August 26, 2004

Inside Veritas -
Article 1 - Dangerous Tax Reform Plans on 2nd Bush Term Agenda?
Article 2 - DEQ Loses BIG!
Article 3 - Talk about the BIG Hype!
Article 4 - Taxation and Finance - Pay Now ... or, Pay Later?
Article 5 - State Manufacturing Jobs at New Low
Association News Update From Laura
Economic Update - States/Locals Depend on Housing
BS: Still about Nothing in particular
Housing Industry Update
Would you like to see a previous Veritas Issues? Click Here

Dangerous Tax Reform Plans on 2nd Bush Term Agenda?

 While most of the media’s attention was turned to 35 year old Swift boat stories, an old nemesis of the housing industry was raising its ugly head in a quieter mode. In mid August, a piece appeared in the Wall Street Journal noting “tax reform” is on the agenda for a second Bush term, and stating: “Republicans say Bush wouldn’t offer details, but would push next year. Model is 1984; then, Reagan’s election year call for reform yielded 1986 tax law.”
That night, GOP Senator Sam Brownback, telling CNBC the president is committed to a “growth agenda,” predicted we would soon be “hearing him talk about a flat tax.” And, House Speaker Hastert, in the process of hyping his book “Speaker,” calls changing “our current tax system and adopting a flat tax, sales tax or VAT (value added tax)” an important goal for the next four years.
If the GOP thinks Reagan’s 2nd term is a model for Bush term #2, they better think again: It, primarily due to the 1986 Tax Bill, was an economic disaster. And, a drastic change in tax structure (sales, VAT or Flat) in the coming years would bring about an even greater disaster.
Unfortunately, too few people seem to recall 1986, when a bi-partisan bill was designed to “simplify” the tax code. It created a two tier tax rate, with the top rate of 28%, and eliminated a number of deductions, including consumer interest, sales tax payments and, most notable, passive loss deductions from commercial real estate.
The building industry was in D.C. that spring, with passive loss deductions on our agenda. However, most were single family builders, who didn’t comprehend the disastrous impact of removing the “loophole (yes, it was a loophole)” that allowed the deduction of losses on real estate operations from profits on other activities.
Complicating the situation was that NAHB had been caught, five years earlier, attempting to sabotage the Reagan Tax Cuts. Now, the organization was reluctant to strongly attack the popular administration’s proposal.
Despite our warnings the bill would destroy the commercial real estate (and residential rental) industry, it passed by gigantic margins. But the disaster predicted was evident shortly thereafter.
As the act was phased in, multifamily starts plummeted from 777,000 units to 184,000. Commercial real estate values fell to below their mortgages, and the government was facing a resulting $50 billion bailout of the institutions that had financed them. Interestingly enough, we were ultimately saved from the disaster by the Tax Bill of ‘93, that restored passive loss deductions for real estate professionals.
In years passed, we’ve written several articles, and took part in studies, that show elimination of housing deductions would drastically impact property values (35% in 1995 for example). The result would make the disaster of 1986 look like a proverbial “cake walk,” with repercussions beyond housing and banking. And, whether we’re looking at a sales, flat, or VAT, the impact would be devastating.

Back To Top

DEQ Loses BIG! $1 Million & plaintiff keeps his Lake Michigan sand dune

For the second consecutive issue, we have the opportunity to celebrate Judicial action in the state. On August 10th it was the Supreme Court action that overuled two decades under the “Pole-town” decision while it affirmed private property rights. But today’s issue is even sweeter, because it truly put the state in its place, hopefully resolving a five year dispute over Lake Michigan Sand Dune Property.
William Heaphy, a Holland attorney, wanted to build a home on a one acre tract, but the state refused to grant the “special permit” necessary to build on the property purchased in 1984. After hearing testimony, Ottawa County Circuit Court Judge Calvin Bosman ruled the state must pay $1.16 million, and said Heaphy can keep title to the land, even after he’s compensated.
Interestingly enough, Heaphy sought $600,000, while the DEQ said the property was worth $570,000. But Bosman, after ruling a “taking” in April, set the value of the land at $11,600 per foot of frontage, for the two (50 foot) lots Heaphy had purchased for $107,000.

Back To Top

   Talk about the BIG Hype!

   I got back into town Saturday evening after two days up north, and heard the “buzz” about a G.M. announcement, coming Monday, that was so big the Governor was coming in from Lansing. The hype continued through Sunday, and one could only surmise there would be a major employment increase was to be announced.
Well, Monday came, and by afternoon there was no mention on any media web site. The 5 O’clock news came, and it wasn’t the top story. In fact, it wasn’t until 11 O’clock when I finally found out that G.M. was investing $60 million, adding two presses to the “metal plant.” And, despite no new jobs, our Governess noted that it could prevent the loss of 130 jobs. Oh, and the Mayor noted it was a sign of the “New Flint.”
$60 million? That’s about the value of a new, 200 lot subdivision. Do you suppose the Governor would show up for an announcement of such? ... By the way: We do note that a new, 200 unit subdivision, would mean about 500 worker/years of employment . Oh yah, and the value would appreciate, not depreciate, thereby created taxable value for generations yet to come!

Barry

Back To Top

Taxation and Finance ---- Pay Now ... or, Pay Later?

   If you've ever sold appreciated property and been paid for it over several years, you are probably familiar with the tax law's installment sale rules. They allow you to report your gain in stages, as you receive payments from the buyer, instead of reporting the whole gain in the year of sale.
The installment method usually works well from a cash flow standpoint. After all, why pay taxes today on money you haven't even received yet? But you shouldn't automatically use the installment method. Sometimes, electing to report the gain up front makes more sense.
For most individual taxpayers, the maximum tax rate on long-term capital gains is currently 15%. (Higher rates apply in some instances.) But it will return to its former level (generally 20%) after 2008. If your sale is structured so that you'll receive large payments after 2008, you could save taxes by reporting your whole gain in the year of sale.
In addition, the tax law lets you offset the year's capital gains with capital losses and include only the net amount in your taxable income. So, if you have an offsetting loss in the year you sell your property, you'll probably win the tax game if you report the whole gain on your return that year.

R, P & T

State Manufacturing Jobs at New Low

The Free Press article began, “Michigan’s economy stumbled in July, losing another 7,000 jobs.” However, it was actually Manufacturing that “stumbled,” as the report went on to suggest that the rest of the state’s economy actually experienced a job gain of 9,000.
Although the manufacturing decline of 16,000 jobs during the month was partially due to shutdowns for retooling at auto plants for 2005 model year production, July represented the first time factory employment fell below 700,000 for the state.
After its recent peak of 911,000 in mid summer of ‘99, manufacturing jobs have declined nearly 25% in the past 5 years. And, in a Wall Street Journal article that focused on “swing states” in the presidential election, Michigan was shown as having lost 245,100 total jobs since the beginning of 2001. That’s equal to 22% of the nation’s total job loss since Bush took office that January. Furthermore, if we combine Michigan’s and Ohio’s lost jobs since ‘01, we find 42.5% of the total employment decline of the 43 months.

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

  La Batt’s Bear Now has American Competition

Couldn’t help but take note of a story out of Seattle earlier this month about the Black Bear who was found, passed out at a Washington (St.) resort campground, after “guzzling down 3 dozen cans of a local beer. We noticed a bear sleeping and wondered what was going on,” said Lisa Broxson, a worker at the Resort. Then, “we discovered there were a lot of beer cans lying around.”
Well, they found that the 2 year old bear had broken into campers’ coolers, broke open the cans with his claws and teeth, then enjoyed the fruits (or hops) of his labor.
But the story doesn’t end there, as the Rueters’ report of the incident notes, we found the “bear was a beer sophisticate. He tried mass-market Busch beer, but switched to Rainier Beer, and stuck with it for his drinking binge.”
So, when the bear returned the next day, Wildlife agents were ready. They set a trap, using honey, and two cans of Rainier Beer. It worked, and the Rainier bear was captured, and relocated.
Now, we can only wait for mass marketing campaign to take the company international. Perhaps the Canadian La Batt Bear will find a new brew.

"Seinfeld" Briefs:

One had to laugh (just a bit) last week when 86 year old Mike Wallace (of 60 Minutes’ fame) was handcuffed and arrested during a confrontation with “Taxi & Limousine Commission” officers outside a Manhattan restaurant. The clash came when Wallace came out of the restaurant with a take-out order, and found the officers bothering his Limo driver. And, it’s probably just as well that the “commission” dropped the charges against the TV legend who’s probably ruined more lives than any investigative journalist in America.
After all, did we really want to see a CBS segment on discrimination against New York's Limousine set?

Back to top

Association News and Events by Laura

  

New Members' Applications SW / Flushing Development Associates LLC Mark Wolf Sponsor: Lucy Ham Accu Homes LLC Anil Uppal Sponsor: Barry Simon J C Development LLC Lisa Harris Sponsor: Barry Smon

GENERAL MEMBERSHIP MEETING We invite all members to join us Wednesday, September 15, 2004, at Bonaparte’s for BAMF’s General Membership Meeting. As with the past meetings, the networking portion of the meeting with cocktails and hors d’oervres will begin at 6:00 and run until 7:00 p.m. The program and regular portion of the evening will begin at approximately 7:15. Our special guest for the meeting will be Kevin Wigton (Head Gunsmith at William’s Gunsight) with ways in which to customize your rifles. He’ll also be bringing along a display that will be of interest to all of you outdoor enthusiasts. We also will be reporting on upcoming fall events and current Association activities. Association longtime member, Starline Distributors (Kitchens by Starline) is the sponsor for this meeting. We hope you can attend and get re-acquainted with those you haven’t seen in months. Remember to RSVP no later than September 8th if you will be attending. E-mail replies to: tracey@bamfhome.com laura@bamfhome.com or call us at 810-603-2200. Fall Parade of Homes Participants The following builders are entered in this fall’s event which runs from October 9th thru October 24th : J.C. Developments (2), Future Homes, Artisan Bldrs LLC, J.M. Developments, Lexington Properties(2), Tom Atwell Homes, Swank Builders, DCC Development, Riske Custom Homes (2), American Associates, G.D. Builders Inc.(2), Alexander Homes, Pine Hollow Custom Homes, SonRise Homes, C & L Homes, HRC Building Co., Woodside Builders, Valley Ridge Const., Horizon Homes, Delcor Homes, HomeTown Bldg, & SW/Flushing Development Associates.

Back To Top

Economic Update: States/Locals Depend on Housing

In the 8/10 issue we noted how gross income has been in decline since 2001, and indexed for inflation was off 9.2% from 2000 to ‘02. Well, this decline in income has had an impact on state and local revenues, as well as the IRS.
Furthermore, state and local shortages don’t stop there. They also take a hit on lower sales tax revenues, due, not only to declining spending in some markets, but the inability to collect on internet sales. However, those states and cities have found a savior. And, that “savior” is the one that’s saved the U.S. economy from economic disaster since the turn of the century.
A recent analysis for the Wall Street Journal corroborates what local municipalities have been aware of for over a decade: Housing growth pays property tax dividends. But, in all due respect, the Journal’s report on the finding basically misses the point.
First, the facts: “The analysis shows that property taxes have risen rapidly since the 1st quarter of ‘01 as a share of state and local tax revenue, as income taxes fell and sales taxes rose slightly:” The sales’ tax share climbed from 31.4% to 32.2%; the income tax share fell from 22.4% to 19.4%; as the property tax share rose from 25.5% to 28.2%.
The article credits, “in good part,” the “soaring housing market lifting median prices by 15%, making property taxes attractive” for revenue enhancement, as since states have grown reluctant to lift income or sales taxes. And, it quotes a Dartmouth economics professor noting it’s “one tax the locals can use to offset declines in state money,” sounding like County Board Chair Hammel, or Burton Mayor Smiley. But there’s a big difference: Smiley and Hammel speak from a perspective that housing growth brings in revenues that offset revenue sharing shortfalls. William Fischel (the professor) was referring to municipal authorities’ discretion to raise the property tax.
The data in the analysis are, in reality, quite amazing. They show how critical the housing boom has been to municipal and state governments, as dependence on property taxes for state and local funding has grown 10.6% since 2001. However, the fact that the “Wall Street” article ignores the impact of the roughly 5.8 million housing units built during that period is totally amazing.
Unlike the existing homes whose taxable value rose "15%," new homes add 100% pf their taxable value to the property tax base. The nearly $1,400 trillion generated roughly $20 trillion in property taxes the first year on the tax rolls. And, of course, continued paying dividends in each subsequent year, at higher rates.
The impact of new construction is particularly critical Michigan, California, or any state that caps its taxable values. But, furthermore, in such states, the impact is even greater, due to the likelihood that a new home purchaser is selling a previously capped house, which unlocks billions in frozen taxable values each year.

Back To Top

Housing Activity Update: Not all housing sectors doing well

   While single family housing starts and sales continue at a pace virtually guaranteeing a third consecutive year of housing records, one sector of the local industry is suffering great pains. In articles last year we questioned the “wisdom” of the 1,400+ permits for rental units authorized in Gen-esee County in 2001 and ‘02, noting how most required rents that were well beyond the standard monthly payment of median priced homes in their vicinity. Now, we’re beginning to see the repercussions from the overbuilding, as apartments lay vacant and “condos” are being marketed at new complexes in Grand Blanc and Fenton.
Overbuilding of rental units seems to be a regionwide epidemic as well. In March we noted that no rental permits had been authorized during the first two months of the year in Southeast Michigan. Well, the recent report by Housing Consultants suggests the rental industry hasn’t gained much strength through July.
In the report, we couldn’t help but notice only 24 rental permits had been issued in the county this year. So, in looking at the rest of the region, we found that rentals were at 822 units, only 5.6% of the nine county region’s total. To put that in perspective, rentals made up 14.5% of total units authorized in 2001; fell to 10.8% in ‘02; and 8.7% in 2003.
So, while non rental permits are up 11% for the year, rentals are down 21.6%, in comparison to 2003. However, in comparison to ‘01, they’re down 61%.

Not only were housing starts revised upward in June, single family activity was at its highest level of the year in July, at 1.65 million units. Furthermore, the rate of building permits passed the 2 million level for the third time in four months (it also hit 2 million in October, for what appears the first time since ‘79).
For the first seven months of the year, single family activity’s running 11.7% ahead of 2003’s record level.
With the June revision, one can see in the chart to the left that single family starts beat ‘03’s rate in every month of the year.
New home sales, on the otherhand, fell for the second consecutive month, and the 1.134 million unit rate fell below July ‘03’s rate, the first time ‘04 had a negative month in comparison to last year. However, census data have sales up 14.7% on a year to date basis, nearly assuring that new record for the year.
Which brings us to existing home sales, which also fell during the month of July. However, the decline was just 2.9% from the all time record monthly rate of 6.92 million in June. In fact, July’s 6.72 million unit figure is the third highest pace ever. For the year, the National Association of Realtors’ monthly average for sales is 6.53 million, and that's 7% above the year end record set last year.
The realtors report also noted a median price of $191,300, up 8.7% from July ‘03, but down slightly from June’s median of $191,800. More interesting, however, is the median was up 4.1% from the 2nd quarter metropolitan average, which had risen to $183,800.
The Realtors’ Metro Price rise for the 2nd quarter was significant, since price levels had declined for the two previous quarters, a highly unusual phenomenon in a strong housing market. They were up 7.6% from the first quarter, which would equate to an approximate 34% annual rate. However, the Metro price level was up 9.1% from a year earlier.
The 2nd Quarter Metro Data was, perhaps, the wildest price report we’ve ever seen. While a number of Midwest and southern cities showed virtually no growth in prices, Southern California’s price level was up roughly 35%, while Las Vegas’ was up a whopping 52.4%. In fact, Vegas prices were up 41% from the end of ‘03.
As we’ve frequently noted, price data are normally distorted by market conditions, and don’t really reflect home values. So, we’ll be anxiously awaiting the government’s House Price Index report for the 2nd quarter at the beginning of the month. Then we can compare the rise in prices with the rise in values and see how realistic these data are.

Local Construction Shock
Grand Blanc Township is in danger of losing its designation as the leader of the county’s housing industry. Housing Consultants’ January - July data show the Township (including the city) at 165 single family/condo units, while Mundy Township’s at 156. A month earlier the spread was 35 units.
However, “Fenton” remains the leader as far as homes per 36 square miles, as the City, Township and Linden had 246 permits though July.

Foreclosures are “Jumping”
A CNN/Money report noted “the number of foreclosed properties in parts of the country is increasing.” Though the rate’s only 1.3% nationally, the rate may be “skewed by extremely low rates in markets like Vegas and L.A., where the distressed owners have an option to sell rather than default,” the report said.
But, in “stagnant or declining markets” foreclosures are way up. For example, the article cites “Wayne County (MI)” as averaging 2,081 listings in foreclosure.com, with “677 added in the 2nd quarter” and Cook Co. (Chicago) had an average of 1,124 listings.”
“By contrast, Riverside Co. (CA) had an average of 32 foreclosures during the second quarter.”

Housing that’s out of reach
A number of articles focused on markets where ownership is “out of reach” in the past month. However, illustrating it best is the Wall Street Journal’s Starter Home Index, featuring 10 zip codes with median incomes of $40,000 and the corresponding “existing home prices.” The average of the ten "neighborhoods" was $396,400, or virtually 10 times median income for the area.

Back To Top

Look Here for Previous Issues of Veritas