Council is in favor of the development, except for the Mayor, a bar owner who’s closely tied to the town’s wealthiest resident, a woman who strongly opposes it.
   The council creates a five person commission that will make the decision: The woman and an old History professor who oppose the mall; two men who support it; and Max, setting up the process for Max’ true education.
   The history prof and rich (woman) form a “citizens” group to save the glen. They hold a rally, and invite the middle school class to participate (Max’ son is in the class, and the intent is that he would lobby Max against the development).
   The biggest contributor to the “Citizens’ group” is a large construction company. What’s their interest? Max discovers they want to build a mall 30 minutes away.
   Then there’s the History Prof himself. Max finds that his primary opposition stems from the fact that the mall would destroy two trees he, and his late wife, planted in the glen when they found they couldn’t have children.
   In the backdrop is a budding relationship between a cop and professor, set to display the separation between the town and academic community, developing their respective outlooks on the project.
   Finally, there’s the Mayor, who explains to Max that he can’t go against the Queen, but urges him to vote for the development.
   In the concluding scene, Max quotes the history professor regarding “history’s importance” in setting direction for positive change, then casts the deciding vote in favor of the mall. Yes, Dr. Bickford was truly educated in the deceit, hypocrisy and distortions used by anti-development forces across America. We can only hope the CBS audience received the same education.

Barry

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Taxation and Finance ---- Early Withdrawal from Individual Retirement Accounts

   An individual may withdraw money from an IRA at any time. However, withdrawals will trigger income tax liability of the amount withdrawn (ex-cept for some Roth IRAs) and a 10% penalty tax unless an exception-to-the-rule is met. From an investment point of view, funds from an IRA should be the last nest egg you touch unless the 10% penalty tax can be avoided.
   Planning early distributions (pre-age 59 1/2) from an Individual Retirement Account (IRA) to take advantage of the exceptions to the 10 percent additional tax penalty allows IRAs to double up as tax-preferred emergency savings funds. In addition, familiarity with specific rules for the various exceptions can avoid falling into any unexpected penalty traps.
   Several new exceptions to the 10 percent penalty have been created in recent years. Most of these exceptions apply to both traditional IRAs and to Roth IRAs. For example, the penalty tax does not apply to certain distributions from a traditional or Roth IRA for qualified first time home buyers. Withdrawals from traditional IRAs and Roth IRAs are taxed differently since the 10% penalty only applies to the portion of the distribution subject to income tax (except for amounts attributable to Roth conversions within five years):
· For a traditional IRA, distributions are treated as coming ratably from contributions and earnings. Only the portion of a distribution attributable to nondeductible contributions is not taxed, while the portion of the distribution attributable to deductible contributions is treated the same as earnings.
· For a Roth IRA, distributions are first deemed to be paid out of contributions, which are nondeductible (or already taxed in the case of a rollover situation). Therefore, substantial withdrawals may be made for any reason from Roth IRAs without tax or penalty. The exceptions: The 10 percent penalty will not be assessed on an IRA distribution to the extent that any of the following exceptions apply:
   ¨ On or after reaching age 59 1/2 by the IRA owner (tradi-tional or Roth IRA;      also exempt from income in Roth).
   ¨ On or after the death of the IRA owner (traditional or Roth IRA; also, exempt      from income in Roth IRA).
   ¨ After disability of the IRA owner (traditional or Roth IRA; also exempt      from income in Roth IRA).
   ¨ Qualified first-time home buyers up to $10,000 (tradi-tional or Roth IRA;      also exempt from income in Roth).
   ¨ Qualified higher education expenses (traditional or Roth IRA).
   ¨ Deductible medical expenses (traditional or Roth IRA).
   ¨ Health insurance premium distributions to certain unemployed owners (traditional      or Roth IRA).
   ¨ A series of substantially equal periodic payments, made at least annually,      to a traditional IRA owner (inapplicable to Roth).
   ¨ Distribution incident to a divorce of a traditional IRA owner made to an      alternate payee under a qualified domestic relations order.
   The general rule of thumb on IRA withdrawals is that a taxpayer should contribute in the first place only those funds that he or she will not touch under any circumstances.
   However, if emergencies arise, at least it will be up to you, rather than Uncle Sam, to make the decision on the trade off between keeping funds for retirement and using them for certain other important lifetime events.

R, P & T

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Home Builders’ Liability Crisis

   At the beginning of the year, an NAHB publication warned that a “General liability crisis is impacting the Building Industry.” It stressed national insurance industry problems (9/11; loss of investment income; rising claims), noting how they’re responsible for higher insurance premiums and, in some areas, scarcity of liability protection in some parts of the country.
   Well, last Wednesday a Wall Street Journal got a bit more specific, explaining that Western builders are being forced to “curtail construction plans because they can’t find liability” coverage. And it placed blame! ... clearly on a barrage of “shoddy construction lawsuits,” noting that “from California to Colorado, a rise in homeowner lawsuits alleging construction defects prompted nearly every standard insurer to stop writing policies for residential building.”
   Last year we wrote about a number of California lawyers who set up practice in other Western States (particularly in Nevada) with the intent of recruiting homeowners for filing suits against builders, noting that these lawyers had saturated the Golden State’s market. Well, the Journal article showed that those lawyers basically bled California insurance companies dry.
   From 1998 through ‘00, insurance companies collected $52.1 million in liability premiums from construction companies, while paying out $118.6 million in claims .. that’s a 2.28 loss ratio. And, what’s worse, is that premiums plunged by $4 million over that period, but losses rose by $8.8 million. So it’s not that much of a surprise to find the number of standard insurers in the state has fallen from 20 to 30 in the late ‘80s, to no more than 4 today. And, up in Washington, 17 insurers pulled out of the state over the past year, leaving builders no access to standard insurance.
   What about Nevada? Well, in booming Las Vegas, where 170 suits were filed since ‘00, the number of standard companies issuing policies is now

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

Farmland Preservation Sierra Club Style?

   Al Gore’s been sounding like a candidate recently; perhaps he’d have stronger appeal in China. Last week Barry Simon was handed an e-mail (in good fun) that apparently came from, of all places, Livingston County.
   The note quoted the Sierra Club webpage on sprawl, regarding a new law in China forcing developers to procure “extensive sets of permits” before building on farmland, under penalty of death, in suggesting the “whiners in our neck of the woods don’t have it so bad after all!”
   The irony is, we’ve heard from builders and developers in Livingston County who, after dealing with local inspectors and township officials, could make a good argument that the death penalty is a cakewalk.
   Still, if Jiang Zemin will leave China and come to the U.S., he has a definite future in regional planning enforcement.

And this is the government that protects?

   If Jiang has a problem with the INS, perhaps he can come to the U.S. as a student. It’s hard to tell what’s a bigger joke: The fact that INS granted “student visas” to hijackers Mohamed Atta and Marwan Al-Shehhi; or the fact that it took eight or nine months for the visas to get to the flight school they wanted to attend. As MSNBC Hardball’s Chris Mathews asks, “If names of mass murderers can pass through our security screens, Mullah Omar and Osama bin Laden can’t be far behind.”

And we thought the AFL-CIO cared about jobs

   In recent years we’ve seen organized labor sway from its historic adoption of liberal ideology when such policy conflicted with the development of jobs. And the AFL-CIO, and its council on building trades, have been allies of the building industry since the mid 1980s.
   That’s why there was reason for surprise when we received a copy of “afl-cio resolution 16: urban sprawl and smart growth, passed at its national convention.” In its 17 reasons to become “actively engaged in the emerging debate surrounding urban sprawl,” the conglomerate blamed “sprawl” for the following: Straining working families by creating long commuting times; fueling air pollution and asthma rates; undermining neighborhood grocery stores; denying workers a choice of how to get to work; erodes public services; allows “anti-union” manufacturers to flee cities; creates pressure for privatization of public services; and on, and on, and on ...

What's your definition of "Family Farm?"

   The Wall Street Journal noted another “show of hypocrisy” on the farm subsidy issue as California Senators Feinstein and Boxer flipped on capping farm subsidies at $275,000 annually. They wrote colleagues calling for a 20% raise in limits, instead of the 40% cut they voted for.
   Why? “Large cotton and rice farms are family farms. Cal’s Farmers Rice Coop got $38 million from ‘96 thru ‘00. That’s some mom & pop operation.”

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Association News and Events

   NOTE on HOUSING QUARTERLY: The April 1st deadline for advertising is approaching, so if you plan to advertise, we need your copy by that day. The spring issue will have 96 pages, including forty-three dedicated to the Parade. Due to the number of color ads, we already had to add extra color pages...So, we have additional full color ad availability if requested.
   We’re in the process of laying out the magazine, which is expected to be printed and in the mail by May 3rd (roughly 3500 will be mailed, the remaining 6,500 will be distributed at Parade Homes and through organizations). If you don’t have an advertising contract and want one, call the Office (603.2200) right away.

   When we hit the final Parade of Homes deadline two weeks ago, we had 43 models entered in the May 11th - 25th event (one more than during the past two springs). And, as usually happens, we also had two builders that wanted in after the deadline.
   The models are pretty well distributed throughout the area, with twenty-one east of Fenton Road, and twenty-two west.
   Thirteen homes are in Grand Blanc, six in Davison, eight in Flushing, five in Swartz Creek, and nine in Fenton/Linden. We also have one each in Goodrich and Clio.
   A complete list of participants is available by calling the association office.

   There was a strong turnout at Tuesday’s Land Development council meeting with the County Drain Commissioner. The Council will be holding a planning session in April, to set direction for the council in the future. Look for details in the April 3rd issue.

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Economic Update: Recession annulled; focus on interest rates

   On Wednesday, February 27, 10 year treasury bonds closed yielding 4.84%. By the following Tuesday, they opened at 5%. The next day, they began a decline that brought yields to 5.4% last Thursday. So, in 12 trading days, during a period when it became apparent that the “recession” was annulled before its consummation, long term interest rates soared more than half a point. And, as would be expected, long term Mortgage rates jumped more than a quarter point from March 1 to the 15th.
   This past weekend, continuing on Monday, a barrage of articles appeared regarding the likelihood of higher rates in the near future. Then, yesterday, came the expected word from the Federal Reserve that it was changing its “bias” from guarding against economic weakness, to a neutral stance between “weakness and inflation.”
   So, what’s the impact of the Fed’s change in direction on future mortgage rates. Probably little if any. It’s been rather obvious that neither bonds nor mortgage rates reacted to federal reserve action over the past 22 months, so why would they start now?
   In May ‘00, while the Federal Reserve was still raising rates, fixed mortgage rates were at 8.6%, and 10 year treasuries were at 6.4%. Over the next seven months, their rates fell to 7.1 and 5.2% respectively, prior to the Fed’s first rate cut on January 3, 2001. Fourteen months later, after eleven cuts in the Federal Funds’ rate, the two market driven rates have remained near their January ‘01 levels.
   If bond and mortgage rates continue to rise significantly, it won’t be due to the fed, but more likely will be in response to the soaring federal deficit. In reality, the bond prices rose for three consecutive days as word on the street suggested the Fed would change its bias. What really seemed to spook the market was the report on March 6th, from the Congressional Budget Office (CBO).
   The CBO said, under the Bush budget, the government will have a $121 billion deficit in fiscal ‘03, then another $51 billion the following year (and that’s before new farm subsidies). Add to that the fact that the administration wants a rise in the debt ceiling that will let it borrow $750 billion, and it’s no surprise that 10 year yields jumped nearly 40 basis points in six trading days.

Other News is Exceptional
   When we look at the other economic news during the last two weeks, it’s obvious why the debate’s moved beyond recession. After reporting that the Manufacturing index was up in February, “the first time in 18 months,” we find that industrial production was up for the second month in a row, the first time that’s happened since summer of ‘00.
   We also found that the index of non-manufacturing activity really took off in February, up 9.1 points to 58.7 (a rating above 50 means the sector’s expanding).
   But perhaps the most pleasant surprise was the growth in jobs, highlighted in “Labor’s” Employment Report, as employers added 66,000 jobs to their payrolls last month, and the jobless rate fell for the 2nd consecutive month. Most analysts thought it was a fluke when the rate fell to 5.6% in January, and expected it to rise to December’s rate of 5.8%, but still welcomed the decline to 5.6%. And, some now believe that unemployment peaked in December.
   And, finally, inflation at the wholesale level remained tame as the Producer Price index rose 0.2% in February, while the core rate, minus food and energy didn’t rise at all (the consumer price report comes out March 21).

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Housing Industry Update

Little change in local housing ‘02 v ‘01
  
   The first look at local housing activity for February came from Housing Consultants this week, and Southeast Michigan is running at a rate nearly identical to last year. Regionally, four more units were authorized during the first two months than were permitted a year ago. And, when rentals are excluded, we find single family and condos are up by 39 units.
   Genesee County authorized a total of 216 permits, up 3 from 2001. However, 22 were rental units (no rental units were authorized at this time last year) so owner occupied authorizations are off by 19 units (8.9%).
   Normally we don’t put much emphasis on permit activity until the end of the first quarter, however, considering the economic uncertainty that’s been evident since the middle of last year, it’s good to see that the region is, at least, holding with ‘01 activity.
   Genesee County shows few surprises as Grand Blanc Twp. had 56 single family/condo permits, followed by Fenton Twp. (32); Linden (26); Burton; Davison Twp. and Fenton. The 22 rentals were in Flint Twp., raising its total to 29.

Glut of Apartments tied to strong housing market

   “The nation’s apartment/rental market is hitting a brick wall.” So opened an article in the Wall Street Journal suggesting the residential rental industry has be hit by a 3 pronged attack: Overbuilding; weakened economy; and continued strength in the housing market. The article notes how New York research firm Reis Inc. said the vacancy rate for higher end apartments throughout the U.S. rose from 3.5% in the 4th quarter of ‘00, to 5.8% at the end of last year. And, it estimates that the rate’s up to 6.3% currently. And, it expects the vacancy rate for all apartments (3.1% in ‘00) will hit 5.6% this year, and 5.8% in 2003. Last year, according to Reis, 112,000 units were built, and the number will rise by 8,000 in ‘02. While the weakened economy takes renters out of the market in some areas, 1/2 million 1st time home buyers limit it in other areas.

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