April 29, 2002

Inside Veritas -
Article 1 - Sewer and Water Capacity: The Primary Issue for Michigan Growth
Article 2 - Business News & Issues
Article 3 - “Fortune” knows “Flint” 2002
Article 4 - Taxation and Finance - Employees Called to Active Duty
Article 5 - Local Existing "Prices" Soar
Association News Update
Economic Update - There’s a reason mortgage rates are down
BS: Still about Nothing in particular

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Sewer and Water Capacity: The Primary Issue for Michigan Growth
  
   It’s been more than fourteen months since Jeff Wright, only six weeks into his term as the Genesee County Drain Commissioner, brought a sobering message to the association’s Land Development Council. At February ‘01s council meeting, Wright said the county’s sewer system was virtually at capacity and immediate action was necessary if he would be able to accommodate building and development at its current rate.
   He went on to say that the County was likely to authorize $2.5 million for an immediate maintenance upgrade, along with an additional program to cut the flow of storm water into the sanitary system that would add capacity for the immediate future, but that long term investment was necessary to assure capacity for future growth.
   Then the commissioner let the proverbial bombshell drop: He planned to charge a $1,000 “capital improvement fee” for every tap into the county water and waste system as part of the plan to finance necessary system upgrades.
   Now, a meeting of builders and developers is hardly the place where one would expect anything but complaints over a program that would add $2000 to the cost of a home. After all, their the ones that get hit every time a government official perceives the opportunity to raise revenue. However, in what must have come as a shock, members in attendance not only refrained from complaint, but were reasonably supportive of the proposal.
   Two months later Wright addressed the association’s general membership meeting, and the response was the same.
   Why would builders and developers accept such in edict? Because they were being realistic regarding a potential crisis for the industry.
   After a year of headlines concerning floods and spills, the threat of a lawsuit by Saginaw County communities to stop Genesee County development, and a number of local communities that were nearly out of allocated sewer taps, the industry understood the seriousness of the problem, and was willing to contribute to the remedy.
   We bring this issue back today because of a Detroit News feature article including threats of a development moratorium “at the heart of Metro Detroit’s suburban boom.”
   With a front page headline shouting the “Metro area faces $52B drainage bill,” the article opens with the dramatic: “Crumbling, overflowing, pollution- spewing sewers are a $52 billion ticking time bomb for Southeast Michigan, that is threatening to balloon water bills, increase taxes, cut into other public services and perhaps even choke off development.”
   Whether one believes the $52 billion figure over twenty years, which was taken from a Southeast Michigan Council of Governments report or not, there’s clearly a current crisis that extends far beyond Michigan’s borders. Congress is even looking at a $20 billion proposal to help states with sewer expenses, but with the Federal budget back in red numbers, the likelihood of help from Washington is, at best, doubtful. And the state legislature has been considering a billion dollar bond to help local communities with sewer maintenance. But Michigan’s fiscal condition isn’t what it was just two years ago.
   So, in all likelihood, local governments will be facing the financial aspect of the sewer crisis alone. And, that means heavy spending without additional resources.
   For example, Macomb County Board Chair John Hertel told the News that currently his county has $100 million in sewer projects under way. He believes the “crisis” is so big, only Washington can handle it. In fact, suggests the issue is as critical as beating the Germans to the atom bomb sixty years ago. “We need something like the Manhattan project,” he told the News.
   Things are every bit as grim in Oakland, as County Executive Brooks Patterson noted it “faced $11 billion worth of drain and sewer upgrades over the next 30 years.” And, it’s Patterson who noted how Federal District Judge John Feikens, who oversees the Federal Clean Water Act in the area, threatened to “slam the door shut on future development in the region” by issuing an injunction on all construction permits until he sees improvement in the quality of the water supply.

Catch 22
   The News says a “growing group of public officials and environmental activists is struggling to gain attention” for the sewer issue. However, it could also have noted that growing numbers of the same are trying to shut off growth for their own personal reasons. So, is it merely the anti-growth crowd taking advantage of a situation? Or, is the crisis as critical as the article indicates?
   The writers gave the answer in the following line: “$1 billion worth of sewer construction over the last decade has failed to keep up with suburban development, environmental requirements, and the need to replace pipes and pumps that are in some cases seven decades old.” In other words, even if the dollars spent on new development were paid for by the users, they haven’t solved the problems of old decaying lines.
   But here’s the catch. If we don’t have more “users” of the Detroit Water System, there won’t be more households to spread the cost of maintaining the old infrastructure.

Genesee County
   Whether the issue is legitimate or not to the south, Genesee County’s problems are on a much smaller, more manageable scale. And, the $60 million or so that Wright needs to complete the northeast connector and western trunk lines, while upgrading the Montrose treatment facility are a proverbial “drop in the bucket” in comparison.
   But more importantly, the Flint area began dealing with the crisis before it received the kind of threats that come from John Feikens.
   However, on a closing thought, has anyone considered what a shut down of development in Wayne, Oakland and Macomb Counties could mean to development possibilities in Genesee?

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Business News & Issues

Global Financing Spurs U.S. Housing Market

   So, you though housing was a local industry. Well, it may be, but the Federal Reserve recently confirmed the housing industry is “especially dependent” on foreign money.
   In its Economic Trends column (4/15), BusinessWeek notes that foreign investment funds play “a critical role in the red-hot housing market,” as foreign investors are gobbling up “enormous quantities of the mortgage backed securities issued by Fannie Mae and Freddie Mac.” It further noted that, during last year’s 4th quarter, foreigners bought “32% of the so-called ‘agency securities’ issued by Fannie, Freddie and other similar government backed enterprises.”
   Without foreign investment buying $162 billion in agency securities last year, mortgage rates would have been higher and financing the continued housing boom would have been far more difficult. So, if you run into a foreigner (part-icularly if they’re Japanese or British), be sure to thank them for your recent success.

Buick: Salvation from a Rendezvous

   In this space 3 weeks ago we questioned the likelihood of the Buick nameplate’s survival, noting it had the oldest clientele of any vehicle, and it was having trouble (despite ‘Tiger’ Woods’ popularity) in making inroads in gaining a younger market share.
   Well, after plunging 22.5% over the past decade, sales of traditional Buicks (LeSabre, Park Ave., Regal, & Century) fell another 23% through the first quarter of ‘02. But the news isn’t all bad, as 16,179 Rendezvous’ (20% of Buicks) sold, and 70% of them went to 1st time Buick buyers.

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“Fortune” knows “Flint” 2002

  Over the past Decade, we’ve often claimed responsibility (as an industry) for the Flint area’s improved fortunes, particularly noting our dual roles of creating revenue for formerly strapped local units of government, while providing jobs, and access to jobs, for local communities’ residents.
   Last week these dual roles came to light nationally in an April 29th “Fortune” magazine cover story, that clearly tells that the Flint area is actually thriving, despite the obvious problems faced by the City; and despite perceptions most “non Michiganders have of Flint due to “Michael Moore’s ‘89 documentary Roger and Me.”
   Notes Fortune’s Justin Fox, “Flint’s become a regular stop for journalists looking to expose the dark side of the post-1980 economy. And there’s lots to expose,” he continues, citing many of the serious problems facing the city.
   However, unlike journalists looking to expose that “dark side,” Fox writes of the real “Flint,” pointing “just across the street from City Hall.” It’s there, he says, sit Genesee County’s government offices which are currently celebrating the “best of times,” with a budget surplus and “fancy new suburban subdivisions going up all over.”
   Fox further explained that the county reached its lowest unemployment rate in 30 years, despite the loss of 55,000 auto industry jobs, explaining the apparent paradox with stating the “commuter” figures (residents commuting to work rose from 4,000 to 30,000 over 30 years).
   The basic point of Fox’ “Flint example” was that its renewed economy was a product of what he called “dumb luck:” Detroit’s sprawl bringing Oakland Co.’s jobs in range of Genesee Co. residents.
   Truth be known, however, it was a bit more than dumb luck. In fact, the rise in Flint area activity came to light because of housing industry vision in the mid 1980s, along with the quality communities in the County’s southern sector, that could support the eventual surge in residents.

Barry

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Taxation and Finance ---- Employees Called to Active Duty

  If you have employees who are in the reserves and are called up for active duty, they are entitled to certain rights involving pay, benefits and job protection under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Among the requirements:

* Reservists are required to provide as much advance notice as possible of their need to take military leave. However, employers may not stand in the way of their leave or penalize them if they are activated suddenly.
* Reactivated reservists are entitled to COBRA-like health insurance benefits for a period of 18 months even if the company is not covered by COBRA regulations, and the protection may not be terminated even though the reservist obtains coverage through the military by being on active duty. After returning to work, no waiting period may be imposed for health insurance coverage, and no pre-existing conditions may be excluded from coverage. They are also entitled to many other non-seniority related benefits, including year-end bonuses and vacations and sick leave accruals.
* Employers are not required to pay an employee who is on military leave, but some companies establish a policy of paying the activated reservist the difference between the military and regular pay.
* Activated reservists may elect to use vacation leave as a means of obtaining pay during military leave, but employers may not mandate this practice.
* When employees who were on military duty submit applications for reemployment, employers must promptly rehire them either at the same position they held when they left, or at the position they would have held had they remained employed during that time. To be covered by USE-RRA, employees in uniformed service must re-apply for work: (1) on the first calendar day plus 8 hours after completion of service if they have been in uniformed service for less than 31 days; (2) within 14 days after service ends if they have been in uniformed service for 31-180 days, and (3) within 90 days after service ends if they have been in uniformed service for more than 180 days. When an employee has been gone for 31 days or more, employers may request documentation showing that a military member's application for re-employment is timely and that the separation from service was under honorable conditions. After a returning veteran is reemployed following a period of uniformed service: (1) the period of uniformed service counts as service with the employer for retirement plan vesting and accrual purposes and may not be treated as a break in service, and (2) the employer must make up any missed employer contributions and allow the returning veteran to make up any missed employee 401(k), 403(b) or after-tax contributions provided for under the plan. (Make-up contributions made by or on behalf of a reemployed veteran are not subject to generally applicable plan contribution limits, and are also not taken into account for applying the qualified plan nondiscrimination, coverage, minimum participation and top heavy rules.)
* When an employee returns from military service lasting over 6 months, the employee may not be terminated without cause for at least one year after the date of reemployment. Where the period of military service is between 31 and 180 days, the employee has 6 months of termination protection, and those who served 30 days or less have no job protection.

R, P & T

Local Existing “Prices” Soar

   The page #1 headline in the March 20 issue told that Michigan’s appreciation rates, not only are no longer tops in the nation, but have fallen below the U.S. average for the last 6 quarters. Well, with those data in mind, some might find it surprising that median prices for last year’s 4th quarter were up, well above the U.S. average, in virtually all metropolitan areas within the state. But that’s exactly what the price data in NAHB’s Housing Opportunity Index (HOI) shows and, if you’ve been reading Veritas, you shouldn’t be surprised.
   The median price segment of NAHB’s Housing Opportunity Index (HOI) for the the 4th quarter of last year showed the Flint area price jumped 9.5% over the previous 12 months, to $115,000, while the Metropolitan “Detroit” area’s prices jumped 13.5%, to $160,000. During the same period, the national median price was up just 6.2%, from $139,300 to $148,000.
   To put that in perspective, the home value data in the Office of Federal Housing Enterprise Oversight’s “House Price Index” shows “Flint” was up 4.96% and Detroit’s gain was 4.82%, while the U.S. average was up 6.92%.
   What we’ve found in the past several years is that the relationship between home sales’ prices and real changes in property values is about the equivalent to the relationship between Federal Reserve action and Mortgage Rates: In other words, little to none.
   In the late ‘90s, when local property was experiencing some of the strongest appreciation rates in the nation, median prices barely moved. Then, last year, when local growth in home values slipped to the bottom 1/3 of all property in the nation, median prices soared.
   In the period that ran from late ‘99 to last spring, Flint area home values had increased by more than 7%. However, the median price in ‘01’s first quarter was $100,000, the exact median price of ‘99’s fourth quarter.
   These seemingly conflicting data do not, in reality, conflict, because they’re measures of two distinctly different items: One compares the prices of property sold during a period with the prices of property sold in previous periods; The other compares sold properties with their previous transactions, to see how individual homes in a particular area have appreciated.
   In good economic times (like the ‘90s) with jobs being plentiful and consumer optimism high, a large number of 1st time buyers enter the market, and sales of lower priced homes have a tendency to rise, and make up a larger share of the market. But when the economy softens, the reverse affect often comes into play, as the market shifts to financially secure buyers purchasing higher priced homes. So, as we’ve been noting for years, median (and average) prices distort real home values.
   Our analysis of data from the Flint Area Association of Realtors suggests that local home sales off by 218 units last year, and 83% of that decline was in Flint, where the average price was $57,100. Last year, Flint sales made up 24.2% of the market; in 2000 it was 26.7%, so it’s hardly a surprise that the midpoint of Genesee County home sales rose so large a number.
   As is evident in the graph above, the Metro Detroit area was in a similar situation as its median price climbed by $19,000 (more than the three previous years combined).

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

From God to Michael Moore; “Greens” run the Gamut
   In the April 3rd issue we told how the “Greens” were “joining hands with the nation’s major churches,” as they “look to the Almighty for help.” Well, last week we found the Greens may have lowered their focus.
   A story out of New York in mid April said the Empire State’s Green Party had been trying to draft Davison’s favorite native, Michael Moore as its Gubernatorial candidate for November’s election. Green Party leader Mark Dunlea, told a reporter that Moore would be a great candidate because he’s “shown he opposes corporate control of the political process.”
   Actually, the Greens need a “name” candidate who can get 50,000 votes to keep the party on the ballot. A few years ago they ran Al Lewis, or “Grandpa Munster,” who was a real success with 53,000 votes (green? isn’t his grandson the energy secretary who wants to drill the Alaskan tundra?). So, it seems somewhat reasonable to think Michael Moore could follow in Grandpa Munster’s footsteps.
   Since Howard Stern backed out of the 1998 race, 2002’s could’ve been a campaign like we haven’t seen since 1969, when Norman Mailer ran for Mayor on a “51” platform (NYC should become the 51st state). But unfortunately, Michael will not run. Either he’s afraid his “Tiger” hat won’t wear well in Yankee/Met land, or he’s saving himself for his real dream, the 2003 Flint Mayor’s race.

A new, improved meaning of "Priceless"
A tank full of gas? $21
A package of legal pads: $9.44
Spotted Owl feed: $31.95
   Having the Interior Department fund your casino adventure: Priceless!
But that’s the new benefit of Federal employment ... or, at least it was!
   The Interior Department, the agency that saves forests from the timber industry so trees can fuel fires, was found to offer its employees a rather exceptional package of fringe benefits. An audit found that its employees used government issued credit cards for payment of rent, withdrawals at casino ATMs, along with purchases of jewelry and furniture.
   The department is now working to “solve the problems identified in the audit,” and is in the process of “training officials to train cardholders” starting this month. However, in fiscal 1999 and 2000, department employees made more than 2 million purchases for $675 million, and no one knows where it went.
   If you think this is a problem that’s only related to those tree huggers at “Interior,” it’s not!
   A Congressional investigation found that more than 46,000 “Defense” employees defaulted on $62 million in travel charges in 2001. The racket went like this: After charging travel, they were reimbursed by the department. But, rather than paying their bills, they just pocketed the money.

Fortune Magazine v the Flint Journal
   One could easily ask if the two publications were writing about the same area with the following quotes on Flint Township: Journal: It “could become the next Flint, complete with empty storefronts, a high crime rate, and flight of upper middle class residents.”
   Fortune: “a bustling commercial center sprawling just west of Flint’s city limits.”
   What do you think?

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Association News and Events by Laura

   The Spring Parade of Homes will open on schedule Saturday, May 11th and run through Sunday, May 26. As mentioned in previous newsletters, 42 homes will be on display (31 single family and 11 condos).
   The Builders participating in this Spring’s event are (in the order of Parade map numbering): Homes by Design; Swank Builders Inc.; Pine Hollow Custom Homes LLC; Little Prince Properties; Grand View Homes; David Keene-Builder; Sharp Homes Inc.; Symphony Homes LLC; Marathon Building and Development; Talon Homes-Pines of Grand Blanc; Pinkelman Custom Homes; Westminster Abbey Homes (2 models), Wake-Pratt Construction Co.; C & L Homes; Lausman Homes; Minto Brothers Construction; Lexington Properties LLC; Future Homes Inc.; Berry Custom Homes (2 models); HRC Building Company (2 models); Myers Building Company; American Associates Realtors-Builders (2 models); Riske Custom Homes (2 models); Vantage Homes Inc.; Valley Ridge Construction; Woodside Builders; Creekwood Homes Inc. (2 models); Pratt Builders Inc.; Del Pratt Builder Inc.; J.M. Developments; Dominic DiCicco Company; Morris Developers LLC; The Fireside Home Company; Tom Atwell Homes and Realty, Inc.; and Rajala Homes Inc.
The homes are open on Wednesdays, Thursdays and Fridays 5:00 p.m. to 8:00 p.m., and Saturday and Sunday hours are noon until 6:00 p.m.
This is our “Silver Anniversary” of the Spring Parade of Homes and we invite all of our members to take the tour and take pride in the quality that has made the “Flint” Parade of Homes the best in southeastern Michigan.

   Housing Quarterly magazine will be in the mail on May 6th. We at Association office are extremely proud of this 96 page issue due to the fact that for the first time ever, the total composition of the magazine (editorial and Parade pages) was done strictly in the Association Office. Members will also notice that there are more color pages and interesting new types of articles.
   We thank all of our HQ advertisers for their support in making this publication (and future issues of Housing Quarterly) possible.

   The Association Directory will be in your mailbox late next week. All current members are listed under the “Builder” or “Associate” section. The “Classified Section” lists those who responded to the “Directory Classified Form”.
   If you find that you aren’t listed in the “Classified Section” of the book, it’s because you did not reply to the Directory form that was sent to you (with highlighted deadline due date). AssociationWebsite listings and links have also been updated. Call Tracey if you have any questions regarding the Directory or Website at 810-603-2200 (9:15 to 3:15 p.m.).

   BAMF’s Annual Golf Outing will be held on Tuesday, August 6, 2002, at Copper Ridge in Davison. The format will remain the same (just a different location). Entry price is $100.00 per person (includes, golf, cart, lunch & dinner). Hole Sponsorships will also be available at same price as last year ... $100.00 if sponsor supplies the prize; $150.00 if we purchase the prize for the sponsor.
   To be fair to all members, we ask that you do not call the office with reservations until, Monday, June 3rd.
   If you are unable to join us that day for golf, members are still welcome to join us for dinner (around 5:00 p.m) at only $30.00 per person (includes entry for prize drawings that evening).
   Call the Association Office if you have questions about any of these Association Events (810) 603-2200.

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Economic Update: There’s a reason mortgage rates are down

   In the March 20th column we noted that long term interest rates soared more than half a point in twelve trading days from late February to the middle of March, followed by a media “barrage” about mortgage rates were on their way upward. Then, when the Federal Reserve changed its bias from guarding against weakness to “neutral,” it was almost considered corroboration for the media barrage.
   Despite strong concerns regarding the impact of higher mortgage rates on housing, we expressed little concern about the impact of the Fed’s change in “bias,” because neither “bonds or mortgage rates reacted to Federal Reserve action over the previous 22 months, so why should they start now?” And, since mid-March, mortgage rates have actually fallen back below 7%, from nearly 7.25%.
   Why? Well, the truth is, the bond market pays less attention to the Fed than the rest of us and, it really hasn’t bought into the rebirth of economic growth. Furthermore, with the rest of the world in turmoil, so much foreign investment continues to pour into American markets, it helps keep rates in line.
   So, as we’ve often said, the bond market will lead the Fed when it comes to raising rates, and Federal Reserve action will continue to have little, if any, impact on market driven interest rates.

Economic Notes:
   Adding credence to bond market direction was the report this morning that orders for Durable Goods (like computers, cars, appliances) surprisingly fell 0.6% in March. And, when defense items are removed, the decline was 1.2%. The report led to even lower yields for government bonds ... The nation’s unemployment rate rose to 5.7% last month, despite an increase of 58,000 jobs on U.S. business payrolls. Of course, employment is a lagging indicator of the economy’s strength, and the fact that a significant number of jobs created offsets the impact of the jobless rise.

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Housing Industry Update

This (Thursday) afternoon Michigan’s House is expected to vote on legislation to raise the minimum size of a home requiring an architect’s seal to 5,000 square feet, while redefining “habitable space” to end the discrepancy between the building and occupational codes. This issue has been on the local priority list since 1990, but has never received a “floor vote.” Though there’s cause for optimism, we’ve been close before and the rug was pulled out. So, call the office if your interested in the outcome, or look for a full report in the next issue

   We’ve tentatively set Thursday, May 16, at 3:00 p.m. for a focus/brainstorming session regarding the future direction for the land development council. If you wish to be involved, let us know if that date and time are all right. Otherwise, look for complete details in the next two Veritas issues.

1st Quarter Starts Continue at record level

   Not that there haven’t been a number of positive signs for the economy during the early part of ‘02, but optimism has to be buoyed by the year’s obvious jump start pertaining to housing industry activity. Coming off a year when housing kept the nation’s economy out of recession, setting new records for sales of new and existing homes, along with near record single family starts, housing’s health would assure the rebound evident in ‘01’s fourth quarter will continue well into this year.
   However, as fixed mortgage rates began climbing at the end of last year, then surged again in March, there was concern that the industry could lose its momentum.
   Well, the first solid indication came when the Commerce Department presented its construction activity report for March showing, despite slowing slightly for the month, the rate of first quarter single family housing starts was nearly 8% above the rate for last year’s January through March period. Furthermore, total new housing starts (including condos and apartments) hit a level of 1.72 million units, up 5.5% from last year’s first quarter.
   The first quarter’s solid housing data came as little surprise to builders, who had been indicating a strong sense of optimism since early January, as indicated in the National Association of Home Builders monthly Housing Market Index (HMI). The HMI is derived from interviews with builders to measure their sentiment about the state of the home building industry in regard to current sales condtions and model traffic from prospective buyers, along with sales expectations over the following six months. Any HMI reading above 50 means more builders are optimistic than pessimistic.
   Throughout the past two years the HMI remained in the range of the mid 50s to low 60s, except for last fall as it fell into the 40s during the aftermath of 9/11. However, by year’s end the rebound in sentiment was evident as the index rebounded to 60 during January, and remained their in March and April.

Realtors Forecast Record Sales in '02

   Last year, the National Association of Realtors’ Chief Economist, David Lereah, remained cautious. Though it seemed evident to Veritas that existing homes would set a new record for sales all the way back in July, Lereah never suggested the possibility until January of ‘02, just two weeks prior to the NAR’s release of December home sales data. But this year is different.
In a press release on April 9th, Mr. Lereah said the organization expects sales to hit a new record level of 5.31 million, slightly above 2001’s record of just under 5.3.
   Lereah’s optimism is justified, merely from the first 2 months’ data showing sales running at a near 6 million unit rate. And, although the March numbers won’t be released until April 25, we suspect he saw preliminary data prior to the April 9th proclamation.
   Regarding new homes, he expects a 4.4% decline in sales from ‘01’s record level of 909,000.

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