April 12, 2004

Inside Veritas -
Article 1 - Proposal “A” 10 Year Coverage Lacked Sense of Facts; History
Article 2 - Builders Note: Grand Blanc Sewer/ Water; Mich. Code
Article 3 - State Funding Begets Desperation
Article 4 - Taxation and Finance - Audits — New IRS Audit Initiatives
Article 5 -
Association News Update From Laura
Economic Update - Still waiting for manufacturing jobs
BS: Still about Nothing in particular
Housing Industry Update

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Proposal “A” 10 Year Coverage Lacked Sense of Facts; History

   Last month Michigan celebrated a major milestone. It’s now been a decade since the state’s voters ended the tax disparity between Michigan’s homes and those in other states, that had resulted in retarded home values. And, the lower taxes that ensued after the passage of the initiative, known as “Proposal A,” spurred incredible levels of growth with: households increasing their net worth as the Michigan homes experienced the strongest rate of appreciation in the nation for more than six years; Soaring construction activity paid gigantic dividends to municipal, state and county treasuries; and the rate of school funding grew at double the rate of inflation.
However, to read the media reports on Proposal A’s decade, one would have serious questions as to whether or not it was a success. We read of: the state’s budget crunch and its ripple effect on municipalities and counties, deprived of their promised revenue sharing dollars; the inability of school districts to finance capital improvements; wealthy districts are suggesting they would be better off had Proposal ‘A’ not passed; and, we were even treated to the “crisis” in Birmingham, now forced to educate its prodigal sons and daughters on a mere $11,800 per student (they may have to sell its limo fleet and buy busses).
Well, for the coming issue of Housing Quarterly, we thought we’d try to set the record straight. In doing so, our research found some fascinating data, which can easily draw one to the following conclusion: Proposal A not only led the way to an economic recovery of epic proportions ... it also provided gigantic windfalls in tax revenue to the state! The problem is that the state couldn’t control itself, and over indulged for eight years, putting itself, its dependent local units of government, and even its school districts, in jeopardy.
The full report is available by request, but will be published in Housing Quarterly at the end of the month. Following are a few highlights from the article:
· The home purchasing power of the U.S. dollar was 17.9% higher in the nation as a whole, in comparison to Michigan, prior to ‘94.
· From 1980 to ‘93, the average home in the U.S. gained 26.5% more value than a Michigan home. Within 2 years of Proposal A’s passage, Michigan made up the gap, then had the highest rate of appreciation in the nation through 1999.
· In Proposal A’s first year, state sales tax revenues were 9.4% above forecast, for a $420 million windfall. Currently they’re up 54% from the ‘95 forecast, far more than double the rate of inflation.
· Operating funding for schools was up 42.5% from ‘94 to ‘01, also more than double the rate of inflation, while infra-structure spending for schools was up 148%. And (see below) local schools were receiving gigantic windfalls through 2003 (and beyond).
· If we adjust the Real Estate Transfer Tax for inflation, it should’ve brought in $193.3 million in fiscal ‘03. It actually brought in $254.2 million, a 31.5% windfall above inflation.
· But the “Big 1” relates to single family home construction. From ‘88 to ‘92 new single family home valuation averaged $2.44 billion. By ‘96 it was up to $4.73 billion, and in ‘03 was $6.285 billion, currently generating far more than double the revenue forecast, and that’s when adjusting for inflation.
· In numbers, housing starts surged by 10,000 units from pre '93 to recent years, with an impact of 24,500 jobs.

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Builders Note: Grand Blanc Sewer/ Water; Mich. Code

Grand Blanc Township Sewer & Water Plans

On April 1, we received copies of Grand Blanc’s sewer and water studies, as drafted by Rowe Engineering. The date was part of last fall’s settlement when we dropped our lawsuit over tap-in fees, and the Township ended its moratorium.
The study included an analysis maintaining the "cost of providing water and sewer to accommodate growth will exceed the recent increase in tap fees to $1,600." It also displayed 40 water and 47 sewer projects at combined costs of $160 million, claiming more than $130 million is "attributed to growth." However, most projects aren’t anticipated until after 2010.
Township officials have indicated they’re looking for financial analysis and community input prior to changing their current fees. The association has asked a couple of engineers to review the plans.
We’ll update on the web site as this issue progresses. Also, we’ll likely be setting a meeting of Grand Blanc developers and builders to discuss the situation in the near future.

Michigan Residential Code
As we previously reported, the new Michigan Code went into effect the end of February. Unfortunately, no code books are printed, and we don’t expect any until sometime in May.
We’ve seen bits and pieces of the new code, and realize that it’s almost identical to the International Code (exactly what we tried to prevent when developing a single state code).
We’ll be checking with Genesee County Building Officials’ Association this week, to see about holding a seminar on the changes in the current code versus the previous one (as we did in 2000).
Until then, if you have specific code questions, give us a call and we’ll see if we can find who can answer them.

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State Funding Begets Desperation

  No community has been stronger in the “Pro-Growth” camp than Burton. And, no leader recognizes the value of housing development more than its Mayor. In fact, our quote on page eight (housing “is the only thing keeping us afloat”) illustrates the community’s support for the industry that grew more than 1,200% [in Burton] since Mayor Smiley took office at the end of 1991.
Under his leadership, Burton’s experienced a level of prosperity that could not have been imagined in years prior. His 12 years took the city from the butt of media jokes to a model for community rejuvenation. And, his efforts to bring development to the city were rewarded with a tax base that grew at a faster rate than nearly any community in southeast Michigan. But despite the growth, Burton’s facing budget deficits.
Ironically, on the day the “quote” appeared in the Journal, I received a call from the same reporter asking what I thought about Burton’s consideration of “Impact Fees” for new development? A new councilman had proposed the idea and, surprisingly, Smiley was on board!
Now, forget that Impact Fees are illegal. And forget arguments about legitimacy. Ask, why would Burton look to raise costs on its economic savior?
Well, I’ve spoken with Smiley on the issue frequently, and his frustration is more than evident. The continued reduction of state revenue sharing funds has caught up with Burton, and even the remarkable growth it’s experiencing can’t offset what may be $1.2 million in the current fiscal year.
The city’s plight is due to the state’s reneging on promises of revenue sharing, and indicative of problems across Michigan. And, it results from a decade of overspending, not alleged deficiencies in revenue.
But, as one can see in our Proposal A article, spending in many areas more than doubled the rate of inflation, which brings us to our point. Michigan has 2 kinds of “Cows: Cash & Sacred!” And, while the Governor and Legislature try to protect those “Sacred Cows,” they put the “Cash Cow” in jeopardy. Well, there’s little question which industry is Michigan’s “Cash Cow!”

Barry

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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

For Drs. Phil and Laura: Homes for “Dysfunctional Families”

   Well, we thought we knew all the latest trends for our industry. Then, in late March, the Wall Street Journal gave us a new one (perfect for a “Jerry Springer” family) in an article titled, “The Dysfunctional Family House.”
The article notes, “after two decades of pushing open floor plans — where domestic life revolved around a big central space — major builders and top architects are walling people off.” They now offer “one-person ‘internet alcoves,’ and locked-door ‘away’ rooms,” along with “his and her offices on opposite ends of the house,” it continued. And, as NAHB research director, Gopal Ahluwahlia told the WSJ in regard to the new designs, they “offer so much seclusion, they’re good for the Dysfunctional Family.”
The article focused on the “Ultimate Family Home,” an NAHB feature at the annual convention, that “hardly had a family room,” put plenty of places where residents can hide from one another. As the builder of the model said, “we call it the ultimate home for families who don’t want anything to do with one another.”
Of course, designers (who probably need a professional degree in Psychology) consider this “new antisocial architecture a backlash against the ‘enforced camaraderie’ of the ‘great rooms’ of the ‘80s and ‘90s.” Or, as “Urban Theorist” James Kunstler, author of several books on suburbia notes, “Privacy is the Ultimate Luxury.”
So, before planning your next spec, we suggest consultation with your local behavior professional ... (By the American Psychiatric Association)

“Seinfeld” People:
  
   It’s “people” that make this column, and we’ve had some classics over the past month. First, there’s Jason Pries and the City of Clio, in a story showing government’s ability destroy of the “American Spirit.” Mr. Pries (a budding Howard Shultz [the Starbuck’s guy]) had a plan to save his Coffee Shop business, and he dominated local news for nearly a week. The plan? Originally topless waitresses, but then, possibly dancers.
While visionaries could see Mr. Pries in one of those NASDAQ commercials, Clio said “no way, take it to Flint.” So, Jason gave up and sold his shop ... but solid ideas live on. Does anyone have a concept for the store next to “Little Joes” in Grand Blanc?
Then, there’s Ashley Revell, the London (UK) resident who sold all his world-ly goods to go to Las Vegas and bet it all on one spin of the Roulette wheel. Now, with a segment focused on his stunt on Good Morning America, Revell’s fame is as strong as a reality TV contestant ... Which brings us to the Donald Trump, whose fame is stronger than ever with "the Apprentice" and his Saturday Night Live follow-up.

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Association News and Events by Laura

  

New Members' Applications Howard Homes Inc. Kelley & Jason Howard Sponsor: Barry Simon Randall Homes Inc. Matt Randall Sponsor: Barry Simon E.J. Dombrowski Ed Dombrowski Sponsor: Barry Simon Lewis & Knopf CPAs Gregory Waller Sponsor: Dave Crawford American Bldg Co. & Maint. Larry Cool Sponsor: Tim Glavin C R Consulting LLC Cindy Holzer Sponsor: Vic Lukasavitz Allied Mailing & Printing J ill Kirsch Sponsor: Mark Nemer Franklin Bank Brent L. Green Sponsor: Barry Simon

Sports’ Trivia Night Wednesday, April 21st What a month! The Wings make their traditional “Stanley Cup” run. The Pistons look like the “team to beat” in the NBA East! Boys “without accents” dominate NASCAR. The Tigers won 5 of 6! Mickelson won a “Major!” And even the Lions made “wise” pre-season moves. In celebration of spring ‘04, along with a short traditional program, the BAMF is hosting its first “Sports Trivia Night,” when members can show their sports’ knowledge and support for their favorite team, and win a number of prizes purchased by the association. Categories include: Football; Basketball; Hockey; Baseball; Winston/Nextel Cup; and, or course, Golf. Pick your favorite category! If you can answer a few questions, you’ll win one of our category prizes. And, you’ll qualify for the ‘Grand Prize.’ However, to win that ‘Grand Prize,’ you’ll have to be well rounded in ‘sports,’ because the finals will focus on all categories. SHOW YOUR COLORS Where a jersey, hat, or other “sports team apparel” on the 21, and you’ll receive five (5) additional Spike Tickets when entering the 50/50 contest. We specify “team” apparel, since golf clothing won’t qualify (even with a “swoosh”). The April 21 meeting opens at 6:00 p.m. with social hour & hors d’oeuvres sponsored (by Siding World). And, we also have a few comments from State Representative Paula Zelenko that’s scheduled. So, join us for the final meeting of Spring, at Bonapartes. And, RSVP at 810-603-2200 ASAP!

The Spring Parade still has 39 entries, as we passed the five week inspection period. It will open at its traditional time of Saturday on Mothers’ Day weekend (May 8th), and run through Sunday evening, May 23rd. We did have one home drop out, but replaced it with a home on the “waiting list.” In recent years homes that applied after the deadline were placed on a waiting list, in case a home fell out of the event. And, Housing Quarterly (all 100 pages) is set for mailing on April 29th. If you would like additional copies of HQ to distribute, call the association office. # # # Social Hours are already filling up for ‘05. If you’d like to be a sponsor at a meeting next year, we suggest you call Laura at the office immediately. 810-603-2200.

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Economic Update: Still waiting for manufacturing jobs

  With Michigan considered a primary manufacturing state, and with the nation’s factory sector struggling for the past four years, we’ve been following the Institute of Supply Management’s (ISM) manufacturing index closely. Back in late ‘01, when the nation was coming out of the recession (that was yet to be recorded), the manufacturing sector began showing life. And, during most of ‘02, the sector’s activity showed positive numbers. Yet throughout that period, employment in manufacturing steadily declined. In fact, from September ‘00 to last November, manufacturing jobs’ data went south (no pun intended). However, the March report showed that, not only had manufacturing activity grown for the 10th consecutive month, its employment index rose for the fifth straight month. In fact, the employment index hit its highest level (57) in 16 + years.
Yet, after months of positive numbers, there’s no evidence of higher manufacturing employment numbers in the government’s monthly jobs’ report. Even in March, as the economy added 308,000 jobs, manufacturing job numbers were unchanged, after declining 43 consecutive months.
Well, the ISM notes that, "over time," an employment index over 48% is generally "consistent with an increase in the government data on manufacturing employment." So, with the sector not losing jobs for the first month in over 3 1/2 years, it’s possible we’ll see some semblance of upturn in the near future.

308,000 Jobs in March
Employers added more jobs in March than in any month since April ‘00, a sign that hiring is finally starting to catch up with recent economic growth. However, few economists expect those kinds of numbers to continue, with forecasts, on the average, suggesting more moderate employment growth in the 160,000 jobs’ range. Still, that’s better than 108,000, the average monthly increase since last August.
A significant part of March’s growth is due to construction payrolls soaring by 71,000 after declining in February due to bad weather.
However, all was not necessarily positive, as the report noted a decline in the average workweek to 33.7 hours. And, as more Americans entered the market, the jobless rate rose to 5.7 %.

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Housing Activity Update:

 It’s quite obvious that housing activity remained strong (across the board) during winter, running well ahead of last year’s record pace. Though February’s housing starts data were below January’s rate, the numbers were up 6.6% from February of ‘03, while sales (new & existing) showed continued growth.
However, from Mid March to early April, mortgage rates rose 0.4 points (7.5%), to 5.79%, and appear to be headed upward. While early upward movement of interest rates often has an immediate “positive” impact on sales (as buyers feel a sense of urgency), it could lead to lower levels of activity in months to come.
However, we have to note, that 4 times since early ‘02, forecasts called low mortgage rates a “thing of the past,” and those forecasters ate proverbial "Crow."
From a local perspective, the year’s running well ahead of ‘03 as well, with Housing Consultants’ data showing the Southeast Michigan region up 19.4% ahead of last year for housing built to be owner occupied. And, it shows Genesee County up 30.1% (49 units). (We also note that Census data were nearly identical to HC’s).
However, there was a notable negative in the first two months’ reports, at least as they relate to rental units. For the first time in memory, there were absolutely NO RENTAL permits authorized for the two month period. So, in the overall scheme, total units were up just 5.9% regionally.

New Housing Activity - U.S.
While the rate of sales of new single family homes remains at record levels (February was the third highest in recent history, and strongest since August), a decline in the single family rate of starts, that began at the first of the year, continued. Still, last month’s level was nearly identical to ‘03’s year end record.

Existing Home Sales
The Realtors report said existing homes sold at a rate of 6.12 million in February, up 2% from the previous month and nearly identical to last year’s record of 6.1 million units. What may be newsworthy is that the median price was $168,100, which is its lowest level since May ‘03, and up 5.7% over the past twelve months.
Remember, last year’s fourth quarter was the first time in the recent boom that home values outpaced home prices. It may be that we’re seeing a drastic change in the market, to more affordable homes.
However, in a separate report the realtors noted that one segment of the industry is experiencing exceptional gains in median price: Condos! Their median price level soared 14.9% in the fourth quarter, to $174,700, now nearly 2% above the single family price, which rose 6.6% during the same period.

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