August 5, 2002

Inside Veritas -
Article 1 - MAHB directors run for cover on statewide sewer and water crisis
Article 2 - Business News & Issues
Article 3 - Sewer/Water Moratorium
Article 4 - Taxation and Finance - Job Applicant Background Check
Article 5 - Three Critical Primary Races
Association News Update From Laura
Economic Update - Weak employment - weak confidence
BS: Still about Nothing in particular
Housing Industry Update

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MAHB directors run for cover on statewide sewer and water crisis
  
   While the Metro Detroit area is facing a $52 billion drain crisis that threatens to shut down development, Acme (by Traverse City) is already shut down due to lack of capacity. And, while Lansing found that it couldn’t spread the cost of storm sewers in one section of the city to all of its rate payers, Birch Run discovered it lacked the water capacity to support planned development.
   Of course, when Genesee Co. found an equitable method for dealing with its own sewer capacity problem, along came a disgruntled developer who filed a class action lawsuit, thereby putting the solution in jeopardy. So, when a resolution regarding the sewer and water crisis, with its statewide implications, was taken to the Michigan Association of Home Builders during its summer conference, the issue sparked considerable discussion for the first two days of the event. The MAHB’s executive committee endorsed the resolution by a resounding 30 to 2 margin. And, five of the seven regions’ caucuses also gave it their stamp of approval. But, when it came to the Board of Directors, a body that historically refrains from concerning itself with such trivial matters as building industry issues, there was a quick motion to table and it passed by a 63 to 25 margin.
   So, despite support from the Executive Committee and participants in the caucuses, the Board of Directors (with roughly 16% of its members present) ended the debate after two individuals spoke against the resolution while no one was allowed to speak for it. And, what was most amazing, is neither of those who spoke even attempted to address the resolution’s conclusions.
   So, what was this resolution that the Board refused to deal with? It was merely designed to draw attention to the statewide drain and water crisis, recognizing that anti-growth activists are using it to slow down sprawl. It further encouraged builders and developers to work with counties and municipalities on finding equitable solutions, and ultimately recognized local associations as the industry representative in their own jurisdictions.
   But the board, in its usual mode of putting aside issues that impact the industry, was concerning itself with more important matters. So, they listened politely to NAHB guests and, and applauded, ever so politely, the recognition of contributors and sponsors. They passed a number of items without question, but clearly decided not to be bothered with a potential debate where they may be forced to vote on a somewhat complex issue.
   But, then again, when you continue to hold conventions at resort hotels, and promote them by their leisure and social activities, its little surprise that those who consistently attend refuse to be bothered with the issues of the industry they’re supposedly there to represent. And, its even less a surprise that the fifty or sixty members who’ve been attending regularly for decades remain the dominant force in board decisions, since few newer attendees see little, if any, opportunity to impact their industry. So, it’s business as usual when 16% of MAHB’s directors are present for a vote.
   What’s fascinating is that the association’s leadership has changed dramatically in recent years, but seems to have no impact on the stodgy “old-timers” who show up time after time, which brings us to MAHB’s proposed Governance Model, a plan to cut the bulk out of the board, give proverbial “new blood” an opportunity to make an impact, give more influence to the locals and regions, and eliminate the need for poorly attended conventions and meetings. It would have an executive board of roughly 39 members, and an advisory board that’s roughly half the size of the current Board of Directors. The “model” includes limitations on years served by an individual, and eliminates the mandate for 3 annual board meetings. It’s proposal is scheduled to be acted on at the Fall board, but will surely be opposed by those not wanting to relinquish their control. But, as current MAHB President Rodney Rajala said after Saturday’s fiasco, “if there was ever a perfect example of why we need a governance change, you saw it today.”

Note: Since Feb. 2000, an average of 111 of the 535 appointed directors attended the MAHB's eight directors' meetings. That's 20.7%.

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Business News & Issues

GM; Ford, plan to raise prices on '03 models

   Shortly after announcing big increases in their incentives on ‘02 models, GM and Ford indicated they would raise the prices on 2003 models, and further indicated there would be making a number of standard amenities “optional.”
   Pricing information released last week by General Motors suggested a mix of price increases and cuts. However, it also showed an intent to cut (or “decontent”) many standard items. For example, as it raised the base price on its Chevy “Trailblazer” by 2.9%, it also made side-impact air bags, along with several low priced features, “optional.”
   And, on some fast selling models, they merely raised the price dramatically. Like, a building industry favorite, the Silverado pickup, will show a base price increase of 4.2%, or $1,278.
   Ford, on the other hand, is suggesting its price increases for next year’s models is less dramatic. Without details, the company that’s been experience a drought in sales for a couple of years says prices will rise just 0.4% (on comparable models), or about $120 per car.

Was BMW what the "boss" had in mind?
   “Born in the USA” has taken on a totally new meaning, at least as applied to the auto industry. A recent Businessweek cover story noted how the auto industry became the “backbone of the U.S. economy” in the 20th century and, “as autos went, so went the nation.”
   Today that statement’s truer than ever, "but no longer due Motown’s might.” Instead, its those foreign companies, like Honda, Toyota, BMW, Mercedes, and even Hyundai that are reinvigorating the vehicle business and “turning the U.S into the center of the global industry.” But, rather than manufacturing their lines in Detroit, Flint, or other Midwest cities, the foreign nameplates are built in places like Lincoln, Alabama, Canton, Miss., and Buffalo, W. Va. Or, as Businessweek puts it, all “across America’s rural south, far from northern union halls.”
   And, it’s that distance from “northern union halls” that appears to have primary importance. The new car factories now employ 50,000. By contrast, the U.S. companies cut employment by 150,000 from 1979 to 1991, and continued closing obsolete plants well into the new century.
   But the most critical issue regarding the advancement of foreign companies in America has been its growing share of the U.S. market. In 1975, the ratio between the Big 3 and foreign nameplates was approximately 77 to 23. Current market shares are about 62% for the “Big 3,” 38% for foreign companies combined.
   An item that we’ve stressed before was also highlighted in the story, which showed the demise of the U.S. in the Luxury market. Cadillac and Lincoln are not only losing out to BMW and Mercedes, they’re now running well behind the Lexus, Acura and Infiniti lines. In fact, Americans had around 42% of the luxury market five years ago, but now is down to an approximate 25% market share.

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Sewer/Water Moratorium

   As you’re aware, the drain moratorium was amended on July 16th, to allow for the issuance of “B” permits on lots that already had sewer and water approval. However, the actual moratorium is still in force, as new developments will not be approved so long as the funding source for capital improvements remain in jeopardy. The parties will be in court July 31st to hear the county’s motion for summary disposition. So, by the time you read this issue, there could be important news on the moratorium’s status. Therefore, we urge you to continue to look for critical updates on the website.

Barry

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Taxation and Finance ---- New IRS Audit Initiative

   The IRS has announced a new audit based National Tax Research Program to measure tax payment, filing and reporting compliance. Initially, it will focus on individual returns and, eventually, it will be expanded to corporate and other taxes such as employment and excise taxes. Under the program, which will go into effect in September 2002, the IRS is planning to conduct slightly fewer than 50,000 audits using the following four basic approaches:
*No IRS Contact-using data already provided to the IRS (8,000returns)
*Correspondence-using correspondence with the taxpayer (9,000 returns)
*Partial Audit-using IRS data and focusing on select parts of returns (30,000 returns)
*Calibration Audits-line-by-line examinations (2,000 returns)
   The IRS says that the 50,000 returns will come from the pool of 600,000 to 800,000 individuals who would be audited in any event. In response to criticism about its intentions, the IRS has stated that the new program will be considerably less intrusive than the former "taxpayer compliance audit program" which required taxpayers to substantiate every entry on the return. One reason for reinstituting a tougher taxpayer audit program was based on a survey by the IRS Oversight Board in which 76% of respondents felt they should cheat, and that an increasing number of Americans are cheating on their tax return. Clearly, taxpayers will be subject to closer scrutiny once the new program is implemented.
   However you shouldn't wait until you get the letter to protect against an IRS tax audit. Start by keeping complete and accurate records; and, keep them accessible. Pulling out a box marked 1999 to prepare for an audit is an arduous task. Going to a file folder marked 1999 and turning to the Auto Expenses tab is immeasurably easier.
   Below are steps you can take to protect yourself:
1. Review your return and support all the numbers with proper receipts and account statements. You may want to prepare a simple spreadsheet file of your income or expenses for each category.
2. Be ready to explain your return. Make notes as to why you felt specific items on the return were deductible. Keep in mind that expenses have to be "ordinary and necessary."
3. Be courteous. You've nothing to gain by being rude or unreasonable. Remember the auditor didn't choose you specifically, the computer did.
4. Hire a professional. The costs associated with the superior tax-knowledge and experience in dealing with the IRS will probably pay for itself.
5. Be prepared to appeal. If you're faced with an auditor who's giving you a hard time and is not cooperative, be prepared to ask who their supervisor is. Beyond that you can appeal to the office of appeals and then the US Tax Court.

R, P & T

Three Critical Primary Races

   If you don’t think government plays a critical role in your life, just look back to the first half of July. If it wasn’t obvious prior to this month, the role of government in home building was continuously on our minds from through July 16, controlling our efforts each day until the moratorium was finally relaxed.
   Because of the attention paid to the crisis during that period, we had neither the time, nor the opportunity, to get involved with the August 6 primary election. So, we haven’t made any formal endorsement in any of the races across the county. However, 3 of next week’s races are extremely important, as they’re realistically contested, and their winner will win the November election, as each district’s dominated by the Democrats.
   2 of the races are for County Commission seats, the other is for the 48th State House district. And, each of these races have candidates with a history regarding support for the home building industry.
   So, in lieu of formal endorsements, we’re presenting background in hopes of helping you make a decision on August 6th.

State Rep — 48th district
   This “open seat” district runs from Flushing and Mt. Morris Townships to townships along the Saginaw & Tuscola county borders. Challenging for the seat are former State Rep Nate Jonker, and County Commissioner John Gleason.
   While in the House, Jonker had an abysmal record on business and building issues, and BAMF (and MAHB) played an active role in the upset defeat that ended his term in ‘92, with dollars and support for his opponent (Sandy Hill).
   Gleason, on the other hand, has backed the industry each time we had an issue with the Genesee County board, where he’s served since 1993. He’s always been aware of the importance of housing to the community and the local economy, and historically acted in a manner consistent with that awareness. Although he (Gleason) has “stepped on some toes" of elected officials, most of whom support his opponent, that’s not a bad thing when it comes to a vote of the total electorate.

County Commission — District #3 (Burton and East Flint)
   Burton Councilman Tom Martinbianco challenging incumbent Ted Hammon. Although an historic ally of the building industry, Martinbianco has swayed from his support for growth in recent years. Hammon, on the other hand, has intensified his support for housing, fully aware of the dividends it has paid for Burton, and the county as a whole. In fact, Ted Hammon stands with the strongest pro-housing leaders in support for the industry.

County Commission — District #7 (Flushing, Clio, Montrose)
   Former Flushing Mayor Archie Bailey, Former Commissioner George Emery, and Flushing Councilman Jay Johnson are vying for this open seat. Bailey’s history in Flushing has been somewhat obstructionist when it came to development, while Johnson’s been just the opposite. Johnson, who appeared at the April BAMF meeting, has strong support among active housing industry members in the area ... We would also note the he (Johnson) was one of the first to offer support when the moratorium was announced, and will clearly be a housing friend.

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

Another side affect of the cigarette tax

   It’s never a surprise when the state’s government bases its financial salvation on concept likely to backfire. But the idea of making up for its shortfall by raising the price of cigarettes is almost laughable. First, its supporters said they hope it causes smokers to quit! The result of success is less revenue, rather than more. But, of course, each smoker has the opportunity to by on the web; cross state lines; or buy on the “black market,” all options which will cut, instead of enhance, state revenues.
   But yesterday we discovered another downside to the tax increase ... higher crime. A gas station owner had to remodel his store, pulling hundreds of cartons behind the counter.
   Why? Because over the weekend they had fifteen cartons of cigarettes stolen, and the new tax doesn’t go into effect until Thursday.
   Now, with the price so high, the incentive’s greater to steal, be it for personal use or resale. And, with 3 cartons now worthy of a “Grand Larceny” charge, perhaps the state should think about expanding its bed and breakfast facilities. Then again, that would cost money as well.

How about that Bonior/Granholm fued

   It’s almost time for the primary and neither Veritas nor Seinfeld has commented on the Democrats’ gubernatorial race, where Dave Bonior and Jennifer Gran-holm are cutting each other up far worse than either would expect from the GOP. But, then again, maybe Bonior’s commercials comparing Granholm with Engler, and calling her “Engler’s attorney, not the peoples,” will help the A.G. in November. But we doubt that’s what he has in mind.
   Interestingly enough, former Governor Blanchard has kept pretty much out of the current fray. Perhaps his opponents’ destructive measures may put him back in contention.

Mayor Rutherford

   Finally, isn’t it ironic that Jim Rutherford’s destined to be the next mayor of Flint. No other major candidate ran under the premise that the state was taking over. Now, it looks like Jim, John, et. al. are back in city hall.

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Association News and Events by Laura

  

FALL PARADE OF HOMES    Just a reminder that the deadline for the Fall Parade is August 12 (at the increased rate of $2,700). Also on that date all renderings, floor plans and house information sheets must be turned in to the Association Office.    Some builders don’t want to miss this opportunity due to the fact that the Fall Parade has been so successful for them in prior years. Don’t be left out! Call Barry or Laura (603-2200) if you have any questions.   BITS AND PIECES    Fall Housing Quarterly contracts were sent out to members July 8th. It’s important members contact the BAMF Office as soon as possible if they’’re putting a full page color ad in the magazine (set-up of each issue depends on how many color pages we need).    Also, if any member would like to submit an article for Housing Quarterly they may do so. We ask that you get us the information before August 12th. (Publisher has the right to edit ).

HABITAT HOUSE - We still need our members’ involvement with this project. Contact President Steve Edwards at 694-4000 or the Builders Association Office at 603-2200, if you can donate your time, labor or materials. Hopefully we will have an up to date schedule listed in the next Veritas as to the progress and items still in need.   2003 NAHB INTERNATIONAL BUILDERS SHOW    Registration & Housing forms for the 2003 International Builders’ Show are beginning to show up in the mailboxes of Association Members. The “annual convention” begins on Tuesday, January 21, 2003 and runs through Friday, January 24th. and will take place in LAS VEGAS.    Hotel assignments for the Michigan Delegation will be at the “Luxor” and also the “Flamingo”.    NAHB once again has an early registration deadline of October 18, 2002, in order to be assigned to these

accomodations for Michigan’s delgation.    If you have not received a Registration/Housing Form yet, we will be getting more at the BAMF office in the near future. Members may also register online (www.BuildersShow.com).    Final advance registration is December 13th, 2002 (after that date you must register on site).    Call NAHB at 800-424-5249 or 847-940-2155 regarding any Builders’ Show Registration and Housing questions.

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Economic Update: Why few seem to buy analysts’ views

   After 3 days of a stock market surge, the market went back into three figure deficit numbers by noon. And, despite the fact that economic reports have been strong since December, and analysts continue to talk up the “recovery,” few Americans, neither investors nor the general public, seem to be buying into it.
   This morning (Tuesday) the Conference Board, the private company that surveys consumers’ attitudes monthly, said Consumers’ Confidence plunged 8.6% during the first 22 days of July to its lowest level since February.
   The low level of confidence suggests a serious problem regarding the future of our consumer driven economy that’s responsible for 2/3 of economic activity. However, with confidence nearing its lows of last fall (after 9/11), much of that activity appears in jeopardy.
   To put it all in perspective, from 1997 through ‘00, the Consumer Confidence index averaged 133. By January of ‘01 it had plummeted to 115.7, then held at near 110 until September (interestingly enough, it was still at 132.6 in November ‘00, but that was little help to Gore).
   So, why is consumer sentiment so low on the heels of a quarter of 6.1% growth, and while professional econo-mists project solid growth in the coming quarter? Because no one believes it, and for good reason.
   We’ve recently noted, in this column, how the growth of the first quarter had no impact on jobs and, despite continued growth in the manufacturing sector this year, its employment continues to decline. Well, with factories still operating at 75% of capacity, there seems to be little reason to invest in equipment and employment (particularly as prices don’t merit such investments). But there’s also the track record of the economists, who are becoming harder to believe. Last fall they said we were in recession, and we really weren’t. So, they’re consensus forecast for the first quarter of ‘02 was growth of less than 1%. Of course that’s a long way from 6.1%. So, when they talk about the healthy economy and anticipate growth in the 3.3% range for the 3rd quarter, no one puts any credence in the prognostications.
   Furthermore, there’s the issue of fiscal discipline in the U.S. Government. After eight years of declining budget deficits, and ultimately a surplus and debt reduction, the government’s back to borrowing massive amounts of dollars. Early this year we projected a Federal Deficit in the $180 billion range (almost identical to total spending on prescription drugs). At the time, government budget officials were expecting a deficit in the $40 to $50 billion range ...well, last month a White House forecast placed the fiscal ‘02 deficit at $160 billion, while some analysts now project deficits throughout the decade.
   Throughout modern history there’s been focus on the federal deficit as an inhibitor of economic growth. But in the ‘80s, there was a new theory that deficits didn’t matter. Well, they did, and dealing with the deficit in the ‘90s led to the longest term expansion in American history. Of course, now that fiscal responsibility is a thing of the past, is it any surprise that few are willing to buy in to the glorious prognostications? We think not.

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Housing Industry Update - Local Single Family Down 11.5%

   While housing data for the first half of the year shows the state’s building activity running at a nearly identical level to ‘01, the Flint area is down roughly 11.5% for single family permits for the January - June period. Furthermore, total activity in the local area’s down 12.5%, according to the U.S. Department of Commerce.
   However, before we read too much into the data, remember that last year’s first half represented an all time high for the period, sparked in part by the strongest “April” in history when builders pulled massive numbers of permits to beat the upcoming sewer and water capital improvement fee. Also, ‘01 as a whole, was a banner year for local housing, while the rest of the Southeast Michigan region, and the state, showed a major decline from the previous two years.
   In all, Commerce said the Flint area authorized 1,200 units by permit, down from 1,371 in the first half of last year. Of those, 919 were single family, off from 1,038 in ‘01.
   Housing Consultants, the firm in Clarkston that monitors permits across Southeast Michigan shows Genesee County’s total activity down just 6%, but single family activity’s off 14.8%. But it’s Housing Consultants’ municipality breakdown that may give us a bit more cause for concern. Its data show that Grand Blanc Township is UP an incredible 96% for the first half of the year, while the rest of the County’s down 30.3%. Of course, Grand Blanc raised its tap-in fees by $1,000 at the beginning of July, so there was a surge in permit applications to beat the rising costs. Furthermore, 220 of 447 permits were for rental units.
   So, it’s apparent that activity’s slumping significantly this year, with municipalities like Davison Township, Flushing Township, Fenton, Swartz Creek and Davison all down more than 50%.

   Home sale, both existing and new, continued at exceptionally strong rates in June, and both indexes look like they’re heading for new record years. However, while new homes sold at new record levels last month, existing sales experienced their slowest rate since December of ‘00. And that’s what’s so amazing about the past few years.
   The Realtors June data shows sales off 11.7% from May. But, the sales’ rate remained above five million for the 18th straight month. To put that in perspective, America’s sales never broke the 4 million level until 96. In ‘99 they hit 5 million and have run at 5.65 million rate for ‘02.
   New homes sold at a record level in June. Their annual rate of 1 million was up slightly from the 996,000 May revised record rate, bring the first six months’ annual rate to 937,000, which is 3.2% above the annual record pace set last year (908,000).
   The median price of an existing home was up 7.4% from a year earlier, to $163,500. But the cost to the buyer was nearly the same, due to lower interest rates. A 90% loan a year ago cost about $930 monthly on the median priced ($152,200) home while a similar loan on the June median price is $925.

   So, with prices continuing to rise, what about all that talk regarding the Housing Bubble? Last week NAHB and the Realtors used recent testimony by Alan Greenspan to attempt to “put the issue to rest.” Well, we think their could be a serious “bubble,” which could emerge if interest rates rise. The fact is, price increases have been offset by lower interest rates since May 2000, and we’ll bet Misters Seiders, Lereah and even Mr. Greenspan that a sharp rise in mortgage rates will be met with a sharp decline in prices paid, in areas with exceptional appreciation over the past two years.
   But, keep in mind, Michigan’s prices grew moderately since it led the nation in appreciation prior to rates plunging in ‘00.

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