May 13, 2002

Inside Veritas -
Article 1 - Farm Bill Legacy: As Always, Policy Comes in Second to Politics
Article 2 - Business News & Issues
Article 3 - Court Strikes Rogue Law
Article 4 - Taxation and Finance - Home Office Deduction Rules
Article 5 - Local Existing "Prices" Soar
Association News Update
Economic Update - Growth Up; Jobs Down; Markets Schizoid
BS: Still about Nothing in particular

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Farm Bill Legacy: As Always, Policy Comes in Second to Politics

   When the Senate was debating last year’s $5.5 billion Farm bailout, a well known Senator from New York rationalized her support because keeping farms in operation would help stop sprawl. After all, if your base of support comes from urban liberals, throwing billions at Midwest farmers and western agriculture giants needs some justification to the folks back home.
   Unfortunately, Madam Clinton was not alone in August, as the Wall Street Journal noted that supporters of the bailout were selling conservation programs as “helping the environment and slowing sprawl.”
   For years the anti-sprawl activists have whined about the loss of subsidized farm land by being converted to productive development. And, each year since the passage of the 1996 “Freedom to Farm Act,” Democrats and Republicans consistently found ways to to keep the cash from the federal treasury flowing. But now, in the name of politics, they’ve reached new depths with an election year bill that will boost spending by 70% at a cost of $180 billion, while clearly reversing the market oriented policy of ‘96 that was supposed to “wean” farmers from government subsidies.
   On a 280-141 vote last Thursday, the House passed the bill (which is expected to slide by the Senate this week) that provides new payments for everything from “milk and lentils to honey and wool.” What’s interesting is, prior to passage, the President noted support, stating that, although it wasn’t everything he wanted, it would “help insure the long-term viability of our farm economy.”
   The administration’s support is “interesting” because it’s in conflict with last Fall’s policy statement noting that subsidies stimulate excess farm production, inflate land rents and benefit a relatively small number of big farms. The current bill will assure the continuance of the problems for another decade.
   And, what’s equally “interest-ing” about the administration’s position is the trade perspective. At a time the President is lauding the “jobs” potential of free trade, these subsidies are clearly anti-trade. The Wall Street Journal reminds us that “only last year, U.S. Trade Representative Zoellick convinced Europeans to put their bloated farm subsidies on the table in trade talks. But this farm bill moves America close to French style subsidies.”
   Or, as real conservative John Boehner (R-OH) said, “we did it with steel, we did it with lumber, and now we’re turning to our allies and saying we’re doing it again with farm.” (The European Union is considering a challenge before the WTO).
   Of course, this bill has nothing to due with economics, or even Farm Policy. It’s geared to November’s elections, and both parties’ hopes of controlling the Senate in ‘03, with the farm states of South Dakota, Iowa and Minnesota appearing to be the decisive venues for majority rule. So, it was hardly a surprise when the new bill included an ethanol mandate that would triple the use of the corn based fuel by 2012 (which would add an estimated $8.5 billion to gas prices annually.
   So, at a time we’ve returned to deficit spending, Congress believes it’s also time to return to the kind of political irresponsibility that brought about the deficits in the first place.

Business News & Issues

G.M. Raises Market Share: But who lost?

   The world’s largest auto-maker had a 28.9% share of the U.S. market last month, a long way from its target, but substantially better than last April’s 26.4%. In fact, GM’s numbers looked good with sales up 12.5% from April ‘01. At the same time, Chrysler’s sales were up 3.2% from a year ago, though it’s share remained at 15.1%.
   Then there’s Ford: off 7.5%, with just 21.2% market share (Ford Jr’s. commercials must not resonate with the car buying public).
   For the first 4 months of the year, GM is the only domestic company with better sales figures than during ‘01. What’s troubling to the U.S. auto industry is the “Big 3’s” loss of market share that declined by 2.4%, representing a 3.7% fall from ‘01’s level of 64.3%.
   All other countries’ nameplates showed an increase, with Japan’s being up 1.1%, while Korean and European shares were each of 0.6%.

Toyota v Chrysler

Several months ago we suggested that, eventually, Chry-sler could be overtaken by Toyota as the nation’s #3 car company. Well, a year ago the spread of market share differential between the 2 was 5.7%; in ‘02 it’s fallen to 4.8%, a narrowing represented by less than 65,000 sales per month.
Perhaps the best news out of the auto industry reports was the statement that GM was raising its second quarter production forecast to 50,000 vehicles above its previous expectations, while Chrysler said 14 of 17 assembly plants will run, at least, some overtime by the end of June.

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Court Strikes Rogue Law

  Once again, Michigan’s municipalities were put in their place by the court system. This time, it’s a case we’ve been following for nearly four years, because it puts to rest another question as to whether or not a city can regulate beyond the limits set in the state’s regulatory capacity.
   In 1997, the city of Marquette passed an ordinance to prohibit smoking in all city restaurants. However, prior to the ordinance going into effect, it was challenged by six restaurant owners and the Michigan Restaurant Association.
   The ordinance was ruled illegal under state law by the Circuit Court, a ruling that was upheld by the Court of Appeals. But Marquette took the case to the State Supreme Court.
   Well, as one would expect of this Supreme Court, there was no desire to allow a municipality to trample on individual rights. The court “wasn’t persuaded” that the city’s argument should be given the time of day.
   Too often, municipalities believe they’re above the law, and even the Constitution, as their legal advisors put local pressures above legal limitations. We’d suggest municipal attorneys begin taking note of Michigan Supreme Court decisions.

Barry

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Taxation and Finance ---- Home Office Deduction Rules

   If you work out of your home you may qualify for some valuable federal income tax deductions. You may be able to deduct part of your home's normal operating expenses for items such as utilities and insurance, you may be able to claim write-offs for depreciation or lease payments, depending on whether you own or rent, and you may even get some extra business car deductions. The tax-saving opportunities available to you will depend not only on the type of work you do at home, but where in the home you perform it.
   You won't get any home-office-type deductions unless you regularly and exclusively use a room or specific area in your home or apartment for business. So, for example, you don't get deductions if you work out of a room that your family also uses as a den. In addition, generally the office must either be the principal place of your business, or a place where you meet or deal with clients or customers.
   If you regularly meet with clients in the home, you probably qualify for home-office deductions, but you may benefit from help on how best to allocate "shared" personal/ business expenses.
   If you don't meet with clients in your home office, qualifying for home office deductions usually still is no problem if your home is your only business location. However, the rules are more complicated if some aspects of your business are performed in the home, and others are performed outside the home. In this situation, there is a question as to whether or not the office is your principal place of business. Often, there is a fine line between qualifying and not qualifying. And the rules seem to change often. For example, starting in 1999, the home office deduction has been allowed for those whose home office is the only place in which substantial administrative or management activities take place.
   If you're an employee who regularly comes home from the office with a loaded briefcase, catching up on paperwork at home won't do you any tax good. Employees qualify for home-office deductions only if they work at home for the convenience of their employer. So there are no deductions if you decide on your own to do office work during evenings and weekends, or work a couple of days a week at home because you'll get more done. And even if your employer requires you to work at home, you don't get any extra deductions unless you also get by the home-office hurdles. One drawback to the home office deduction is the impact it may have upon the eventual sale of your home. If you have taken depreciation deductions on the part of your home you use as an office, that amount will not qualify for the tax-exemption you otherwise get on the gain from the sale of your house. And if 100% of your home did not qualify as your principal residence for at least two of the five years preceding the sale, you will have to pay capital gains tax on the business portion of your house.

R, P & T

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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).

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

Drug Campaign? What about Iraqi Oil?

   Not that it’s surprising when Federal Government activities project signs of idiocy (see the report on the new farm subsidy bill in this issue), but the current anti drug campaign may have brought intellectual standards to a new low. In an obvious attempt to capitalize on 9/11, the ads focus on the proceeds from illegal drug traffic; how they finance terrorism and general criminal behavior.
   The rationale behind the campaign is to let drug users know that, even if you believe drug use is a personal decision, its sale is hurting victims of terror and police killed by gangs that are financed by drug trafficing.
   What’s wrong with this concept? Well, the “terrorism” impact would be removed immediately if drugs were legalized and their proceeds controlled ... but, here’s the catch.
   In last Wednesday’s edition of the Tri-County Times, publisher Rick Rockman wrote the following: “Last year, the U.S. imported 267 million barrels of oil from Iraq, which meant we paid Saddam Hussein over $6.58 billion. Saddam has paid $25,000 to the families of each Palestinian suicide bomber. In other words, we’re giving Hussein the money to reward those who commit suicide and bomb innocent people.”
   Perhaps environmentalists will take note. We can envision a “soccer mom” standing in front of her Suburban at a gas pump stating: “I just paid for two vials of anthrax.” Then comes the “yuppie” with his Porsche at the same pump noting: “I helped arrange a plutonium purchase.” Of course, some of us would prefer a Senator, on the heels of voting against drilling on the Alaskan tundra, stating “I just supported Saddam’s quest for weapons of mass destruction.”

Flint; Again in the National "Limelight?"

vLast fall, after analyzing elections results, we wrote that Michigan appears to be a “New England” state, separated by Ohio and Pennsylvania. Now, we find that may not be true.
Just two weeks after “Fortune” magazine gave the nation a “different view of ‘Flint,’” a Wall Street Journal feature suggests we’ve maintained our Arkansas heritage, as its “Me & My Car” column focused on the Audi TT (“a far out pocket rocket that hollers ‘mid-life crisis’”). The column reported that, while the TT sells best in political sister Hartford (CT), it sells “worst” in Flint and its cultural sister, Little Rock.

Would the Freep rather bring back the KKK?

In a typical May 3rd article, the Free Press reporter turned the focus of a story on a troubled Howell teen (who set 5 fires in his High School) to the impact of sprawl on fragile teen-aged psyches in the once rural community where “swank subdivisions sprout like fast growing corn.” It also quoted a county official noting “the TruGreen guy has replaced the manure spreader.”
It makes one wonder if the Free Press longs for the days when Howell’s main attraction was a “manure spreader” by the name of Robert Miles, who just happened to be the “Grand Dragon” of the Michigan Klan?

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Association News and Events by Laura

   With the Spring Parade starting this weekend, the BAMF Office has been overwhelmed by county (& non-county) residents anxious for the event to open. Our website hits have been tremendous and the phone just doesn’t stop. It once again looks like another “banner” Spring Parade of Homes.
   Remember the Parade runs from May 11th through May 26th. The hours are 5:00 p.m. until 8:00 p.m. (Wednesday, Thursday and Fridays); noon until 6:00 p.m. on Saturday and Sunday. We hope you’re able to take the tour !

   Got a prospective new member? We have informative Membership Packets available at the Association Office. The packets include a membership application, newsletter, and literature on insurance programs, discount plans for long distance, gasoline, and other products.
   Just give us a call, and we will send a packet out to your prospect (with your name listed as sponsor on the application) or stop by and pick up a few packets to have on hand at your office.

   The Regional Lunch Meetings will begin again this summer. As many of you remember from last year, the Regional Meetings take place in different areas of the county and are held at various locations.
   Since these meetings are at a smaller scale than the regular General Membership Meetings, they are usually held at restaurants with small banquet areas.
   The meetings are geared to those who do business (or build) in a certain region of the county and the guests invited are those who govern (i.e. Twp Supervisors, City Mayors, and Building Officials) that region.
   At press time, we are putting together a meeting for June and the featured region will be Grand Blanc. Please check out the next issue of Veritas for the details.

Construction on BAMF’s “Habitat” for Humanity house is set to begin next week, according to the construction schedule provided by President Steve Edwards. Construction of the foundation for the 1,055 square foot ranch on Nichols (3 blocks north of the Township Hall, off Saginaw Rd. in Grand Blanc) is scheduled for the week of May 18th through 24th, with framing and roofing taking place during the first two weeks of June.
The Habitat committee has set team leaders for each section of the house, and additional categories incidental to the process. For the sections to be constructed by the middle of June, they include:

Site Plan and Permits
Keith Kirby and Vic Lukasavitz
Excavation, Foundation & Steel
Steve Lissner
Framing/Roofing Materials & Labor
Doug Graham Jr.
Windows & Doors
Doug Graham & Amanda Richardson
Monetary Donations
Larry Corbett and Vic Lukasavitz

The house is scheduled for completion in mid-August and will appear in the Fall “Parade of Homes” October 5th through 20th. We’ll be printing updates on the home’s construction, along with team leaders, in each issue of Veritas through completion. If you wish to get involved, call any of the "team leaders," or the BAMF Office.

Economic Update: Growth Up; Jobs Down; Markets Schizoid

  Outside of the Federal Reserve and the economists who get paid to follow the leader, no one seems convinced the economy’s on track for solid growth. Despite a surge in 1st quarter economic growth, and the third consecutive month of manufacturing growth, the financial markets plummet and surge on daily news (and occasionally no news at all). So, when unemployment jumped to its highest rate in 8 years (6%), it had a stronger impact than the GDP announcement.
   However, one market that’s remained stable for the past month is U.S. Treasuries, and that’s been good for mortgage rates which, ironically, have headed lower since the Federal Reserve’s “bias” changed from guarding against weakness to neutral (however, yesterday’s bond prices fell dramatically, meaning rates could turn upward by next week).
   What’s surprising about the bond market is that it had little positive reaction to record productivity data released Tuesday. So it’s possible investors understood the hype wasn’t all it was cracked up to be.
GDP
   The Commerce Department’s first estimate of 1st quarter Gross Domestic Product suggests the economy grew at an annual rate of 5.8% through March, the strongest showing since the end of 1999. It was also the first time since early 2000 that the economy experienced growth above the 2% rate.
   It’s noteworthy that a primary factor in the quarter’s strength came from a slowdown in inventory reduction, reportedly adding 3.1 points to GDP. In recent issues we’ve noted that the anticipation of a manufacturing upturn stemmed from recent dramatic declines in business inventories, which had placed them near historic lows. So, it’s likely that inventory restocking isn’t as critical at the present time, and won’t have nearly the same impact on the 2nd quarter.
Manufacturing Index
   Although the rate of growth declined in the monthly index of the Institute of Supply Management, which measures the health of the manufacturing sector, April still represented the third consecutive period of growth (remember, February was the first positive reading since 2000). A reading above “50” suggests that manufacturing is expanding, and last month’s reading came in at 53.9, down from March’s 55.6. The decline basically means the recovery isn’t setting the world on fire and, coupled with the inventory data in the GDP report, may temper expectations for the immediate future.
Productivity
   The economy’s productivity rate soared at an 8.6% pace in the first quarter, which was its fastest in nearly 20 years. The importance of productivity was often stated during the ‘90s as its continued improvement allowed the economy to expand without a fueling wage cost inflation. Now, these latest productivity figures suggest the economy can grow at roughly a 4% rate without wages forcing prices higher. The old school of thought felt the sustainable rate was no higher than 2.5%.
Before total euphoria sets in, someone should remind the analysts that 1st quarter productivity boom was, partially, a result the manufacturing upturn last quarter, which took affect after the loss of more than a million manufacturing jobs. So with higher output from somewhat of a skeleton crew, the productivity rise shouldn’t have been a surprise, let alone reason to celebrate.

Housing Industry Update

   Two weeks ago we noted that a bill to raise the threshold for a mandated Architect’s Seal was expected to be voted on by the Michigan House. Well, the bill came to the floor that day, and the results were even better than expected. By a 98 to 1 margin the law, which would raise the threshold to 5,000 sq. feet, and give the occupational code the definition of habitable space that’s equivalent to that in the building code.
   All Flint area reps, except Jack Minore, supported the bill. Minore, who had been upset with the process of bringing the bill to the floor, attempted to refer it back to committee, passed on the final vote.
   The bill is now in Senate Regulatory Affairs, where Committee Chair Bill Schuette has assured us it will move to the full senate (Reg Affairs has held up previous ‘seal’ bills). The current bill is similar to a compromise Schuette attempted three years ago so, things look favorable for this issue that we’ve been heavily involved with since 1990. Also, we can expect support from Senate Democrats, as Minority Leader John Cherry’s been the legislative champion of the concept, introducing the ori-ginal bill to completely repeal the seal in ‘92, ‘93 and ‘95.

   The final ‘01 Census Bureau data for new housing activity hit the web last week, and we find that activity was stronger in the Flint area than they previously reported. “Flint’s” revised permit numbers took the local area up 1,129 from ‘00, a 48.6% rise.
   During the same period, total statewide activity was off 4.5%, or 2,350 units (nearly all of it due to a decline of 2,130 units in the traditional “Detroit” area.
   The census data provided on a monthly basis is normally quite accurate for Ann Arbor, Detroit, Grand Rapids, and Flint. However, it’s normally off by roughly 3% state wide, which usually reflects on the smaller metro-areas, along with the more rural regions of the state. So, we developed a monthly rate of activity (shown on page 4) which has proven to be quite accurate since its inception at the end of 2000.

“Coming off the highest two months on record, existing single family home sales declined in March, but remain well above historic norms,” said the National Association of Realtors April 25th release. The reference was to an 8.3% drop in the rate of sales (from Feb.), but the March rate of 5.4 million, beyond the record level of 5.3 million for all of 2001.
As we noted 2 weeks ago, the “Realtors” are expecting another record year, with total sales hitting the 5.31 million mark. The report also noted the median price rose 6.7% over the past year to $153,000.

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