July 9, 2003

Inside Veritas -
Article 1 - Faulty Federal Jobs’ Data May Invigorate “Anti-Sprawlers”
Article 2 - “Metro Home Sales Sputter”
Article 3 - Gephardt: New "Monarch" in Waiting
Article 4 - Taxation and Finance - Investment Property — Planning for Installment Sales
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - Employment Degeneration Continues
BS: Still about Nothing in particular
Housing Industry Update

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Faulty Federal Jobs’ Data May Invigorate “Anti-Sprawlers”

   Last week’s major economic news was the nation’s jobless rate jumping to 6.4%. And, for the past year and a half, or so, this newsletter, usually on page 2, has often dealt with the employment situation, particularly manufacturing, in regard to the soaring costs of employment, with emphasis on health insurance.
Then, in the June 24th issue, as part of mocking the U of M — Flint/Ameregis report on sprawl, we noted how the Flint area’s unemployment rate fell 57% in the ‘90s, ending the decade at 5.5%, the lowest rate on record. But a subsequent check of government employment data suggests that as many as 30,000 commuters are being missed in the Bureau of Labor Statistics’ (BLS) calculations.
As is evident from the jobless chart, the local unemployment rate remained between 5.5 and 5.9% from ‘97 to 2000. However, according to the BLS data, Flint area employment peaked in 1996 at 194,028 (with a jobless rate of 6.3%), and plummeted 6.3% to 181,706 by ‘00. Yet, despite the apparent loss of more than 12,000 job holders, the unemployment rate fell 12.7%, to 5.5%.
So, if we’re to believe the BLS, 14,800 members of area’s work force mysteriously disappeared between ‘96 and 2000, despite the frequently noted rise in population, and number of households during that period. How could that be?
Well, it probably wasn’t. A check of old government data from those periods found that in April ‘96, 181,100 workers were supposedly employed in the area, while total area jobs were 7,500 higher. However, 4 years later, the same data show 10,900 fewer employees in the area, with 11,100 additional jobs, bringing total employment to 182,100, which is 6,500 below the ‘96 figure.
However, from 1996 to 2000, Census data suggest the rise in the number of Flint area commuters was 16,600, further suggesting a net gain in employment of 5,700. So, rather than falling to 182,100, the number of Flint area workers with jobs was likely in the 194,000 range in 2000, which would be in line with 1997, when 191,200 jobs also generated an unemployment rate of 5.5%.
Under that premise, the Flint area’s workforce was roughly 205,000 in ‘00, or 6.7% above the government’s “esti-mate” of 192,184. But why the discrepancy? Well, it can probably be found in the word “estimate.” No estimate will foresee a 120% rise in commuter jobs during a decade. But, unfortunately, we remain stuck with faulty Government data, and their abuse by unscrupulous academics with an issue.

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“Metro Home Sales Sputter” (from previous issue)

  Normally we’d look at Monday’s (6/23) Detroit News headline (above) and rip it for putting a false negative on the regional real estate industry. Then, we’d tear down the arguments on a point by point basis.
   However, this article has considerable merit, as it makes some important points, that reflect on the health of the industry. Although the primary point of the article was the danger to the local economy if the market slows for an “extended period,” it focused on some important data that indicate real cause for concern.
   First and foremost, it notes sales of existing homes are running 5% below last year’s level, while listings are up a whopping 14%. Then it says that “midpriced homes—those priced be-tween $200,000 and $400,000— are taking the biggest hit.” The reason? “In part, because many dual-income families are reluctant to make major financial commitments given corporate layoffs and cutbacks.”
   The article also notes that median prices are up just 2% in the past year, to $161,900 (which is more a reflection on the market being geared to lower priced housing). However, that is in line with the actual rise in value of real estate, as measured by the House Price Index of the OFHEO — front page article — which shows the rise in value of an actual home in the Metro-Detroit area was 2.75% since the first quarter of ‘02.
   Still, the article noted that moderate priced homes are still selling well, as today’s low mortgage rates have a greater impact when attracting “first time buyers.”
   But, what’s troubling, is the impact of employment concerns, which is something that’s evident throughout the "Detroit" market, extending all the way to Southern Genesee County.

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Gephardt: New “Monarch” in Waiting

  The call for an American monarchy was heard at the democrat presidential forum sponsored by Jesse Jackson’s Rainbow/PUSH Coalition on June 22, just prior to the Supreme Court’s verdict on the University of Michigan affirmative action challenge.
Though all nine wouldbe leaders consistently patronized the largely African American audience, U.S. Representative, and former Speaker of the House, Dick Gephardt (MO) may have reached new heights (or depths) when he virtually stated, “Separation of powers be damned.” Going well beyond Trent Lott’s praise of Strom Thurmond,” and Rick Santorum’s alleged “gay bashing,” Gephardt promised to make the U.S. Supreme Court obsolete, at least when it’s opposed to his point of view.
Said the wannabe president, “When I’m president, we’ll have executive orders to overcome any wrong thing the Supreme Court does tomorrow, or any other day.”
Of course, while Lott and Santorum’s statements remained lead story news for days, Gephardt’s (except for a brief mention on fair and balanced Fox News Sunday) was barely referenced in the traditional media.
Now, we don’t normally subscribe to the “liberal bias” theory, but it took the e-mail of an Associated Press story to bring the Gephardt statement to our attention ... Can you say “Double Standard?"

Barry

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Taxation and Finance ---- Investment Property — Planning for Installment Sales

   Suppose you want to sell investment property but you cannot find a cash buyer. You may have to settle for installment payments. Even with appropriate safeguards, financing the purchase in this fashion would be unattractive if you had to pay tax on the entire profit in the year of the sale. Fortunately, the tax installment sale rules generally allow you to match the payment of tax on realized gain to your receipt of payments. These rules can be used for sales of real estate held as investment property and for sales of closely held stock. However, they are not available for sales of publicly-traded stocks or bonds.
The installment method applies automatically if you are eligible to use it and receive at least one payment after the close of the tax year in which the sale takes place. However, you can chose not to use it, and there are times you should make this choice. This letter examines these and some other planning considerations that arise when one is considering an installment sale.
For one thing, an individual who sells property on the installment basis will want to take steps to minimize risks beyond making the buyer personally liable on the loan. But you have to be careful when structuring protection because if you go too far you will jeopardize the tax deferral that you are seeking. For example, if the note will be paid out of an escrow account, you'll generally be treated as receiving cash up front and be taxed currently. You can, however, use an escrow as long as there is a substantial restriction on your right to receive payments. Also, a third-party guarantee will not cause you to be taxed on the guaranteed amount.
Sometimes, you'll want to elect out of installment reporting. For example, if the sale would generate a big capital gain and you have large capital losses from other sources, you may choose to have the entire gain recognized in the year of the sale so you can use your losses to offset the gain. Also, installment reporting may not be desirable if the gain would be taxed as ordinary income (sale of land held for 1 year or less) and you expect to be in a higher tax bracket in post-sale years.
Selling property to a family member on the installment basis offers a number of advantages and, at the same time, raises a number of concerns. If you are in a high bracket and own income-producing property, you can make an installment sale of the property to a family member in a lower bracket and thereby save family income tax. But you have to be sure that the notes carry a high enough rate of interest or interest will be imputed to you. But, if the value of the notes and interest payments are less than the value of the property sold, you may have to set a higher rate so that you are not charged with making a gift.
The family-member buyer can resell the nondepreciable property if he or she no longer finds it suitable as an investment. However, if the sale occurs within two years of the purchase, the original seller's gain will be accelerated. And while concerns about security may be less significant if the purchaser is a family member, protective steps usually should be taken even for related party sales.
Please contact a tax professional if you have any questions about the matters addressed in this letter or about any other aspect of installment sales.

R, P & T

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

A Vote for Constituents may bring the Journal’s Wrath

   Well, it’s now potentially dangerous to vote in your constituents’ best interest, that is, if you’re a suburban legislator in Genesee County. Now, Dave Robertson (R-Grand Blanc) and John Gleason (D-Flushing) are branded small-minded by the Journal for backing a plan that would “increase the pain of those with the greatest suffering.”
So, what did these two despots do to deserve such an attack? They voted to give their constituents a better share of revenue sharing than that “fair minded” governor, Ms. Granholm, proposed.
What was most fascinating about the Journal’s condemnation editorial was its opening: Apparently “Granholm’s strategy to develop ‘cool cities’ doesn’t have much support in the House.” But Robertson’s district has 2 cities trying to become “cool” in the Governor’s image. In fact, one of them (Fenton) has a Downtown Development Authority that takes in 5 times more than Flint’s on an annual basis. But in a few narrow minds, “cool” can only apply to Central cities (like Royal Oak & Birmingham?)
Related Note: Detroit’s attempt at “cool ness” (casinos, entertainment) is under attack from the city’s clergy. In a stinging column in Saturday’s Detroit News, Rev. Edgar Vann challenged “outside investors plotting the rise of the Mega Strip Club in prime locations around the city.”

"Seinfeld" Briefs:

   If Lee had prevailed, would “Spike” Club have been the next target? When Viacom decided to make its cable (TNN) network “Spike TV” (a “Man’s” network featuring such classics as “Baywatch” and “The A-Team,” joining WWE wrest-ling and “Stripperella”), Movie Director Spike Lee (better known to the Spike target audience as Reggie Miller’s nemesis when the Knicks host the Pacers), objected, filing a suit claiming the network was attempting to “hijack” his image.
Well, all the publicity got us wondering, did Shelton Jackson Lee “hijack” the “Spike” moniker from the National Association of Home Builders’ “membership awards’ program?” With NAHB short on cash, perhaps they should go after Mr. Lee, demanding a share of proceeds from “Do the Right Thing” and “Malcolm X.” With a few million, they could suspend the future installments of January’s three tier dues increase.

# # #

Apparently Ray Lord, an old friend/nemesis with liberal union ties, has developed quite a sense of humor as a retiree in Fenton. His local AARP chapter is sponsoring a public forum on the recall of five township officials, and is hosting it at a Mobile Home Park ... Ironic because the reason behind the recall is that the 5, under threat of an imminent law suit, agreed to a compromise that would allow a “Mobile Home Park” to be built, while keeping the density down.

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Association News and Events by Laura

  

Golf Outing Reservations Full; Waiting List Begun Well, it took three weeks instead of the traditional two, but 36 foursomes have reserved their spot for the annual BAMF Golf Outing ... Since, however, there’s usually a couple of no-shows, we’ve begun a waiting list which, as of this date, only has one foursome on it (so, there is a possibility that another group or two could make it). The event’s set for Tuesday, August 5th (we’re confident that all Flint residents will cast there vote for Mayor prior to the 10:00 a.m. shot gun start at the “Captain’s Club” (Woodfield). We also have 14 hole sponsors as of this time, meaning contests with prizes will be in abundance. However, that also means that four sponsorship opportunities remain available. Remember, all sponsorships include a contest at the sponsored hole ... cost? $150 if BAMF buys

the prize; $100 if sponsor brings it! Call the association office (603.2200) if you wish to sponsor a hole, or get on the waiting list. Fall Parade of Homes: First Deadline Approaching Fall Parade contracts were mailed to Association Builders at the end of June, and the first deadline (when the initial fee remains in effect) is coming July 23rd. The 2003 event will open Saturday, October 11th, and run through Sunday, October 26th, with traditional fall parade hours (noon to six on weekends; 4 to 7 Thursdays and Fridays; closed Monday thru Wednesday). Entry fees remain at the same rate as they’ve been for the past twelve years ($2,500 for the first home; $1,750 for additional entries by the same builder) ... however, after July 23, the rates rise by $200. If your need another contract, or more information, call the BAMF office

... Also, regarding the Fall Promotions: Advertising contracts for Housing Quarterly magazine will be mailed to previous advertisers and new members by the end of this week ... Again, we emphasize, we can accommodate everyone wanting a full color ad, only if we know early enough ... so, let us know ASAP.

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Economic Update: Employment Degeneration Continues

   The early days of July have given little reason for optimism regarding the jobs picture. On July 1st came the monthly manufacturing report from the Institute of Supply Management, showing that manufacturing activity was still declining in June (though less sharply than in May) while the sector’s employment continued it contraction for the thirty-third consecutive month. Then, 2 days later, the Labor Department said the economy lost 30,000 jobs in June (on top of a revised decline of 70,000 jobs in May) bringing the nation’s jobless up to 6.4%, the highest level since April of ‘94.
Manufacturers have shed some three million jobs since activity peaked in mid 2000, including 2.3 million since early 2001 when that year’s “delayed” recession began. But, what may be interesting to some, is that the remainder of the economy has shed just 300,000 in that period of time.
However, what may have been most fascinating were the words of wisdom from the nation’s capital, where Bush spokesman Ari Fleischer said that, although the president was concerned, he believed the recently enacted tax cuts would help in the future.
And, then there was Labor Secretary Elaine Chao noting, “as the economy gains steam and people gain confidence about their job prospects they will declare themselves back in the job market and the jobless rate may increase (part of the rate increase was due to the government raising the number of people in the workforce). That’s what I think we’re seeing today.” Of course, that doesn’t speak to the loss of more than 100,000 jobs over the past two months, which put the nation down by 236,000 jobs through the first half of 2003.
And, adding another downer on the employment picture, the Wall Street Journal’s survey of economists found a strong consensus expecting growth to accelerate in the second half of the year, and average roughly 3.6% for the next four quarters. However, their estimate of the unemployment rate in November is just what it was in May ... 6.1%. Unfortunately, in recent forecasts, they’ve been far more accurate in predicting unemployment than they have in predicting growth.
Back in January, the 30 economists’ consensus said May’s unemployment rate would be 6% (it was 6.1), while their projection for first quarter growth was 2.7% (it was actually 1.4%).
Two of these thirty (Ethan Harris of Lehman Bros. and William Dudley of Goldman Sachs) were extremely accurate for the first quarter, forecasting growth at 1.5% and unemployment at 6.4 and 6.2% respectively. They see the November rate at 6.4 and 6.3%.

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Housing Industry Update

New Home Sales Set Record in May

For the ninth time in the past ten months, new home sales broke the million unit barrier, as May set an all time record with a rate of 1.157 million units, up 12.5% from a strong April showing. The May record brings the monthly average for 2003 up to 1.028 million units, 5.7% above 2002’s year end record of 973 thousand. And, what may be more notable, for the 12 month period ending May 31st, homes sold at a rate of 1.02 million, a full 4.6% above the ‘02 record.
The Commerce Department report had more “good news” for builders than record home sales. It also found that inventories were at a 3.5 month supply...only once in recorded history has the months’ supply been that low (of course, that’s if sales continue at the current pace).

Existing Sales Also at Near Record levels

Existing homes experienced a 1.2% rise in May, to their third highest monthly level on record at 5.92 million units, a level that was only topped in the months of January, both last year and this. So, when one combines new and existing, homebuyers purchased houses at an unbelievable rate of nearly 7.1 million units for the month, 8.3% higher than their combined, record breaking, year end figure in 2002.
For the first five months of the year, existing sales are running at a rate of 5.85 million, which is 5.2% above the “Realtors” ‘02 record.
Of course, as with new home sales, the lowest mortgage rates in 30 years are credited with the surge in activity. And, as we’ve noted for the past two issues, those historically low levels are likely to be an historic artifact in coming months.

And, Regarding Mortgage Rates
Well, the Federal Reserve shaved a quarter point and bonds yields reacted ... rising roughly half a point over the next ten days. And, as would be expected, mortgage rates began following suit, as evidenced by last Thursday’s Freddie Mac report and, we’re confident, the report to be issued July 10th.
As we’ve been noting since early ‘01, history tells us that the Bond market leads the Federal Reserve, not the conventionally accepted vice versa, which was evident in the second half of 2000. And, as mortgage rates are tied to ten year treasuries, their movement is significant. Perhaps the first indication the economy was in trouble, came when mortgage rates dropped 1.5%, prior to the Fed’s slashing in 2001. Now, if we look for a positive economic signal, we may find it in rising long term interest rates, which were predicted by the “so-called experts,” in winter of ‘02. Now, seventeen months later, it looks like it's happening ... so, LOCK IN today!

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