August 8, 2006

Inside Veritas -
Article 1 - Fall Parade promotes “New” builds ... Deadline August 17 th
Article 2 - Existing Market Activity
Article 3 - Housing and Economic Briefs: GDP falls taking mortgage rates lower
Article 4 - Regulators often need monitoring
Article 5 - Taxation and Finance by Rachor; Purman & Tucker CPAs
IRS focuses on Employee/Shareholder "S" Corp compensation
Association News Update
New Construction and Sales Activity
BS: Still about Nothing in particular
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Fall Parade promotes “New” builds ... Deadline August 17 th

In last month’s report on local housing activity, we explained that homes were selling much better than perceived, and the market (from a sales perspective) looks very similar to 2001 through ‘03. Well, with the first half of the year data in, homes are continuing to sell at a solid level, with 2,458 sold through June (an annual rate of 5,320), meaning we’re still on track for well over 5,000 sales in the area this year.

Of course, the problem of excessive inventory remains and, now, even the National Association of Realtors says it’s a “buyers’ market.”

That’s why the coming fall promotions take on an even greater role than in the strongest of housing markets. It’s through these promotional events that we stress the benefits of “New” versus “existing” homes. We point to the comparisons on “real” costs, explaining the value of lower energy and maintenance over the next decade. And, we feature advantages of the latest in designs, styles and amenities, to give the builder a step up in making more of this year’s 5,000 to 6,000 sales. And, as we noted last month, there’s been a bit of a surge in remodeling and, during the spring Parade, there were several reports of remodeling jobs contracted. Again, we want to give our builders a step up in gaining that business as well.

The Fall Parade opens October 7th, and will run through the 22nd. Contracts were mailed in late June, and the final deadline is Thursday, August 17th.

As always, Housing Quarterly magazine will precede the Parade, with mailing scheduled for October 2nd.

The Parade and Housing Quarterly, are always accompanied by heavy Television, Billboard and Newspaper promotions, and this fall will be no exception. If you’ve not participated in the past, and would like to, call the BAMF office at 810.603.2200 for a contract and information.

Bonapartes’ Closing: At the end of July we were informed that the IMA is pulling out of the Great Lakes Tech Center, meaning the home for our General Membership meetings will have to change. So, the first week in August we began a search for our September and October meetings, along with a permanent site.

While we expect to have the Fall 2006 meetings set early next week (August 7 - 11), we’ll be looking for the best (and most convenient) location for 2007 and beyond. Note: We’ll post the fall meeting dates and location(s) at www.bamfhome.com/ immediately when available. And, of course, it will be highlighted in the September issue of Veritas.

However, we will miss the cooperative staff at Bonapartes’ ... and we thank them for the past five years.

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Existing Market Activity

When the National Association of Realtors released their June sales data late last month, activity had slipped for the third consecutive month. However, sales remained solid at a 6.62 million annual rate.

The problems for the industry relate far more to the ever growing inventory, which hit 3.73 million, up 140,000 from May. With the slower sales’ rate, the supply of homes on the market would take 6.8 months to sell, up from 4.4 months a year earlier. But what really hits us is that inventory is now up by 1.58 million, or 73.5%, since January 2005.

Considering the soaring inventory and rising interest rates, we remain somewhat surprised at the growth in the median price, which rose just enough to stay above (0.9%) the June ‘05 mark. However, what really brings us to question the price data relates to trends. As you can see in the chart in the right column, prices declined continuously since last summer, but mysteriously began an upward swing in April. What’s interesting that the “swing” started with inventory up dramatically, while soaring mortgage rates were driving up the costs of buying.

However, what we find as most questionable, is that three of the four regions of the nation reported flat or declining prices. Only the Northeast showed a gain, at a time we keep hearing stories of declining prices in New York and Boston.

In the Midwest, prices fell from $178,000 to $175,000 (-1.7%).

State, Local and Regional

As of Thursday morning, June sales data had not been posted by Michigan’s Assoc. of Realtors (MAR). However, we’ve got the numbers from the Flint area, and they’re holding reasonably solid at a second quarter rate of 5,180 sales. Unfortunately, inventory is continuing to climb, and was just under 7,200 at the end of July.

Thus, at the 2nd quarter rate of sales, there’s 16.2 months worth of homes on the market. We’re also told the average price was at $127,000 in June, which likely brings the y-t-d average up to $121,640.

Regionally, we did hear Metro-Detroit inventory’s up to 53,000, which would represent a rise of 43% from reports a year earlier.

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Housing and Economic Briefs: GDP falls taking mortgage rates lower

It’s always been difficult to define “good news” when it relates to the economy. So, in late July, when a Federal Reserve report found economic growth slowed across the U.S for the previous six weeks, it wasn’t really a shock that the financial markets responded positively. And, two days later, when the Commerce Department reported a sharp decline in its primary measure of economic growth (Gross Domestic Product), the markets’ rallies really took off.

Well, after growing at a 5.6% rate in the first quarter, the 1st estimate of 2nd quarter GDP showed the economy growing at a rate of 2.5%, due primarily to declines in spending by consumers and the sharp fall off in home building.

The report confirmed suspicions that the impact of gasoline prices on spending, coupled with the evident decline in home building, would have a dramatic impact on growth. And, the markets responded, pushing stock prices up, and market driven interest rates down (all under expectations the Fed would halt its raising on short term rates when it meets August 8th).

However, complicating the matter was the report within the GDP that says the “core personal consumption index (exclude food and energy) is rising at a rate of 2.9%, well above the Fed’s comfort zone (of 1 to 2%).

Coming from an automobile region, we couldn’t help but find a report out of Tokyo, stating that Japan’ automotive companies built more vehicles outside of its homeland than in it, somewhat fascinating. The “Japan Automobile Manufacturers’ Association” announced that its members built 10.93 million overseas, and 10.89 million at home.

The data represented a rise of 10.6% in overseas production over the previous twelve months. (Note: Toyota’s and Honda’s U.S. sales soared in July).

Home ownership rose in the 2nd quarter, but remains below the peak level of 2004, according to a Census report released last week. After hitting 69.2% in the fourth quarter of 2004, the percentage of Americans living in their own homes fell as low as 68.5% in this year’s first quarter, before rising back to 68.7% during the April through June period.

However, what may be more notable, is the report’s section on vacancies. While the section shows the rental vacancy rate at 9.6%, up slightly from the first quarter (but the second lowest since the 2nd quarter of ‘03), the homeowner vacancy rate is up to 2.2%, which is 22.2% above the second quarter of last year.

What we can find somewhat troubling is that, since ‘05’s second quarter homeowner vacancy has risen 0.1% each period. This seems in line with the rise in the foreclosure rate. Prior to its rise in ‘05, the rate had seldom gone beyond 1.7% in the previous 11 years.

A couple of interesting items were brought to our attention by RisMedia.com/. The first noting that “Piggyback loans (which it called Suicide Loans) default by up to 50%.” Actually, a Standard and Poors analysis found that mortgages connected to “piggy-backs” are 43% “more likely” to default (headline writers?). However, the real problem may stem more from the number of these loans (up to 62% of mortgages) in high priced regions of states with highest foreclosure rates.

The other related to appraisal and general mortgage fraud, up 200% since 2003. According to the report, lenders estimate that as much as 15% of appraisals are overvalued, “but not necessarily fraudulent.”

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Regulators often need monitoring

A few years ago, local authorities were ordered by the state to step up enforcement on soil erosion near water, supposedly due to new federal regulations. Not surprisingly, over zealousness prevailed, and some of the suggested regulations reached the point of being “ridiculous,” requiring permits for such things as seeding lawns, digging post holes, planting trees or shrubs, and even gardening.

Well, June 30, ‘05, a law went into effect to exempt homeowners (and their contractors), from having to get a permit for many of these procedures. However, the DEQ was nowhere near as zealous in telling local regulators of the relaxed provisions.

We found out about it due to President Steve Steffey’s questioning the procedure on a deck in Fenton, then Steve Edwards’ learning about the law in a real estate Con Ed class. Of course, we brought it to the attention of the Drain Commissioner who, to our knowledge, has been quick to rectify the situation.

So, if you run into a regulation that seems totally out of line, let us know immediately.

Barry

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Taxation and Finance by Rachor; Purman & Tucker CPAs
IRS focuses on Employee/Shareholder "S" Corp compensation

If your business is an S corporation, the IRS may want to take a look at how much you and other shareholders who work in the business are earning. The reason? Taxes, of course.

What's the Difference?

S corporation shareholders who work for their companies are eligible to be put on the payroll. They also can receive distributions of corporate earnings in the form of dividends. Salary payments are, of course, subject to income tax. And S shareholders are required to pay income tax on the corporation's earnings - even if the earnings aren't distributed.

The difference between salary payments and dividend distributions is that salary is also subject to employment taxes (FICA and FUTA); dividends are not. As a result, there may be a "tendency" for shareholder-employees to be under-compensated in terms of salary (relative to industry standards) while receiving generous dividend distributions.

What is the IRS Doing?

The IRS is taking steps to close what it considers an employment-tax loophole. For starters, it addresses the issue in S election acceptance letters that go out to new S corporations by clearly stating that shareholders providing services to the corporation receive reasonable compensation and that employment-tax obligations must be met.

If the IRS suspects shareholder wages are too low, an audit may follow. If it turns out that the dividends were used in lieu of reasonable compensation, the IRS may recharacterize the amount in question, resulting in a liability for employment taxes, plus any applicable interest and penalties.

What's an S Corp to Do?

If you don't already have one, develop a reasonable salary policy and make sure shareholder-employees are compensated accordingly. Here are some factors to consider:

· Qualifications of the employee

· Nature and scope of the work

· Size of the company

· Nature of the business

· Compensation levels of comparable positions at similar companies.

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

Weapon against late night partying

Suburban Sydney (Australia) officials used an ingenious method in attempting to curb late night partying in a local park. Local officials began a six month “trial” of blasting high volume hits of Barry Manilow into the park, anticipating the “revelers,” that were becoming a nuisance to the surrounding neighborhood, couldn’t handle the annoying tones of “Mandy,” “Copacabana,” and “Could it be Magic,” and would carry the party to some other location. “Barry’s our secret weapon” said Deputy Mayor Bill Saravinovski, who insisted the plan “seemed to be working.”

However, officials discovered another problem: Many of the residents around the park find Manilow’s music annoying as well.

Of course, in America, such abuse of eardrums would likely be ruled “cruel and unusual punishment” by the courts ... However, it may work in Iraq.

“Seinfeld” Briefs:

Citizens who benefit from high oil prices: It was a good year for Kuwait and its 1 million (that’s all?) citizens. While we’d call it a “dividend,” each Kuwaiti will get a grant of an extra 200 dinars ($690), which is beyond their normal “salaries.”

Each Kuwaiti is already the recipient of a “cradle to grave welfare system,” and pay nothing in taxes. Furthermore, of the 300,000 or so who do work, 92% “work” for the government, “with high wages and minimal pressure” according to Yahoo news ... (Well, we see there are some similarities with America after all!)

We’ve often heard about all the “gigantic profits” builders make on a house. So, we were intrigued by an NBC news story on a Beruit developer who had to put a hold on his condo project because of the Israeli bombings. According to the report, the $45 million project was to consist of 80 units at an average of $2 million each. Of course, the NBC reporter never questioned the 255% profit. Then again, he’s probably from New York and thought the price was right!

Final note: After 201 years, it’s finally legal for a man and woman to live together in N. Carolina without marriage.

Barry

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Association News and Events by Laura

2006 Golf Outing Monday, August 14th at Flushing Valley Golf Club 4 person scramble 10:30 shotgun start Sponsored Contests Lunch Anytime Dinner at 4:30 p.m. $100 per golfer Door prizes galore Hole Sponsorships $125 & $175 Tee Reservations 810-603-2200 Golf Outing update: There were still 3 foursomes available as of August 8th

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New Construction and Sales Activity

National Activity

Single-family starts took a sharp decline in the 2nd quarter, after running slightly ahead through March. The third consecutive month of starts falling behind 2005’s level brought the non-adjusted year to date estimate to 814,800, off 4.5% from last year.

Still, the rate of single-family starts was just under 1.5 million in June.... a rate that would ultimately relate to the 3rd strongest year on record.

Sales, though continuing their downward trend, remained at a rate above 1.1 million, a level unheard of prior to 2004. However, there’s little question the market’s cooling (or, perhaps it may just be overbuilt) considering the massive rise in inventories. Though sales are down a significant (but not overwhelming) 11.9% as compared to the first half of last year, inventory’s up 24.5% according to government data. And, the combination of declining sales and higher inventory reflects on a 40% rise in the “months’ supply” of new homes on the market.

A year ago, the 458,000 units of inventory represented a supply of homes that would take 4 months to sell at June 05’s rate. The 570,000 unit of inventory at this June’s end represented a 5.6 month’s supply.

Finally, and equally noteworthy (in light of all the Media stories on builders’ incentives) is the median price decline, down for the 2nd straight month, to a level of $231,300. While June’s price is up 2.3% from last June, it’s down 8.8% from April ‘06.

Regional and Local

The chart and graph to the right suggest the local industry has continued to deteriorate in June, and we’re now off 56.1% for the first half.

Through June, the Southeast region’s authorized just 5,632 single family and condo permits (according to Housing Consult-ants) down 44.2% from a year ago, and down 51.7% from the same period of 2004, when homes were built at a record level. While Genesee County’s down 55.1% from ‘04, its two southern neighbors, Livingston and Oakland counties, are off 66.4% and 61.2% respectively.

However, looking at individual municipalities, we can see several with declines in the 70% and above range. Ironically, a number of these communities have suggested they were (previously) growing too fast.

With the severity of some of these declines we can’t help but wonder how many units these cities and townships budgeted for in 2006? And, what the fiscal impact from the decline will be to these municipalities?

All too often, local units of government, (usually under pressure from constituents) talk of the need to “control growth.” Some will even claim the downturn’s a good thing (and publicly claim responsibility) until they discover a severe budgetary short fall, of course.

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