August 18, 2003

Inside Veritas -
Article 1 - No surprise as Land Use Council Ignore’s Causes of Urban Decline
Article 2 - “Peoples’ Republic” Jumps First; Ann Arbor Plans Green Belt “Mote”
Article 3 - Gephardt: New "Monarch" in Waiting
Article 4 - Taxation and Finance - Selling Investment Property — Like-Kind Exchanges
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - Are signs of strength abundant?
BS: Still about Nothing in particular
Housing Industry Update

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No surprise as Land Use Council Ignore’s Causes of Urban Decline

  (Analysis) We doubt it was in her plans, but Free Press Real Estate writer Judy Rose’s column this past Sunday may well have highlighted the problems facing Urban Centers, far more than all the pages of the Land Use Leadership Council’s report in totality.
   While the “council’s” primary objective may be urban redevelopment with the intent to create “cool cities,” it refused to deal with the causes of urban decline, instead opting for plans that would restrict individuals’ options. But Sunday’s column clearly brought to light one of the many maladies that continue to contribute to urban decline: Outrageous tax rates and overall costs of owning a home.
   Rose’s column, “What you can buy for $200,000,” in communities throughout the Metropolitan Detroit area, showed houses ranging from 1,041 square feet in Ann Arbor to 2,940’ in Detroit. But the disparity in size wasn’t nearly as consequential as the disparity in property tax. While a $200,000 home in Brighton has an annual tax bill of $2,226, a similar priced home in Detroit pays more than 3 times the amount, $6,769. And, that doesn’t even take into consideration a 2.55% city income tax, higher insurance rates and higher utility rates.
   To put this in perspective, a household earning $100,000, that purchases a $200,000 home, would pay an extra $7,000 in property and income taxes, along with higher home and auto insurance rates, just for the “privilege” of being able to live in a high crime area with poor municipal services (not to mention low house appreciation).
   Although they don’t get as much attention, taxes, like crime and schools, impede the redevelopment of older cities like Flint and Detroit (Flint’s 1% income tax, along with higher property taxes and insurance rates has a similar impact comparatively). However, like crime and schools, the Land Use Council chose to ignore the tax discrepancies though they impede its goals.
   After the Council approved it 57 recommendations to restore cities, preserve farmland and contain sprawl, it’s intellectual leader, Bill Rustem, was the featured guest on “Inside Michigan Politics.” Rustem’s company makes up the council’s “staff,” and the draft of the preliminary report was nearly identical to statements he’s made in recent years regarding sprawl and its resulting problems. In the appearance, he explained the “serious” situation facing Michigan, referring to a study claiming the state is 47th in attracting 25 to 34 year olds.
   According to Rustem, the problem isn’t caused by lack of economic opportunity, or even climate. It’s because, he says, “our cities are horrible.”
   Reacting to his statement, OTC host Tim Skubick suggested that crime and schools were the cities’ real problems, to which Rustem responded that to use crime and schools is just “an excuse to do nothing.”
   In other words, a majority of the Land Use Leadership Council members want people to invest in Michigan’s cities, but refuse to address the problems that inhibit such investments. Until there’s progress on those problems, no government edict will make the state’s primary cities “cool,” let alone desirable places to live and invest.

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“Peoples’ Republic” Jumps First; Ann Arbor Plans Green Belt “Mote”

   In 1998, most of Michigan’s local home builder associations supported the efforts of Washtenaw County’s chapter to stop a countywide ballot proposal to create funding for the purchase of development rights from the area’s farmers. The effort was successful as the proposal was defeated by voters, despite the fact that Ann Arbor’s voters approve the plan by a solid margin.
   Now, however, with Land Use in the forefront of Michigan politics, the “People's Republic” of Ann Arbor plans to go it alone, and set the trend for the state.
   Last Friday the city’s leaders proposed a program that would generate some $30 million in tax revenue (along with $50 million in matching funds) to “buy outright or purchase the development rights to about 10,000 acres in and around the city,” according to the Free Press (as most [2/3] is directed at outside the city limits). The proposal would add a tax on all city property of 0.5 mill (50 cents on every $1000 of taxable value).
   Although a few Michigan communities have taxes that support the purchase of development rights within their boundaries, this would be the first time a municipality would blatantly purchase control of land outside its corporate limits.
   What’s most disconcerting about the Ann Arbor proposal is it’s likely long term impact on housing affordability. From a historical perspective, Ann Arbor’s housing has been the least affordable in the Midwest. When the NAHB published its quarterly “Housing Opportunity Index,” (HOI) Ann Arbor consistently ranked at the absolute bottom of the region due to its extremely high existing home median price.
   In the last HOI (1st quarter ‘02) the median price of $190,000 was affordable to a region low 60.2% of the area’s families. And, for the first half of 2003, the average price of an existing home was $253,500, or 86% greater than the state’s average price of $136,400.
   But what’s most notable regarding the cost of housing in the proverbial People’s Republic comes from another Free Press article regarding “what $200,000 will buy around the Metro-Detroit area.” The $200,000 home in Ann Arbor was a hundred year old, one bedroom, 1.5 bath house on a 50’ by 112’ lot, with less than 1,050 square ft.
   Now, here’s the “catch.” City councilman Bob Johnson, who supports the plan, told the Ann Arbor News that “there isn’t a lot of land left to buy inside the city boundaries.” And Mayor John Hieftje, the plan’s father, considers it a proposal to stop sprawl. So, the question begs, where will development take place if the program goes into effect?
   Well, the answer’s quite obvious: outside the area’s where the city controls development. In other words, if the city purchases land (or development rights) on, or near, its borders, development will have to leapfrog beyond its “greenbelt" and, thereby, intensify the "sprawl" that Ann Arbor's trying to contain.

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Gephardt: New “Monarch” in Waiting (from Previous Issue)

  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 ---- Selling Investment Property — Like-Kind Exchanges

   A well known, but sometimes overlooked, way to alter investment holdings without paying tax at the time of the transaction is through the use of "like-kind" exchanges. In a like-kind exchange, investment property is traded for other investment property. The person transferring one piece of property receives different property but keeps the same basis as that for the old property. That way, the gain is deferred while other tax attributes are preserved.
  Of particular interest are the flexible features that make a like-kind exchange an especially useful technique. First, properties do not have to be of identical type to qualify as like-kind. To take a few examples, commercial buildings have been exchanged for unimproved lots, farm land for city lots, and even cooperative housing stock carrying occupancy rights for a condominium interest in the same property.
  One caution: like-kind exchanges do not work with all types of investment property. For instance, neither stocks and bonds nor partnership interests qualify. Second, properties do not have to be exchanged at the same time. Therefore, it is not necessary to have already located the exchange property to make a like-kind exchange (an important consideration if the end of a tax year is looming). It is sufficient that the exchange property be identified within 45 days after the relinquished property is given up, and that the identified property be received within 180 days. (However, if the tax return due date for the original transfer year occurs before the end of the 180- day period, the identified property must be received on or before the tax return due date).
  To illustrate how these exchanges can work, consider the following example: Fred owns an interest in an office building. He bought it years ago for $10,000, but today it's worth at least $100,000. Fred has decided to move to Florida and convert his office building interest into an ownership share in a Florida apartment building. Allison wants to buy Fred's office building interest, and for tax reasons she wants to own the building interest by December 31. Fred wants to avoid the high tax he would have to pay after a cash sale.
  A solution is a deferred like-kind exchange. Fred transfers his building interest to Allison on December 31. Allison agrees to locate and buy a Florida apartment building interest of equal value suitable to Fred. (Fred can even insist that Allison put the purchase price in escrow, so long as Fred has no independent right to the cash).
  After Allison finds and buys the Florida property, she transfers it to Fred, and the like-kind exchange is completed. Provided the 45/180 day rules along with other requirements are satisfied, Fred receives the Florida property tax-free, with the same basis and holding period he had in the office building. As you can see, a like-kind exchange can be an excellent tool that can be used to achieve investment goals. Even in situations where it is impractical to arrange a completely tax-free transaction, like-kind exchanges may still reduce the immediate tax consequences of altering yourinvestment holdings. Any transaction must be carefully structured and completed by a tax professional.

R, P & T

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

No Wonder Jerry Wanted Out

   A primary reason the TV sitcom Seinfeld ended at the height of its popularity was that Jerry wanted out of California. Well, in recent months his desire to flee (even to return to New York) seems far more understandable, as the state and its residents have virtually dominated national news broadcasts for 2003.
   First there was Modesto resident Scott Peterson, who apparently adopted his former congressman’s (Gary Condit) method for dealing with unwanted lovers. After losing his “lead story” status to the war in Iraq, he was back as the headliner as his wife and child’s bodies were found, only to lose #1 status to a Los Angeles hero. Of course, that was Kobe Bryant, the former “good guy” NBA poster child, who ran into a little felony problem in Colorado.
   After two weeks as America’s lead story, Kobe fell to a neighbor, when Jay Leno played host to the “Terminator’s” surprise announcement that he would run for Governor as part of the ballot set to recall the State’s current governor, who was just reelected in 2002. Yes, the Austrian body builder, Arnold Schwartzennegger, not only is a candidate for governor, but the clear front runner. And, as “the” candidate, he made the covers of both Time and Newsweek.
   But Schwartzenegger’s rise to political prominence, as strange as it may be, is just a symptom of the California that’s been, to some extent, the laughing stock of the nation. Though noted for being the world’s 5th largest economy, the Golden State’s politics are about as realistic as its best known industry. And, with substantive policy giving way to image oriented politics, the state finds itself with a deficit of $38 billion, and a public that’s so put off, it’s almost sure to recall the Governor it elected last November.
   But what really adds to the state’s laughing stock image is the cast that makes up the 135 (or so) candidates to replace Governor Gray Davis. While a Buffalo News’ editorial calls it the “California Carnival,” the Arizona Republic Refers to “Left Coast Lunacy.” And while Leno and Letterman have their expected “field days,” even Fox News and CNN can’t contain the laughter. And why not ... here are some standouts:
· “Hustler” publisher Larry Flynt, says “I honestly think Californians wouldn’t mind having a smut peddler who cares.” He wants to expand gambling revenues to battle the budget deficit.
· Gary Coleman, the diminutive Arnold of the ‘80s sitcom, Different Strokes.
· Mary Carey, an “adult” film star, who wants to swap porno films for guns, and tax breast implants (may work in Cal.)
· “Gallagher,” the semi celebrity comic known for smashing melons on stage.
· Michael Jackson, an engineer hoping to capitalize on his name.
   If Davis is recalled, as expected, the top vote getter becomes governor. And, with 135 names on the ballot, 3/4 of 1% of the vote could conceivably win. So, if Arnold stumbles, it’s anyone’s race. But then again, how can anyone “stumble” in, what Archie Bunker called in the ‘70s, the “Land of Fruits and Nuts?”

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Association News and Events by Laura

  

Parade Entries at 25; Housing Quarterly Deadline Near   It looks like another year of strong participation for the Fall Parade of Homes, opening Saturday, October 11th. As of Friday morning we had 24 homes, with more expected at Monday’s deadline. Running through Sunday, October 26, the event’s open during our traditional Fall hours: Noon to six on weekends, 4 to 7 p.m. on Thursdays and Friday’s (closed Monday thru Wednesday).   As has been the custom since 1991, the Fall event will coincide with the Fall issue of Housing Quarterly magazine, due for publication Friday, October 3rd. Due to strong support from BAMF members, we’ve been able to keep HQ advertising rates at, or near, 12 year ago levels (non member rates are 50% higher). If interested in advertising in the fall issue, we remind you that all contracts, copy and payments must be in by September 2nd. However, we have to make note that full color ads can’t be assured beyond Monday, August 18th.

BAMF NOTES:   With the current focus on “sprawl” and the proverbial finger pointing at the building and development industries, BAMF has joined together with the Tri-Cities local HBAs (Saginaw, Bay and Midland) for a two week “image” TV advertising campaign on channels 5, 12 and 25, beginning the third week of September. The ad stresses the comforts of home, with the theme that your local associations are working to preserve “your vision of the American dream.”   The add will run 78 times, leading up to our Parade of Homes’ advertising blitz, and should help enhance our visibility and purpose as we face the coming Land Use attacks. # # #   Remember, the first General Membership Meeting this fall is September 10th at Bonaparte’s. Printcomm will sponsor the evening ... details in the 9/2 Veritas. # # #   Special thanks to John McMurray who successfully forecasted the Golf Outing weather (8/5), way back in April!

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Economic Update: Are signs of strength abundant?

   For the past two weeks we’ve been deluged with a multitude of reports suggesting the economy’s strengthening. As the first estimate of second quarter growth had Gross Domestic Product up 2.4%, a new survey of economists projected a 3.6% rate of growth for ‘04. The economy experienced a surge in productivity, the manufacturing sector expanded in July, which was obviously a result of the largest rise in factory orders in 3 months (up 1.7% in June), including the biggest jump in durable goods orders in nearly a year.
   Furthermore, despite another decline in the consumer confidence index, consumers spent more than expected last month, as retail sales rose 1.4%, led by an upturn in auto sales.
   However, back in the early ‘80s, as the economy was so bad the question was recession or depression, the difference between the two was defined in the following terms: “If your neighbor lost his job, it’s a ‘recession.’ If you lost your job, it’s a ‘depression’.” And, unfortunately, many of our neighbors are continuing to lose their jobs.
   While headlines noted the unemployment fell to 6.2% in July (from a 9 year high of 6.4%), the decline resulted from the “exodus” of 470,000 from the job market, rather than from an upturn in employment. In fact, the economy lost 44,000 jobs during the month.
   And, while manufacturing sector activity grew in July, manufacturers shed 71,000 jobs, making it the 36th consecutive month America’s factories cut the number of employees.
   Which, takes us back to the “good” news about the 5.7% surge in worker productivity. With the economy growing during a period that it shed more than 100,000 jobs, what else could be expected?

Economic Growth Up 2.4%
   “A more robust recovery got a boost as the nation’s major engines for economic growth accelerated their pace of spending in the 2nd quarter.” That was the Wall Street Journal’s opening line in its report that economic growth was up a surprising 2.4%, the strongest rate of growth since last summer.
   However, if there was a major bright spot in the economy, it came from the Federal Government, based on a 44% rise in Defense spending, the biggest jump since the Korean conflict more than fifty years ago. Still, Treasury Secretary John Snow said the Commerce Department data show the economy is “well on its way to recovery,” noting “we haven’t even yet seen the full effects of the tax bill — add the momentum that’s already there and I think we’re going to have some much better results in the 3rd and 4th quarters.”
   In reality, there was one significant plus in the GDP report: that business fixed investment rose at a 6.9% annual rate. Not only was that the fastest pace since early 2000, it included an annualized 7.5% rise in equipment and software. Since spending by the business sector has been lagging, this seems, on the surface, to be a “positive.” But, investments in equipment and software are unlikely to increase jobs in the companies making the investment.

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Housing Industry Update

   For more than a year we’ve been focusing the impact of historically low mortgage rates on median home price levels, often pointing out that, while prices soared, the actual cost of buying was substantially lower. Our point was that, despite denials by National trade organizations, there was, in fact, real potential for a “bursting bubble,” led by a decline in prices on the nation’s coasts.
   Now, over the past five weeks, rates have risen more than 1%. To put that in perspective, the cost of a $120,000 loan is up more than $100 per month, and bond market activity during the past few days suggests a significant rise is imminent by the time Freddie Mac reports next week.
   During the past two weeks, as mortgage rates soared, two articles appeared in national publications (Wall Street Journal and Money) focusing on the threat of lower values because of higher rates. Both articles identify the problem correctly, but due to an age old economic mistake, they overstate the danger because they confuse “prices” with “values.” Frequently over the past several years, we’ve focused on the differences in median price levels, as reported by the Realtors, and values as reported by the OFHEO’s “House Price Index,” particularly as they related to activity in the most expensive markets. Often those markets showed prices growing at double the rate of the HPI.
   The danger with the confusion is that median prices, particularly in the high priced markets, will undoubtedly recede. Since much of the national media are based in these areas, they’re likely to misinterpret declining price levels as declining values, and begin a panic that will, ultimately, result in “declining values.” And, we may see those lower median prices as early as the third quarter report .. so, we can only hope our national associations can explain the discrepancy of Price v. Value.

# # #

   Regarding prices, the Realtors said that, for the first time since they began reporting, “all metropolitan areas” showed an increase in prices during the 2nd quarter of ‘03. For the April through June period, the median price of an existing home was $168,900, up 7.4% from the same period in ‘02. Also, there were 40 metro-areas with double digit appreciation (we’ll check those with HPI data next month), led by Riverside (CA) and Providence (RI) at + 23%.
   Only 2 Michigan cities, Lansing and Grand Rapids, were in the report, showing 7.6% and 3.7% increases respectively. Unfortunately, Flint and Detroit never show up in NAR reports.
   The “Realtors” also reported its housing affordability index remained near its all time record in the 2nd quarter, as a family with the median income of $53,285 had 143.4% the necessary income to purchase a median priced home .. but that’s likely to dramatically change with higher rates this quarter.

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   There was a lot of attention given to the analysis of Census Data showing California with 128,619 homes valued at more than $1 million, which is 41% of the nation’s total, 476% above 2nd place New York’s 22,327 (Michi-gan was 10th, with 5,989). Of course, as we’ve seen in previous issues, $1 million may not get you all than much in California’s high priced areas.
With median prices of $560,000 in the San Francisco area, and $472,000 in Orange County, $1 million would be the marginal equivalent of $400,000 in traditional Metro-Detroit, or $280,000 in the Flint area.

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