August 22, 2002

Inside Veritas -
Article 1 - Despite denials, housing "bubble" could burst; but probably not here
Article 2 - Business News & Issues
Article 3 - Sewer/Water Moratorium
Article 4 - Taxation and Finance - Education Savings Program
Article 5 - Indict Secretary "Don" Evans
Association News Update From Laura
Economic Update - Was Commerce "cooking" the books?
BS: Still about Nothing in particular
Housing Industry Update

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Despite denials, housing “bubble” could burst; but probably not here

   Each month when the Realtors report existing home price data, a media frenzy ensues regarding the “housing bubble,” usually suggesting that home prices are artificially high, and face the fate of inflated stock values at the end of the 1990s. And, subsequently, the NAHB and NAR try to put the fears to rest, noting historical data that suggest there will be no burst as “even during recessions the national home price has risen every year.”
   But if we’ve learned anything about housing in the current era we’ve learned that history does not, necessarily, apply. After all, housing’s gone into a down turn during every expansion before the rest of the economy turns south. Yet housing celebrated its strongest year in history in ‘01, with the nation, arguably, in recession for the first nine months. So, lets look at this so-called “housing bubble.”
   Most of the “bubble” talk results from exceptionally strong rises in median existing home prices, which were up 7.4%, nationally, from ‘01’s 2nd quarter to the same period this year. However, that only tells part of the story, because a number of highly populated areas experienced double digit rises, as high as 29.6% in Long Island’s Nassau and Suffolk Counties, and 21% to 25% in other metro-New York communities, San Diego and Washington, D.C. In fact, 26 communities had median price increases of 11.5% or higher, suggesting real estate values are soaring, despite a relatively soft economy.
   Now, these numbers go along with the “bubble” theory that points to the following: 1) For the past few years, house prices have been rising faster than incomes; 2) In meeting those prices, buyers have been assuming far greater mortgage debt, with payments running as high as 42% of income (normal range was 28%); 3) Payments, as a percent of disposable income, are at their highest recorded level, up 45% since 1980; 4) Credit standards keep falling under the premise that homes will appreciate, therefore lenders (and mortgage purchasers) should be insulated from big losses if the buyer can’t make their payments.
   However, if a large number of loans go bad, and there appears to be a loss in home values, the ripple effect of repossessed homes going back on the market, with tighter lending standards and a weaker economy, could cause prices to tumble downward.
   Now, these items may provide some cause for concern, however, as we’ve often stressed, there’s a lot of market distortions that inflate median prices, and those price levels frequently don’t reflect home values, either nationally, or even in a particular metro-area.
   First of all, the National Association of Realtors’ metro housing report looks at roughly 140 metropolitan areas. So, it means only 18.5% showed those solid (11.5% plus) gains. Then, if you eliminate those in Florida, California or the Metro-New York area, there are only 11 that show double digit price gains, or just 8.8% of the rest of the U.S.
   But, the real key to the housing “bubble” relates to actual home values, rather than median prices. Rather than using sales price data (alone) to show appreciation, we look at the data from the Office of Federal Housing Enterprise Oversight (OFHEO), which measures growth of values on individual properties’ transactions over a period of time. By looking at the same properties’ transactions, we get a better idea of real values, undistorted by stronger activity in certain market segments.
   When we compare median prices in these markets with the OFHEO’s House Price Index, we see just how drastic these distortions can be. While Nassau-Suffolk’s median price was up 29.6%, its HPI was up roughly 11.5%; and while San Diego had a median price rise of 21.6%, its HPI was up about 9.3%.
   The median price explosion began in late 2000, as mortgage rates fell to the 7% range from 8.5% in May. Interestingly enough, Michigan homes experienced greater rates of appreciation prior to 2000, than since. So, it’s likely that we’re insulated from the repercussions from the “bubble.” But, then again, so are most areas around the nation. (note: a full examination of the “bubble” will appear in Fall Housing Quarterly)

Business News & Issues

GM leads auto sales to highest rate for year

   Spurred by 0% financing incentives, over 1.5 million cars and light trucks were sold last month, representing an annual rate of 18.1 million units, and a rise of 8.2% from July ‘01. With auto sales up 11%, and light trucks up 36%, GM led the way with a 24% rise since last July, and even saw its market share jump above the 30% threshold.
   Even Ford saw its sales rise. Although it was just 1.5 over ‘01, it was the first rise for the distraught #2 automaker this year. Chrysler, on the other hand, experienced a decline of 4%, and its market share plummeted to 13.2%.
   Toyota’s sales rose 4.6% to a new July record of 156,053, giving the #4 “American” auto maker a 10.2% market share, just 3% below Chrysler. Last month we reported that June gap at 4.3%, and the year to date gap for the first half of the year at 4.6%. Well, July’s data brought the y-t-d gap to 4.3%.
   But, if there’s a real story in the July sales figures it’s the strong GM data. Last July the world’s biggest manufacturer had a 26.6% share of the U.S. market. Last month its share was up to 30.4%, making it the only major player in the American market to show a gain. Furthermore, it now has 28.7% of the share for all of ‘02, up from 27.9 in 2001.

For GM, it's more than just market share

   The once floundering largest auto company is showing signs of its old dominance at the expense of its domestic rivals. But its recent success extends far beyond its rising share of the domestic market, as it’s in position to extend its dominance to the future.
   What’s been most interesting about this recent round of incentives is that Chrysler and Ford, both weakened in the past couple of years, are finding it difficult to compete with GM. Despite incentives costing GM $423 more per vehicle than its competitors, the costs are having less of an impact on the company’s profits.
   It appears that, over the past 20 years or so, GM has done a much better job of making itself competitive in the world market. An article in BusinessWeek noted how GM has reduced its variable costs per vehicle to roughly 62% of revenue, as compared to 70% for Ford and Chrysler. So, the big rise in sales means GM can run assembly lines faster, raising productivity and gaining even more from its competitive advantage.

Insurance companies know what to do

A Wall Street Journal article asked, “what’s the best way to get rid of mold? The insurance industry has the answer: Exclude it.”
The article explained how most insurance companies are eliminating coverage for mold, in some cases even for mold caused by insured storm damage. It pointed out how “2 years ago, mold was barely on insurance radar screens.” Then, an avalanche of mold claims cost the industry $1.3 billion in 2001 alone. And, who’s the culprit? You probably guessed it ... trial lawyers and the media blowing the problem out of proportion.

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Sewer/Water Moratorium

1) The hearing set for September 6th has been postponed to Sept. 23, to give plaintiff time to review the Drain Commission’s justification for the Capital Improvement Fee (of course, one would have thought they’d have studied the available information prior to filing the suit). 2) Despite the moratorium, the commission is continuing the development approval process and will deliver all developments that have successfully gone through the process to the state immediately after the suit is disposed of. 3) Drain Commissioner Jeff Wright will be at the September 18th General Membership Meeting to present an update and answer questions.

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Taxation and Finance ---- Education Savings Program

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Indict Secretary “Don” Evans

   Consider this! It’s Spring of ‘01 and the nation’s economy is in serious trouble. Consumer Confidence has fallen 33 points in six months, the Dow Jones Industrial average is down over 1000 points, manufacturing activity’s plummeting and a growing number of analysts claim a recession’s imminent. Then, the Commerce Department reports that the economy actually grew a surprising 2% in the first quarter (later revised to 1.3%).
   Well, with recession no longer “imminent,” confidence, along with consumer spending begin to rebound over the following 2 months, and investors go back to the market helping the “Dow” recover its 1000 points.
   A year later, with the “Dow” off some 2500 points, the same department says “sorry, our figures for that first quarter were wrong. Actually the economy contracted during the period.”
   It makes one think if Martha Stewart had a friend at Commerce, she would have sold all her stock holdings on July 31st.
   Now, how familiar does this sound? The auditor for the U.S. economy, with obviously the full faith and credit of the nation, assures Americans that the economy continues to expand. The public goes back to buying stock in American corporations under false premises before finding their government mislead them. The result? A 22% decline value of those investments.
   Now, if this were Enron, the Senate would have subpoenas out for the “scoundrels” who were responsible. Maybe Playboy would have a special issue dedicated to the women who lost their savings from failing investments. Bill O’Reilly and Chris Mathews would verbally harass the culprits nightly until they confessed or committed suicide. But in this case there’s been nary a word about incompetence or deceit.
   Well, this should give all a sense of understanding. Commerce Secretary Don Evans was formerly the CEO of an oil company in Texas. How many dealings do you think he had with Ken Lay? It’s time to heat up that tar kettle!

Barry

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

Government mandates breeding grounds for "West Nile" virus

   This past Saturday the Flint Journal published a Washington Post article regarding the fact that governments are “inadvertently creating vast breeding grounds for mosquitoes — including those carrying West Nile virus — by installing storm water retention ponds.” The article quoted the chief of Maryland’s mosquito control program noting how the ponds “are everywhere and give us fits.”
   Well, the article was a reminder of a recent conversation regarding theories behind the creation of Michigan’s original drain code back in the late 1800s. In those days, the state had a serious problem with another mosquito transmitted disease. Apparently breakouts of malaria reached epidemic proportions at the time, so there was an advantage to eliminating such breeding grounds as wetlands and swamps.
   Of course, by the 1970s, no one was concerned about malaria, and environmentalists had converted wetlands into hallowed grounds. So, the state went into its protection mode, and filling a wetland became tantamount to killing an owl or whale or something.
   Now, we even take credit for creating more wetlands than were in existence years ago, and we continue to build retention ponds under government mandates. In other words, new laws endanger the very public health and safety they were designed to protect.
   Earlier this summer, didn’t forestry experts say that the laws designed to protect forests were responsible for the destruction of those same forests (regarding the fires out west)? Maybe it’s time governments quit interfering with matters they really don’t comprehend.

Don't call it "Sprawl" It's now "Declustering"

   A fascinating op. ed. piece appeared in last Thursday’s Wall Street Journal called the “Declustering of America,” by Joel Kotkin, a senior fellow at the Pepperdine Institute for Public Policy. The editorial questioned the wisdom of building more high rise office structures to replace the World Trade Center or, for that matter, building high rises in any major city. Kotkin argues that most people don’t want to live, or work, in big cities, and that, due to modern communication technology, there’s no need to cluster industries, or employment in general.
   Kotkin uses a number of examples of how companies and families have prospered tre-mendously with a “squarer existence in many of the nation’s burgeoning ‘nerdistans’ located on the outskirts of major cities.” And, he suggests, without directly saying, that centralized business districts in big cities have become obsolete.
   But it’s one of his conclusions that really hit home for Southeastern Michigan as he wrote: “City officials and economic development professionals are no longer going to be able to hold onto companies because firms in a particular line of business have ‘always’ clustered in a specific area.” You can only hold onto current “economic supremacy by improving quality of life, services and tax structures.” And that statement is the sum of the fate of “industry towns” like Fint and Detroit.

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Association News and Events by Laura

FALL PARADE OF HOMES

   The Fall Parade of Homes will open October 5th with the final tally of 28 homes. The participating builders are: (Listed by order set in the
Parade Location Map)

1) Patrick Widing Custom Homes
2) Lausman Homes
3) J.M. Developments
4) HomeTown Building LLC
5) Sleepy Hollow Condos
6) Pratt Builders Inc
7) Valley Ridge Construction
8) Woodside Builders
9) Woods of Flagstone Condos
10) Riske Custom Homes
11) Samuel Anthony Homes
12) HRC Building Co
13) Future Homes
14) Riley Custom Builders
15) Symphony Homes
16) Woodfield Development
17) Wake Pratt Construction
18) Fischhaber Builders
19) Homes by Design
20) Signet Residential Inc.
21) Simoni Custom Builders
22) J.M. Developments

23) Lexington Properties
24) Westminster Abbey Homes
25) Westminster Abbey Homes
26) Symphony Homes
27) Talon Homes-Pines of GB
28) L.C. Building

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GENERAL MEMBERSHIP MEETING

   Mark you calendar for the next General Membership Meeting which will be held on Wednesday, September 18th at Bonaparte’s (in the Great Lakes Tech Center on Saginaw St and Atherton Rd).
   The sponsored cocktail hour by S & M Lumber will begin at 6:00 p.m., buffet dinner at 7:00 p.m., with the meeting following dinner at approximately 8:00 p.m.
   The topic of the program that evening will be announced in the next newsletter (program dependent on sewer and water crisis).
   As in the past, we ask that members to RSVP a week before the meeting if they are going to attend (Sept 11th) by calling the Association Office at 810-603-2200.

BITS & PIECES

   It’s still not too late to advertise in the Fall issue of Housing Quarterly. The final deadline for black & white ads is August 30th. (Color ads must be reserved immediately). Contracts and rates are available at the Association office. Since space is limited, we ask that you act quickly and call us today.

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   Finally, after paperwork and scheduling problems, the hole has been dug and the basement will be poured for our sponsored HABITAT HOUSE on 2282 Nichols Ave in Grand Blanc Township.
   Within the next couple of weeks, the house will be at the physical stage where we can start keeping a photo diary of the progress being made.
   If you still want to contibute or help in any way, please call President Steve Edwards at 810-694-4000 or the Association office at 810-603-2200.
   (An update will also be given by Steve at the Sept 18th Meeting).

Economic Update: Was Commerce "cooking" the books

   When the Commerce Department released its first estimate of economic growth during the 2nd quarter, its data suggest the economy was so anemic it would have contracted had it not been for businesses restocking depleted inventories. In fact, the 1.1% growth rate was less than half of expectations, and well below a downward revision of first quarter growth of 5% (from 6.1%).
   But 2nd quarter GDP was the minor story in comparison to the rest of the department’s report. It turns out that Commerce says it had been overstating growth for more than a year (sort of like Enron, WorldComm, et.al.). Its newly revised data show the economy contracted 0.6% in the first quarter of ‘01, rather than growing at a 1.3% rate, and at a 1.6% rate in the second quarter (vs. 0.3% growth). The weaker two quarters also meant that the third quarter decline (originally 1.3%) wasn’t as severe. However, if the revised data are to be believed, it means that the economy was clearly in recession during ‘01, despite record sales of homes and near record sales of vehicles.
   Now, one could joke about the irony of the revised data coming a couple of weeks before CEOs were required to sign their companies’ financial statements to assure authenticity or write mock indictments and subpoenas for Cabinet officers. But in reality, the revisions bring good news for an administration that’s been under fire for questionable economic acumen as the President was quick to use the new data as evidence he “inherited” a recession, rather than being responsible for creating one.
   However, a serious question remains: How can the government’s data be so distorted? And, how can businesses and individuals, who make decisions that are based on economic data continue to have confidence in the government’s ability to provide it?
   Or, of course, there’s also the skeptics’ question: Did the Commerce Department “cook the books” to perceptually enhance the Bush administration’s economic stewardship?
   But the real problem for the economy is that, after reasonably strong quarters at the end of ‘01 and beginning of ‘02, activity was back near negative growth this past spring. Throughout the period of the past six quarters homes, both new and existing, were selling at all time record levels.
   Historically, housing activity tapers off well before the rest of the economy begins to contract, then gears up to pull the nation out of recession. Yet, while the nation was arguably in recession last year, housing continued its expansion that began in 1992, when its single family growth had an impact on the economy of adding nearly half a million jobs.
   So, the question remains, with housing having little room to grow, what industry or industries will take its traditional role in pulling the nation out of recession? Unfortunately, none seem ready to step up to the proverbial plate.

Manufacturing Expansion Continues, But ....
The Institute of Supply Management’s index remained above 50 in July, meaning the manufacturing sector was still expanding for the sixth consecutive month. However, it fell from 56.2 in June to 50.5, which was well below expectations. Furthermore, its employment index fell sharply, as it has shown no rise in sector jobs for more than two years.

Inflation Remains No Threat, but problems persist ...
July was just another normal month on the inflation front, as Consumer prices rose 0.1% and wholesale prices fell 0.2%. But there was cause for concern in the Labor Department reports. While the CPI rose at a compounded annual rate of 0.9% over the past three months, Medical Care was up 5.5% and Education and communications’ costs were up at a 6.5% rate.

Housing Industry Update - County's existing home sales up 11.7%

   With the Clio, Grand Blanc and Flint school districts showing the biggest gains, Genesee County’s existing home sales are up 11.7% for the first half of 2002 as compared to the same period in ‘01. Our analysis of data from the Flint Area Association of Realtors’ “sold books” over the past four years shows that local real estate sales recovered back to their recent years’ levels for the first half of ‘02, after tumbling more than 13 percent in the first half of 2001.
   In their breakdown by school district, the Realtors’ data show Clio area sales rising 49.4% over ‘01, while Grand Blanc’s numbers were up 30.6%, and Flint’s up 27.9%.
   What’s interesting about this year’s data is that, unlike other years when the City of Flint had a tremendous jump in sales, the average price of a home in the county rose. When the city experienced a similar increase in its share of homes sold, back in 2000, the average price fell by $3,100 county wide. But for 2002, the average price is up $2,800, to $120,720.
   However, the most fascinating data comes from the price levels around the county. Districts primarily in the southern third of the area (Fenton, Linden, Lake Fenton, Goodrich, Grand Blanc and Swartz Creek) made up a third of all sales. However, the dollar volume in those districts were nearly half of the total.
   The average price of an existing home in those six districts was $180,700, or 49.7% above the county as a whole. But if we separate the southern third from the rest of the county, the numbers are far more dramatic, because the northern 2/3 of Genesee County showed an average price of just $90,915, barely half of that southern area price.
   We’ll have a full analysis of first half sales activities in the Fall issue of Housing Quarterly, coming around October 1st.

What’s rising faster than single family home prices? How about Condo prices! The median existing condo price for the second quarter soared to a new record of $139,300, which is a rise of 14.7% from ‘01’s second quarter, according to National Association of Realtors’ sales data. That’s “double the rate of single family homes,” notes the NAR’s Economics’ chief, David Lereah.
The realtors’ data also shows that 42.2% on condo buyers are over 50, continuing the trend of “Baby Boomers” buying upscale but downsized housing.
While the typical single family home costs 13.2% more than the typical condo, the Midwest remains as the one region with higher condo than single family home prices. The median Midwest price was $150,000.

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