June 3, 2003

Inside Veritas -
Article 1 - House Deflation: Economists haven’t figured it out yet
Article 2 - Business Briefs: Health and Welfare
Article 3 - Myron Orfield: U-M’s Second Coming of Ed Martin?
Article 4 - Taxation and Finance - ‘03 Tax Bill — Breaks for Individuals
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - Growth ; manufacturing; deficits
BS: Still about Nothing in particular
Housing Industry Update

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House Deflation: Economists haven’t figured it out yet

   By the end of May, fixed rate mortgages had fallen 3.3% in a three year period (8.6 to 5.3%), a 38% decline. During the 36 month period, the median price of existing homes rose 18.8%, while inflation was up 7.36%.
   To put these numbers in perspective, let’s look at the impact on monthly payments. An 80% mortgage on a median ($137,600) priced home in May ‘00 consumed roughly $850 per month. Last month, a similar loan on a median ($163,400) priced home took roughly $720. So, today’s buyer is spending 15% fewer dollars to finance a home worth 18.8% more.
   However, if we index for inflation, we find the median home price was up 10.6% ($152,200) in 2000 dollars. And, the cost of financing 80%, if indexed, is $670 per month ... meaning the monthly finance costs were actually 21% lower than in May of ‘00 in real dollars.
   The graphs below chart the growth in prices and decline in finance costs for months of May in the 21st Century (Note: the ‘03 median price is April’s). What becomes evident is that mortgage spending peaked 3 years ago, and buyers have been spending less, not more, despite the rise in prices, ever since.
   Even if we factor in property taxes (up roughly $40 per month), payments are down 9.8% (15.9% if adjusted for inflation) since ‘00. If home prices are a function of housing costs, and they historically have been, low interest rates likely have a similar impact on the housing market to “irrational exuberance's” impact on stock prices 4 years ago. If so, an "adjustment" may be in the offing.

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Business Briefs: Health and Welfare

   A few issues back, we wrote about possible relief from outrageous health care costs that could result from Federal Legislation that would allow “group-ing” of small companies. Last week, the Wall Street Journal featured the proposal, and it really peaked our interest since it was noted as an “association” plan, whose primary backer is the National Federation of Independent Business (NFIB).
   The article explains that the proposed legislation would allow “association health plans to escape burdensome state regulation in favor of lighter federal oversight.” It would allow businesses to band together across state lines and purchase policies through their associations.
   So, what’s really behind the proposal? $$$! It’s estimated that NFIB could earn revenue of $100 million annually by selling insurance to its members. And, it’s also a benefit that will increase “membership retention and growth.”
   Of course, NFIB isn’t alone. The article points to the National Restaurant Association and U.S. Chamber as potential beneficiaries of insurance windfalls (we’d presume NAHB) as well.
   So, who’s the opposition? As we’d expect, the leading opponent is Blue Cross/Blue Shield, which has the most to lose; along with consumer, labor and state regulator organizations. And, of course, Ted Kennedy.

   Even though President Bush had been determined in his requests that Congress pass tax relief in 2003, it's hard to believe that we’re already looking at a new tax law again -- the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA '03). Given the fact that two major tax reform laws passed in the last two years and Congressional Democrats and Republicans seemed miles apart on more tax cuts, a third tax cut appeared impossible. Although President Bush did not get his entire wish list, JGTRRA'03 provides approximately $350 billion in tax relief--amounting to the 3rd largest tax cut in history.
   Although the timing may have come as surprise, it is a pleasant surprise that will give you and your family more disposable income this year and give you a smaller bill when tax time rolls around next year.
   As an individual taxpayer, the new tax law benefits you by:
* Lowering the rate at which you must pay taxes on both earned income and investment income, including income from capital gains and stock dividends;
* Providing relief from the alternative minimum tax;
* Providing greater marriage penalty relief; and/or Increasing the child tax credit, and providing a rebate check in ‘03 in the amount of the increase in the credit ($400 per child).
All of these benefits are temporary and many expire in ‘05. However, a future Congress could make them permanent. Many of these benefits are retroactive to January 1, 2003. Here's a more indepth summary of each of the benefits the new law will provide:
**Lowering marginal rates.
The tax law Congress passed in ‘01 put in place a phase-in of decreasing tax rates beginning in 2001 and ending in 2010. The rates scheduled to be effective for ‘03 were 10, 15, 27, 35, and 38.6 percent. JGTRRA '03 accelerates the rates that were not supposed to be effective until 2006. The new rates for 2003 (retroactive to January 1, 2003) are 10, 15, 25, 33, and 35 percent.
The new rates allow you to adjust the amount you have withheld from your paycheck to reflect both the retroactive and the prospective benefits of the tax rate. This measure alone will provide you with more money which you can choose to either spend or save. In fact, you could get a double break by taking this money at year’s end and investing it in an IRA or a SEP (if you are a sole proprietor).
**Expansion of 10% marginal rate. In addition to the across-the-board lowering of the marginal rates, JGTRRA'03 expands the outer income limits of the 10 percent tax rate in 2003 and 2004. The outer limit for the 10 percent rate for single taxpayers increases from $6,000 to $7,000. For married taxpayers filing joint returns, the outer limit for the 10 percent rate increases from $12,000 to $14,000.
**Increase child tax credit. JGTRRA'03 increases the child credit from $600 to $1,000 for ‘03 and ‘04. It also promises that those with eligible children will receive a rebate check in the amount of the increase in the credit ($400) in 2003. In 2005, the credit will fall to $700.
**Marriage penalty relief. Relief was enacted under the ‘01 bill, but had a delayed and phased-in effective date. JGTRRA'03 immediately increases the standard deduction for married couples filing joint returns to twice the standard deduction for single taxpayers for ‘03 and ‘04. In 2005, the standard deduction for joint filers drops to 174% of the single taxpayer standard deduction. Additionally, the new law accelerates expansion of the income range for the 15% tax rate for joint filers.
**AMT relief. For ‘03 and ‘04, JGTRRA'03 provides additional relief from the alternative minimum tax (AMT) by increasing the AMT exemption for married couples filing jointly and surviving spouses to $58,000 and for single filers to $40,250. Nevertheless, the principal reason for this relief is to balance out the tax benefits in that otherwise would subject many more taxpayers to the AMT. It does not solve the underlying problem that pushes a greater number of middle class taxpayers into the AMT each year. The immediate solution continues to lie in tax planning.
**Capital gains. For transactions occurring on or after May 6, 2003 through 2008, the capital gains tax rate is lowered from 20 to 15 percent. For transactions on or after May 6, 2002 through December 31, 2007, the capital gains rate is lowered from 10 to five percent for individuals in the lower tax brackets. The five percent rate falls to zero in ‘08. Certain capital assets, however, remain subject to the top capital gains rate of 28 percent.
**Stock dividends. For 2003-2008, the tax rate on qualified stock dividends is 15% for most taxpayers. For taxpayers in the 10 and 15 percent brackets, the tax rate on stock dividends for 2003-2007 is five percent, with the rate falling to zero in ‘08. However, major questions are developing over what corporate distributions will be considered "dividends" qualifying for the reduced rates. Many taxpayers, both corporations and their shareholders, will need to follow a set of complex rules under the new law in order to be safe.
**Going forward: To make the most of the new law, time is of the essence. Given the retroactive nature of most of the tax cuts, along with the temporary effective dates, many pitfalls exist for individuals who do not have a plan to follow. Contact your professional tax advisor to determine the effect of these changes on your individual situation.

R, P & T

Sewer and Water Update (from previous issue)

   As we reported the "8 month nightmare could soon be over"...then, as we posted at www.bamfhome.com last week, the County Board supported the Drain Commission's bonds for the Western Trunk line. So, it's just a matter of time until the moratorium's officially over. It could come as early as this week...so, check the website for updates!

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

Move over Ben and Jerry! It’s Star Spangled Ice Cream time

  Just like FOX news surpassed liberal leaning cable networks in ratings, “Ben and Jerry’s” days may be numbered as the premier political ice cream maker in the U.S. Welcome “Star Spangled Ice Cream,” a ‘fair and balanced’ company we presume. “Star Spangled’s” flavors include “Iraqi Road; I Hate the French Vanilla; Smaller Governmint; and our personal favorite, Nutty Environmentalist.” These tempting flavors can be purchased for just $76 per gallon, and that includes shipping. If you’re interested in shipping a gallon of Nutty Environmentalist to Governor Granholm, or perhaps the Journal editorial board, just go on line to starspangledicecream.com

Rough Weekend at the Annual Mackinac Leadership Forum

  Each spring the Detroit Chamber hosts its leadership policy conference at the Grand Hotel, while Detroit and Lansing media act like its a “G 7” (8 or whatever) summit. Fortunately (with the possible exception of the Governor) most participants don’t take it quite so seriously. So, this year’s “highlights” were some of the most notable ever. First, there was Oakland Co. Exec L. Brooks Patterson mocking Detroit Mayor Kilpatrick, by showing up at a session with six bodyguards and a flashing earring. Then, in reference to the Mayor's size, he suggested that island horses were relieved that John Engler was no longer at the conference .... that is, until Kilpatrick got into a "taxi". But our favorite had to be the attack on a GOP legislator early one morning... not for the act, but we haven't seen a Republican out after bars closed since the early '80s. (except for Patterson)

"Seinfeld" Briefs:
During May “Sweeps,” while CBS was looking at the life of Hitler, NBC focused on Martha Stewart. Although Hitler’s evil was well portrayed, it was still difficult to tell which came out “most despicable.”
# # #
Fascinating story from Austin (TX) last month as House Democrats fled to Oklahoma (out of the reach of the Texas Rangers) to stop a GOP attempt to gerrymander legislative districts. The legislature can’t act without a quorum, even if it has a majority ... wonder if we can apply this to Michigan? How about a fund-raiser to house your legislator (in Ohio).
# # #
After its editorial decrying the evils of SPRAWL, we thought it interesting that the Journal was so gracious in its praise of the Growth Alliance’s efforts in bringing 160 jobs to that bastion of suburban sprawl known as Grand Blanc Township.
# # #
When a bomb exploded at Yale three weeks ago, the immediate fear was “terrorism.” Subsequently, when it was discovered the explosion took place at the Law School, some thought it might merely be a preemptive strike.
# # #
Wayne County must have gotten first pick! The 5/30 Flint Journal’s front page told that Wayne County would be receiving 55,000 tons of Canadian “human waste.” Page B2 said Flint (Widing Aud.) was getting Canadian Anne Murray.

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Association News and Events by Laura

  

Interest High in Spring Parade We probably couldn’t have had worse weather for the Parade opening, but the traffic was solid in most area’s, exceptional in others. We’ll present a follow up report on the event upon its completion, but there’s one significant item we need to emphasize. From Wednesday May 7th (when the heavy TV advertising began) through Tuesday May 13th, individuals accessed 22,700 web pages at bamfhome.com/, of which 65% were the spring parade. However, the Fall Parade drew another 4%, and 1% went back to last spring’s event.

Housing Quarterly If anyone wants extra copies of the Spring issue, you should come to the BAMF office right away. By the opening of the Parade, we were down to less than 800 left. Golf Outing The annual Golf Outing will be back at the “Captain’s Club” in Woodfield, set for Tuesday, August 5th; with the usual 10:00 a.m. shot gun start; four person scramble ... Lunch at the turn, Steak at the banquet; the sponsorships and prizes you’ve come to expect ...and we held the price at $100. Hole sponsorships continue at $100 (you bring the prize) and $150 (we by the prize)...remember, we have a contest & prize at all sponsored holes. Tee reservations will be taken June 2. We expect the usual sellout, so act quickly.

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Economic Update: Growth ; manufacturing; deficits

   There were few surprises during the past few weeks’ economic reports and other activity. Unfortunately, that also means there’s little to cheer about.
   Although first quarter growth was slightly stronger than originally estimated, manufacturing continued its slowdown. And, while a “stimulus” tax bill was passed and signed, history of similar actions gives reason for pause, and fears regarding deficits have intensified. So, let’s begin at the top.
Economic Growth
   The second estimate of Gross Domestic Product in the first quarter shows the economy growing at a 1.9% rate, up slightly from the 1.4% first estimate. The primary contributors to 1st quarter growth were personal consumption expenditures and residential fixed investment, which were partially offset by “negative contributions from equipment and software, along with private inventory investment.”
In other words, housing is all that’s keeping the economy moving. As the lead article (in this issue) notes, even consumer spending is buoyed by the $100 billion freed up by “refinancing.” And, the “residential fixed investment” factor speaks for itself.
Manufacturing
   There was some positive news on the manufacturing front, as the Institute of Supply Management’s “purchasing index” rose from 45.4 in April to 49.4 in May. Furthermore, its new order index jumped 6.7 points, suggesting coming growth. However, the sector continued to contract last month, while its employment index continued to contract for the 32nd consecutive month.
Tax Cuts and Deficits
   As our “Tax & Finance” section explains, there’s a lot of “benefits” in the $350 billion tax cut. However, the price will be deficits, estimated at $400 billion from fiscal ‘03 through ‘05 ... and likely more than a trillion long term.
   The problem is that history suggests few benefits will accompany this stimulus package. Since ‘81, the only major tax act that appeared to have a positive impact on the economy was in ‘93 (+3.7 million jobs in a year) ... and that was a tax increase, not a cut. Following the ‘81 cuts, jobs decline 2.1 million in the next year. The 2 previous “Bush” cuts were followed by 1.7 million jobs lost.

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Housing Industry Update - Housing continues to “buoy the economy;” But for how long?

   The Wall Street Journal’s front page (5/28) focused on two issues that have frequently been featured in Veritas over the past several years. First was recognition of housing’s impact on the national economy. Secondly, Alan Greenspan’s 4 decade obsession with that impact.
   The article, which was written on the heels of the release of exceptional home sales’ data (which follow), lauded the facts that “home prices are up 38% in five years, housing starts hit a 16 year high last year, buoying employment in construction,” and “refinancing freed up $100 billion last year for consumer spending, saving the economy from what could have been a worse downturn.” And, it noted that Mr. Greenspan was a virtual pioneer in examining housing’s impact (which we’ve been noting since he was in between jobs at the Ford White House & Fed in the early ‘80s).
   However, it ignored the reality of the impact of declining housing costs’ on prices, which suggest that house values are currently tied so closely to low mortgage rates that they could easily decline if, and when, rates rise. “Fed officials,” according to the article, “acknowledge that housing is likely to weaken when interest rates rise,” but not before the economy rebounds. And, it further suggests that even Green-span acknowledges that prices could “slip after such a big runnup.” But it doesn’t look at the question, what if prices slip, but the cost of buying a home, even at the reduced price, is significantly higher?

New and Existing Sales Rose in April

   For the seventh time in nine months, the rate of new home sales surpassed the million unit level, showing that low interest rates continue to offset the nation’s economic weakness. For the year, the April rate of 1.03 million brings the y-t-d rate up to 990,000 units, 1.6% above last year’s all time record.
   On the day the Department of Commerce released new home sales, the Realtors said existing single family sales jumped 5.6% for the month, to a rate of 5.84 million. The data bring the y-t-d average to 5.83 million, up 4.8% from ‘03’s year end rate. The realtors also said median prices were up 6.8% over April ‘02, to $163,400. However, in what might be considered a sign of the impact of the weak job market, there was a spike in existing home inventory of 10.3%, to 2.47 million. The level is the highest in recent history (probably on record), beating out the 2.43 million from May ‘98, which was the last time inventory broke the 2.4 million barrier.

Housing Starts Fall, But Don't Buy Into the Headlines

   “Big drop in housing starts don’t spell a soon-to-pop bubble.” “Housing starts tumble 6.8%.” Those were a couple of headlines so, ARE YOU SCARED?
   Well, the headlines could have read, “Single family housing starts continue at near record levels.” In fact, the April decline in housing starts was due, primarily, to a 22.5% decline in multi family units in buildings of 5 units or more. Single family activity was off 3%, but its 1.356 million unit rate was nearly equal to the year end record level set in 2002. Furthermore, the rate was 6.4% above last April’s level.
   In fact, the current y-t-d average (1.39 million) is 3.7% above last year’s record rate through April.
   Furthermore, April’s data suggest that starts are picking up, since permits rose 1.2% for single family, and 2.8% industry wide.
   On more of a local note, Michigan’s single family permit activity is running 5.6% behind last year’s rate (y-t-d), as 10,985 units have been authorized according to Census Bureau estimates.

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