June 9, 2006

Inside Veritas -
Article 1 - Parade traffic presented sense of optimism; Golf ‘on the clock’
Article 2 - Distortions rule first quarter price data; but not with Michigan
Article 3 - Housing and Economic Briefs
Article 4 - Existing Sales' Activity: Median price growth at 4.2% annual rate
Article 5 - Taxation and Finance by Rachor; Purman & Tucker CPAs
When to Deduct Entertainment Expenses
Association News Update From Laura
New Construction and Sales Activity
BS: Still about Nothing in particular
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Parade traffic presented sense of optimism; Golf ‘on the clock’

For the first time in 2 decades there was a bit of apprehension with the opening of the Spring Parade. But reports as early as May 15th brought a sense of optimism for participants, as well as the industry.

While traffic was strong in most sectors of the county, more importantly, it appeared that many were undeterred by recent media reports of south-east Michigan’s economic demise. Yes, there were concerns expressed about selling current homes, but hundreds seemed more motivated by their desire for the 21st century housing options on display.

What was most heartening were the reports of multiple visits from the same individuals, with surprisingly heavy weekday evening traffic. And, as a rule, these individuals were clearly looking at the quality features that were far more evident than usual during these events.

If there’s a message from this Parade, it’s that there remains a solid market for new homes, but that the massive numbers of the early 2000s are likely a thing of the past.

Golf Outing update: We began taking reservations June first, and by this morning (6-6-06) there were only 11 (of 36) foursomes remaining ... so, call and reserve yours today!!! 810-603-2200.

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Distortions rule first quarter price data; but not with Michigan

Consider the following sets of data for Cape Coral/Ft. Myers real estate during this year’s 1st quarter: 1) The price level fell 8.8% according to National Assoc. of Realtors’ data; 2) The value of the area’s homes rose 6.12% according to the Federal Government’s House Price Index (HPI).

In all, prices in the nation’s metro areas fell 3.3% from the 4th quarter of ‘05 to this year’s first, as 66% of the NAR’s 146 reporting areas experienced a decline. However, the “HPI” of homes in the nation’s metro areas climbed over 2% during the period.

Confused? Well, so are the nation’s business journalists who’ve written conflicting articles over the two reports. But what’s missed here is the fact that the HPI is based on items beyond home prices and also is limited to homes with conforming loans ($417,000 and below) which excludes most of California and many of the nation’s coastal areas where prices are actually declining.

There’s have often been large discrepancies between the realtors’ price levels and the HPI. But what’s troubling about the current data is the sharp decline in prices since the 2nd quarter of ‘05, and the actual decline in metro prices since September (4.3%). Add to that the soaring level of inventory, and one can see how easily the “bubble” could burst.

Michigan, “Detroit & Flint”

As it’s been showing since last year’s 3rd quarter, Michigan remains dead last on the House Price Index, up just 2.86% for the year (and 0.2% for the quarter). Of the HPI’s “20 areas with the lowest appreciation,” eight Michigan Metros were listed: Grand Rapids; Detroit; Oakland/ Macomb; Holland; Ann Arbor; Monroe; Flint; & Saginaw, which ranked lowest in the nation.

During the final quarter, each of those (with the exception of Detroit) experienced declining values (as did Jackson and Lansing which just missed the bottom 20).

During the 12 months from 05’s first quarter, “Flint area” homes were at 1.48% appreciation and suburban Detroit was at 1.97%, well below the rate of inflation and suggesting that municipalities may have a serious problem automatically raising the taxable value of property at that rate.

Regarding Michigan price levels: Unfortunately, only 2 Metro areas showed up in the Realtors report, but both Lansing (-5.1%) and Grand Rapids (-1.9%) displayed declining prices.

Watch Out for 2nd Quarter

Ironically, half of the HPI’s “Top 20” were Florida communities, led by Naples and Cape Coral. And, virtually all of those metros are clearly overbuilt and experiencing falling prices. So, don’t be shocked if the September 1st report shows the “biggest” drop in “appreciation rates” in history.

Remember, 96 of 146 metro areas showed price declines in the 1st quarter, but nearly all of them reflected a positive HPI ... and, that could spell trouble!!!

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Housing & Economic Briefs

Another quarterly report sent out in May (the NAHB “Housing Opportunity Index”) lists Lansing as the “most affordable” Metro area in the nation. According to the HOI, 92.7% of all the area’s homes that sold during the first quarter were “affordable” to the median income household (with a $64,900 income).
What was more interesting in the report was that the median price in the Flint area declined to $98,000, which was 24% below the level of 2004’s third quarter. (The HOI didn’t report from early ‘02 until mid ‘04).
When the HOI began its hiatus in ‘02, “Flint” was the 2nd least affordable market in the Midwest with 66% of the homes sold considered “affordable.” This year, it ranked 17th most affordable in the nation, with 86% of the sales considered “affordable.”
We would also note the HOI found the median price fell 1.5% during the quarter from a national perspective.

An article the May 26 “Free Press” caught our eye, as it has tremendous significance regarding the Genesee County Housing’s attractiveness to the over all Southeast Michigan market.
According to HomePages.com, “70% of consumers say soaring gas prices have become an important consideration” when deciding where to live.
We’ve been concerned for the past couple of years that benefits of somewhat lower prices in the Flint area were being offset by the combination of property tax rates and commuting costs. Now there’s evidence that make those concerns a reality.

Immigration reform & housing: A recent Fortune magazine article’s headline noted “Up to 40% of home building is done by undocumented aliens.” It cited a study by the Pew Hispanic Center showing 36% of insulation, 29% of roofing and 28% of drywall are installed by “unauthorized workers.”
The article pointed to the plight of Fischer Homes, a Kentucky & Indiana builder, that was raided last month and charge with harboring illegals. The government accuses Fischer of “using subcontractors to ‘provide a layer’ between it and some 75 illegal workers,” according to the article. But, “that layer does not relieve Fischer of the responsibility to ensure their contractors employ a legal work force,” say the Feds. In other words, as far as immigration services are concerned, Builders will be held responsible (at least) until courts say otherwise!

Job creation slowed for the third consecutive month in May. While the 75,000 new jobs added during the month made for a “weak” report, the unemployment rate actually fell to 4.6%. Now, jobs are up 3.22 million from the year 2000, which gave us another reason to look at Michigan’s data. Well, we’ve lost 300,000 jobs over the period, including 193,000 in the Southeast.

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Existing Sales' Activity: Median price growth at 4.2% annual rate

While existing homes sold at a solid rate in April (6.76 million), the numbers were down significantly from 7.17 million a year earlier. However, what was more notable relates to median prices. Despite the first rise in its level since last October, the median price was up just 4.2% over the past 12 months (a year ago the 12 month rise was 14.7%).
But even more notable is the continual rise in inventory (3.383 million at month’s end), up 37% in a year (57.6% since 1-05).
The combination of lower sales and greater inventory brought the supply of homes on the market to a six month level, 46.3% greater than 4.1 months’ supply in April ‘05.
Inventory has now climber for 13 of the past 14 months. If we couple that, with declining sales’ level, we can expect the supply based on “months” to grow even faster in the near future.

State and Local Sales

Michigan’s sales are down slightly in comparison with last year, while Flint area sales really tumbled in April, down 25.8% from a year earlier (Michigan sales were off 13.4% for the month). The year to date data shows the state off 9.7%, while local activity’s down 15.4%.
Last month we reported that, seasonally adjusted, the rate of sales for the first quarter locally was at 5,567 (which happens to be 10.5% below ‘05’s first quarter). While we don’t like using 1 month’s data in so small a market, we do note that April’s sales would adjust to an annual rate of just 4,344 units, which is 31.2% lower than April ‘05. More significantly, the June 1st level of inventory (6,700 units) would take 18.5 months to sell at the April sales rate.
Regionally, Livingston, Oakland and Macomb counties all experienced double digit declines over the four month period. Detroit, however, is up nearly 17% on a year to date basis.

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Taxation and Finance by Rachor; Purman & Tucker CPAs
When to Deduct Entertainment Expenses
You may deduct ordinary and necessary expenses for entertainment in the pursuit of business or in connection with the production of income. The term entertainment includes various forms of recreation, amusement, food, and beverages. You can’t deduct any expenses if they are personal, family, or living expenses. Any business entertainment expense, in order to be deductible, must meet the general requirements for business expenses and avoid entertainment disallowance rules. These disallowance rules do not permit the deductibility of expenses that are otherwise not deductible under the Code.
Under the entertainment disallowance provisions, entertainment expenses that satisfy ordinary and necessary requirements must still meet business connection requirements and special substantiation requirements. The business connection requirements disallow a business entertainment expense unless you prove the costs are directly related to your business or that they are associated with the business if it directly precedes or follows a substantial business discussion.
You can prove that an entertainment expense is directly related to your business by satisfying either of two tests: Test A) Whether, the entertainment occurs during an active business discussion. (To satisfy this test, you must meet four requirements: (1) a general expectation of deriving a business benefit other than goodwill; (2) during the entertainment period, there must be a business meeting or a bona fide business transaction; (3) the principal character of the meeting must be business; (4) expenses for a non-business guest are not deducted).
Test B) Whether the entertainment occurs in a clear business setting directly in furtherance of your business. This test is objective and is likely to be met where there’s no meaningful personal or social relationship between the taxpayer and his/her guest.
The other method to prove that there exists a business connection is if the entertainment was associated with the active conduct of your business and the entertainment directly preceded or followed a substantial and bona fide business discussion. This test allows you to deduct entertainment expenses even though no business is actually discussed during the entertainment. As a result, goodwill entertainment can be deducted under this method.
There are several statutory ex ceptions to the entertainment disallowance rules. A business entertainment cost which falls within one of the exceptions is deductible if it is ordinary and necessary and for the active conduct of your business. Some of these exceptions, stated generally, are:
(1) food and beverages for employees;
(2) entertainment expenses treated as compensation;
(3) reimbursed employee expenses;
(4) recreational activities for employees;
(5) business meetings; and
(6) meetings of business leagues.
In addition to satisfying the above tests, IRS regulations require taxpayers to substantiate their entertainment expenses. In general, taxpayers must maintain documentary evidence (such as receipts) for all lodging expenses and, effective for all entertainment expenses of $75 or more.

Jeff Sabolish, CPA, CFP

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

DaVinci Code; “Over the Hedge”
While religious groups were protesting at “Cineplexes” across America during the weekend of May 20th, we have to ask, “Where were the builders?” Not only did the weekend bring the opening of the “DaVinci Code,” it brought us a vicious attack on suburban development, designed to poison the minds of the nation against the very essence of our existence.
In “Over the Hedge”, a group of animals awake after a long winter to find their habitat taken over by a subdivision. It’s stated “Plot Outline: A mischievous raccoon (played by Bruce Willis) and his sensitive best-buddy turtle (Gary Shandling we think) along with other forest creatures try to resist the evils and temptations of encroaching suburbia.” Why was there no organized effort by NAHB? ...

Seinfeld Briefs:
Surprised Heidi Fleiss didn’t think of this! A Reuters report told of a brothel be-coming “the first in Berlin to offer special deals for virgins,” with “sensitivity trained” prostitutes that specialize in “first time clients.” For 60 euros the “virgin” gets a half hour session with one of the brothel’s sensitive professionals. Now we’re not sure of the exchange rate, but it sounds like a wonderful option if looking for that perfect Confirma-tion or Bar Mitzvah gift.

Air hammer shuts down Congress! On May 26th we were most concerned when hearing there were shots fired in the Rayburn Building, home to the offices of many of our longest serving Representatives. The “shots,” that shut down operations from mid-morning to 3:15 p.m. turned out to be noise from an air hammer, used to repair an elevator. Well, we guess the “Kinks” said it best: “Paranoia may destroy YAH!”

Finally, we were happy to see the U.S. has a new trade partner in Moammar Khadafy, Libya’s stylish dictator. We can envision his clothing line coming to America, recalling an old “SNL” tagline on a faux commercial for the Khadafy Look: “Whether expanding territorial waters, or cutting off a dissident’s hand, you’ll always look your best!”

Leno on ‘Barbaro:’
Regarding concerns the Kentucky Derby winner (gravely injured in the Preakness) may not be able to “support himself on his (broken) hind leg when servicing mares while in stud,” the “Tonight Show” host reminded his audience that Kevin Federline can’t support himself, but doesn’t seem to have a problem with stud service. Of course, we would add that the likely recipients of Barbaro’s “stud service” are expected to be of a somewhat higher species than Mr. Federline’s.

Barry

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Association News and Events by Laura

2006 Golf Outing Monday, August 14th at Flushing Valley Golf Club 4 person scramble 10:30 shotgun start Sponsored Contests Lunch Anytime Dinner at 4:30 p.m. $100 per golfer Door prizes galore Hole Sponsorships $125 & $175 Tee Reservations beginning June 1 810-603-2200

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New Construction and Sales Activity

Sales rise again, but so does inventory .....

New home sales surprised the experts again, rising for the 2nd consecutive month in April, up a solid 4.9% above the March level. However, despite fewer single family starts, inventory is still on the rise, up 13,000 units over the previous month.
For the year, sales are down 11.3% from the first 4 months of 2005 (50,000 units). However, the more notable issues are the price levels and inventory.
April’s median price came in at $238,500, less than 1% above last April’s, as prices have now remained flat since August.
Inventory, on the other hand has continued it’s climb that has seen it hit 565,000 units at the end of the month, up 27% on a seasonally adjusted basis (and even in actual data).
Single-family housing starts, which were running above last year’s level through the first 3 months, dove below ‘05 for the year. For the month of April, starts were down 6.6% compared to a year earlier, taking them down slightly on a year to date basis.
In all, builders started single-family homes at an annual rate of 1.535 million in April, still an incredible number from an historical perspective. But, here’s something our former Federal Reserve Chairman would likely call a “conundrum.” We thought we’d check on the employment impact of the lower rate of activity, and found something fascinating: According to the Bureau of Labor Statistics (BLS), direct jobs in the single family sector were up 6% in comparison to April ‘05, while total residential construction employment hit a a record 983,500 jobs, up 3.9% in twelve months.

Local/Regional

As you can see in the chart to the right, April’s permits in Gen-esee County were well below the year earlier level, which has been pretty much standard during the past 12 months. Excluding rentals, the area’s running 60.5% behind the first 4 months of last year, while the region as a whole is down 47.1% (recall that Genesee County was up 15.8% at this time in ‘05, while the rest of the region was down 15.3%). In comparison to 2004, both are down 54%.

For the first time this year, we thought we’d look at permits in a number of municipalities for a comparison of 2005 to ‘06 from Housing Consultants’ data:

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