Veritas

From an 8,000 square foot mansion in north Oakland County to a 1,200 square foot ranch in eastern Genesee, the 2001 edition of the Spring Parade of Homes presents the most complete showcase of diverse new housing opportunities available locally since it premiered as an annual event in 1978. And from localities like Clarkston and Tyrone Township just south of the Genesee County line, to Clio near the county’s northern border, the ‘01 event covers the vastly expanded reach of the Greater Flint area that’s been evident throughout the past decade.

There’s little question the momentum making housing development the Flint area’s “growth industry” of the 1990s is continuing in the new millenium. As tens of thousands of southeast Michigan residents commute across county lines on a daily basis, the growth in local housing activity has been closely related to the Flint area’s proximity to interstate access. And, the explosion in real estate values has made the area an attractive site for housing investment, luring families from across the region.

We’ve often stated, the Parades mirror current local housing activity in nearly every way, from the scope of the event, to the range of new housing opportunities, to the strength of the market in each particular price range, to the venue of new housing activity. Well, this Spring’s Parade is no exception as it reflects the image of an industry with strength in all market segments, along with a community that’s growing in all directions.

The event runs through May 27. Check it out and you’ll surely take pride in your industry.

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Business News & Issues

U.S. Auto Sales Fall: Double Digit Declines
   In April 23rd’s issue we noted a couple of reports suggesting that declining dealer inventories would soon be leading to a manufacturing recovery. The gist of the articles referred to told of the auto industry gearing up to get idled plants rolling again.
   However, on May first came the news that auto sales, which had been relatively strong for the first quarter, stalled in April. On May 1st, all three U.S. automakers, Ford, General Motors, and Chrysler’s half of Daimler, reported double digit sales declines. And, Ford added that it was cutting second quarter production to deal with the sales slowdown.
   G.M., on the other hand, was cautiously optimistic, despite its 16% sales decline, and anticipates increasing second quarter production to 1.3 million units.
   While total sales for cars and trucks slipped dramatically for the month, full sized SUV sales rose 12 for the worlds largest manufacturing company.
   Some foreign companies, however, experienced a solid April, like American Honda which had its 10th best sales month in American history, and BMW of North America with a 30% jump in sales.

Estate Taxes and the Family Farm
   Like they do with so many other issues, politicians love to invoke the plight of the family farm when focusing on the need to end the Estate Tax or, as they frequently call it, the “Death tax. Now, a new government study inds that, in reality, the estate tax hits very few farmers.
   In ‘98 there were just 1,219 farms big enough that the heirs owed inheritance taxes, according to a Department of Agriculture analysis. The total represented 4% of the 31,161 farm estates that were settled that year.
   What the study found is that “current deductions and exemptions encourage farmers to hold land until death and allow most farm estates—except for the very largest—to be transferred free of tax.” In reality, roughly $2.6 million of a farms value can be exempt from the tax. The study also suggests the estate tax may benefit young farmers because it encourages old farmers to sell off their land while still alive. Noting that a big barrier to young farmers is the lack of affordable land, the study said that higher estate tax exemptions enacted in 1997 may reduce the opportunities for others to enter farming as it encourages “older farmers to retain ownership until death.” So, as always, what’s created politically to preserve the “farm” ultimately works in the opposite direction.

And these are the people setting market interest rates
If you wonder why mortgage rates fluctuate wildly for no apparent reason, all you have to do is look at last Friday’s bond market. Early that morning came the news that job creation came to a halt in April, and the unemployment rate jumped to 4.5%. Markets quickly responded as stocks fell while bonds rose, sending yields (rates) lower. Ten year treasury yields fell from 5.21% to 5.05% by 9:45 a.m., but a funny thing happened ... stocks began to rise. So, bond traders got nervous, and yields followed ... rising back to 5.19% by 1 p.m., as the Dow Jones average was up 100 points at the same hour. And, of course, ten year mortgage rates followed.

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Term limits + new salary = pension opportunity

   Last summer I was talking with an old “friend” who spent 18 years in the state legislature. The conversation turned to term limits and I joked that this new group of house members is so pathetic, I’d even support him for the four years of eligibility he has remaining (retired in ‘94), even though we normally opposed him.
   Well, even though this former Rep lives out of state, the idea no longer seems so far fetched. Why? Because the legislature received a roughly $24,000 pay increase, creating new incentives for former legislators to return.
   This past winter, a couple of lobbyists noted rumors that Congressmen Barcia, a former State Legislator, was considering a return to Michigan in attempt to reclaim his former Senate seat. Although it wasn’t said to be the deciding factor, the point was made that his state pension would be enhanced dramatically by returning.
   Last Friday I was asked about one of this industry’s long time friends who, apparently, let it be known that he’s also considering a return to the House after a sixteen year absence.
   What seems to be going on here may, ultimately, prove beneficial to Michigan. Now that we’ve experienced the problems associated with term limits, there may well be a proverbial “light at the end of the tunnel,” in the return of former legislators, too old for political agendas and secure enough to be free from having to play the political game for reelection purposes. They’re individuals who can gain all they need by being elected to just one term. It’s called pension enhancement and it may be coming to a House District near you.
   Since pensions are based on the final salary a legislator receives prior to retirement, and salaries are up some $40,000 over the ‘80s, one term can have an incredible impact on the security of these individuals. This may sound cynical, but bringing back some of the “pros,” at any cost, would be just as beneficial to the state’s future ... and, it may take a retiree off the local streets.

Barry

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Taxation and Finance ---- Deductibility of Computer Software

   Computer systems are virtually indispensable in a wide variety of businesses, including building contractors. An increasingly expensive component of these systems is the software used for job costing and general accounting functions. Following are various ways you may be able to write off software expenses you incur in your business.
   If the software is included in the purchase price of the computer itself, it generally does not have to be broken out separately. The entire cost of the machine and the software it comes with may be depreciated over 5 years, or expensed in full in one year, subject to the annual limit, generally $24,000 (in 2001 and ‘02, with a permanent limit of $25,000 starting in 2003) for all expensed property you begin to use in your business that year. However, if the price is stated separately, the software component will probably come within the rules that allow a three year write-off.
   If you bought additional software, it is fully deductible in the year of purchase if it has a useful life of one year or less. This may apply, for example, to software that is upgraded annually or for which a new edition must be issued each year for the user to stay current.
   If the additional software you have purchased has a useful life longer than one year, it can be depreciated over 3 years, if it is bought “off the shelf,” i.e. is for sale to the general public and is not substantially modified (customized) for you. Even if the software isn’t “off the shelf” because it has been designed or specifically modified for you, or your have an exclusive license to use it, it can be written off over three years if it was bought for use in your regular business, and was not obtained as part of acquiring another business. However, if the software is customized and was received in a business acquisition, the cost of the software must be amortized over 15 years.
   Note that “software,” under these rules, generally does not include databases, unless the databases in the public domain and is incidental to the operation of deductible computer software.
   If instead of buying “off the shelf” or customized software, a business writes or develops its own software internally, the research and development costs can be written off currently, or can be written off over five years, or any shorter useful life, that can be clearly established. This is true whether or not the software is patented or copyrighted, and whether or not you also sell it to others. But if you choose to fully deduct these costs, generally you must do so consistently each year.
   Also, it is always a good idea to consult with your business accountant prior to seeing how best to handle your past, as well as present software purchases. R, P & T

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Michigan Legislative Update - One code a reality; Enforcement bill passes

   It’s Official! The new single state construction code passed through the promulgation process, and will officially go into effect on July 31st.
   The content of the Michigan Residential Code (MRC) has not deterred from the expectations MAHB’s been reporting for the past few months: Stair geometry remains at 8 1/4 inch risers; 9 inch treads; If basements have “habitable” space or sleeping areas, emergency egress will be required; Sprinklers will not be permitted in lieu of egress from these areas.
The new MRC books are expected to available on July 1st, and we’ll try to make copies available shortly thereafter.
   MAHB has planned a number of code classes, and BAMF is still expecting to hold a joint session with the Genesee Co. Building Officials Association (GCBOA). We’ll expect to be announcing plans in the May 22 issue of Veritas.

   A month ago we wrote that S.B. 351, the bill that will dramatically alter the enforcement process in dealing with claims of poor “workmanship,” passed the senate and “Flint area Senator John Cherry played a critical role in keeping it on track.” Well, although we printed a retraction two weeks ago, noting it only came out of committee, the previous article was “pro-phetic,” as the Senate passed the bill 37-0 and Cherry’s role in keeping it on track was, in fact, “critical.”
   The bill’s now in the house were committee referral will be known later this week.
   Among other items, 351 will require the state to presume a contractor’s innocence, establish performance guidelines, and assure the builder was given reasonable time to fix any disputed problem.

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

  McCain Sports’ Betting Bill Threatens’ American Way
   Could you imagine having to look to Monte Carlo to discover the spread on next November’s Michigan v Ohio State game? That’s exactly what could happen if Senator John McCain has his way!
   With campaign finance behind him (in the senate at least) the Arizona Republican, and would-be president, turned his focus toward the elimination of betting on college sports (legal only in Nevada), and recently pushed a bill though his Commerce Committee which would accomplish just that!
   Proponents of McCain’s legislation say gambling is threatening the “integrity” of college sports. But McCain’s legislation will threaten the integrity of America, if it becomes law.
   Why do we say that? Because sports’ fans across the nation look to Vegas to make betting fair. After all, it’s the sanctity of professional “odds makers” that set the spreads that, even, illegal gamblers use. Without their credibility on the line each week, betting on football would be as much of a gamble as, for example, investing in internet stocks.
   If college sports betting is outlawed, Americans will be forced to accept the edicts of “back alley” odds makers or worse; foreign based operatives.
   Could you imagine some idiot who believes Rugby is “football” setting the point spread On Florida v. Florida State? Or, what if Princesses Stephanie and Caroline become Queens of the Spread?
   Preserve America as we know it. Write Senators Levin and Stabenow and tell them to stop the McCain attack on the moral fabric of American society.

Business “Play” of 2000-01; Murdoch by a Landslide
   A few years back, when the Fox Network outbid CBS for National Football Conference TV rights, Rupert Murdoch, chairman of Fox’ parent News Corp., had ulterior motives in mind. He was building an afternoon audience to lead into his Sunday night Prime Time schedule, highlighted by the “Simpsons” and “X-Files.”
   Last year, when Fox joined NBC with an astronomical bid for NASCAR’s Winston Cup series (Fox would run the first half of the season, Feb. through July), the deal made sense for both: Fox would maintain a strong Sunday lead-in after the Super Bowl, and NBC, who lost its NFL rights to CBS, would regain a Sunday afternoon audience for the late summer and fall seasons. But, this spring, it became evident Fox had more to gain: access for its cable network Fx. Many of the nation’s biggest cable providers (including Comcast) ignored News Corp’s cable network. So, rather than putting Winston Cup exclusively on its primary network, Fox scheduled four races for its cable affiliate, then told millions of NASCAR fanatics to call their cable companies and demand Fx, unless they were willing to miss a Winston Cup event. Since cable companies have the impending threat of Satellite competition, they felt compelled to add the network to their lineup.
   It’s really a lot like lobbying congress ... Too bad NAHB doesn’t have as strong a hold on its members.

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Association News and Events

The Parade of Homes may not kick off until Saturday, but the Association has already had a run on Housing Quarterly magazines. Citizens began coming to the office to see if the magazine was in more than a week prior to publication. And, we gave out more than 100 just yesterday and today.
In fact, the calls regarding parade information seemed stronger than ever during April, and it appears that just the two TV ads that ran Monday evening generated more than 300 hits on the website, www.bamfhome.com.

Beginning tomorrow, web hits should increase even more. Along with the traditional advertising we’ve historically used to promote the parade (TV, radio, billboards, Journal and HQ), we’ve got a banner on TV 12’s website at www.abc12.com.

If you’d like to attend the annual MAHB summer convention, July 26 thru 29 at Mackinaw Island’s Grand Hotel, make sure you send in your hotel reservation form early. You’ll have full registration information in the next issue of “Michigan Builder.”
Remember, this convention is for the MAHB membership as a whole, and is not exclusively for the board of directors.

Gas Prices Got You Down?
Although just a few local members are taking advantage of the program, the MAHB savings of 3 cents per gallon at Speedway stations is paying great dividends for those who are. In one month, the nine BAMF participants saved over $1,400. Call the office for details.

Economic Update: GDP’s growing, and so are jobless lines

   It’s been a strange couple of weeks for the economy since the April 23rd issue. We found that first quarter economic growth was substantially stronger than anticipated, but that April employment figures appear recessionary. We discovered that homes (new and existing) sold at record, or near record, levels, put the confidence of consumers reassumed its downward direction. And we saw stock prices jump on the unemployment news, while market driven interest rates rose as bond prices declined on the same news.
   But, perhaps most perplexing, and having the deepest impact on America’s economic psyche, is the fact that oil is selling at a relatively moderate $28 per barrel, while gasoline is at a record $2 per gallon. Add the fact that productivity declined for the first time in six years, while unit labor costs soared at their highest rate in four years, and there’s likely to be considerable apprehension awaiting the April inflation reports due May 11th and 15th.
   Here’s the problem. Stock prices rose in response to the unemployment data, under the belief it would insure an additional Federal Reserve cut. However, a price level report showing the effects of higher energy and labor costs would put a damper on the Fed’s likelihood to act, while it would likely spook bond market investors. Fed inaction, at a time the markets have built in an expectation of a cut would send a message that concerns about inflation are real ... and, markets will likely respond negatively.
   If this sounds like the first time this column has shown concern about the expansion continuing, it is.

Q1 GDP Surges
The economy’s strength in the first quarter surprised many analysts as the nation’s Gross Domestic Product grew 2%, according to the first Commerce Department estimate, double the previous quarter’s rate. It really shouldn’t have been a surprise, however, as consumer spending remained strong, while even manufacturing showed some semblance of life. What will be interesting under further analysis is, what percent of growth related directly to housing’s record sales activity? It may be shown that the industry was responsible for as much as 30%.

Labor Costs and Productivity
At the end of April we found the Labor Department’s Employment Cost Index rose 1.1% in the first quarter, as wages increased by 1%, and benefits were up 1.3%. Then, this morning (Tuesday) we learned that 1st quarter productivity fell 0.1%, the first decline since 1995, and that unit labor costs rose at a 5.2% rate.
It seems like every analyst has a take on the productivity data, but its quite evident that, as output declines, fixed labor costs become a greater percent of each unit produced, so it only becomes a matter of time until the productivity gains during periods of high output begin to dissipate.

Unemployment Rate Rises
The jobless rate jumping to a 2 1/2 year high of 4.5% wasn’t the “big story” in the jobs report. Most analysts expected a rise to 4.4, and even at 4.5%, the rate is historically low. The shock came in the actual job numbers which showed businesses cut a “stunning” 223,000 jobs in April, when most expected an addition of 25,000 jobs. And, for the first time ever, the service sector lost jobs, and the numbers were big: 121,000. Also, despite evidence that manufacturing was beginning to show life, that sector experienced a drop of another 104,000, the ninth consecutive month of losses.

Notes: Although manufacturing continued to decline at a slower rate for the third straight month according to the National Association of Purchasing Management (NAPM), the organization reported that manufacturing execs are “more pessimistic” than at any time in the past 4 years. Today, 38% of its members are pessimistic for the 12-month outlook, up from just 5% in last December’s survey.

Housing Industry Update

   New homes sold at an all time record pace in March, on top of a strong upward revision of February’s data. After revising the previous month’s sales from 911 to 980 thousand, the Commerce Department said new, single family, homes sold at a seasonally adjusted rate of 1,021,000 units for the month, a rise of 4.2 percent.
   Sales rose in three of the four regions of the nation, led by a 39% rise in the Northeast and a 15% rise in the Midwest. The South posted an 8.9% gain, while the West declined 17.2%.
   For the first quarter, sales ran at a rate of 990,000, nearly 7% above the first quarter of 2000, a year new homes sold at their second highest level on record.

   “Phenomenal” is the term the National Association of Realtors’ chief economist used in announcing the rate of existing home sales for March, which rose 4.8% to a seasonally adjusted rate of 5.44 million, just shy of the all time record pace of 5.45 million in June, 1999.
   Although the Realtors had expected a slight decline from the previous month, the “phenomenal” sales were hardly a major surprise, as the organization has been continuously raising their sales’ expectations all year (see next note).
   March’s median price of $143,500 is up 6.5% from last March when it came in at $134,700. Of course, the average mortgage rate is down approximately a point and a quarter, meaning the average monthly financing cost on an 80% mortgage is around $50 lower today.

Somehow we missed this, but on April 10th, the Realtors announced another increase in their projections for the year, noting that despite “weakness in other sectors of the economy, existing home sales will rise 1.6% for theyear, to a total of 5.19 million units. Furthermore, they expect new home sales to hit 921,000.
“This means we now expect 2001 to be the second-best year on record for existing homes, and it’ll set a record for new-home sales,” said the NAR’s Chief Economist David Lereah. Interestingly enough, the rise in forecast preceded the March sales data by more than two weeks.

Back in February, when we received December’s housing report from the Commerce Department, we said the final report would probably show 52.3 thousand housing permits for Michigan when the final data is tabulated (the preliminary was just under 51,000). Our forecast was based on the average rates we developed for each month at the end of last year.
Well, last week they finally entered the year end numbers on the Department website, and Michigan had 52,489 authorizations, a decline of approximately 3.3% from each of the previous two years. Single family activity came in at 42,960 units, a 5.4% decline from 1999.

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