September 2, 2003

Inside Veritas -
Article 1 - Meeting will Focus on Michigan Land Use Council’s Report
Article 2 - Maybe Warren Buffett has a Point; California Property Taxes too Low?
Article 3 - Gephardt: New "Monarch" in Waiting (from previous issue)
Article 4 - Taxation and Finance - Business and Nonbusiness Bad Debts
Article 5 -
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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Meeting will Focus on Michigan Land Use Council’s Report

   The Michigan Association of Home Builders’ presentation on the governor’s “Land Use Council” report is titled, “Small Volume Builder - R.I.P.” ... and, for good reason. Even the “good” recommendations in the council’s final report, if enacted, will contribute to the demise of the type of company that’s made up the proverbial “heart” of the industry, scattered site builders.
   For the past 18 months we’ve frequently stressed the fact that the largest building companies have been increasing their market share (particularly in Metro areas) at an incredible rate. In fact, the top building companies in the nation doubled their percentage from 1998 to 2001.
   The concepts adopted by the Land Use Council would clearly expedite this trend.
   Wednesday evening we’ll be joined by County Treasurer Dan Kildee, who was an appointee to the Council, to present some of its recommendations. We’ll also explore the MAHB position on the council’s report, with a discussion of what we can do to keep it from becoming the law of the land.
   On the surface, the council’s direction seems quite benign: “Preserve for-ests and farms, make cities more livable, make better use of infrastructure, create numerous options for affordable housing and encourage better land use decision making.” So, one could expect that the final report would explore remedies to solve the economic crisis facing farmers, the economic and social problems that have caused Michigan’s population to forsake the state’s urban centers, or the outrageous regulations that needlessly drive up the cost of housing. But instead, the Council’s recommendations deal with limiting the opportunities for Michigan’s future.
   Rather than making farms profitable, it wants to purchase their rights to develop, burdening an already strained state budget to limit land available for development. And rather than dealing with crime, deficient educational systems and tax disparities in cities, the council proposes more urban spending along the lines of previous boondoggles for urban redevelopment.
   But, with its primary focus on sprawl, the council wants to preserve land that, in reality, isn’t even threatened. Even its support for increased density in developments would have a negative impact on development as we know it.
   The council’s recommendations are posed as a consesus, and legislation will soon be written to put its recommendations into effect.

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Maybe Warren Buffett has a Point; California Property Taxes too Low?

   Nationally, the average property tax on a home valued at $150,000 is $2,250 per year or, roughly, 1.5% of its value. So, it came as quite a shock when the world’s second wealthiest human, Warren Buffett, argued that California’s property taxes are too low, not because of the statement, but due to his evidence. Because of California’s 1978 tax rebellion, resulting in the passage of Proposition 13, Mr. Buffett pays $2,264 tax per year on his $4 million Laguna Beach home. So, the Chairman of Berkshire Hathaway (advisor to the Schwarzenegger gubernatorial quest) pays the same as the owner of a $72,000 home in Detroit, or a $115,000 home in Flint. And, with California’s deficit in the $38 billion range, Mr. Buffett finds all this absurd.
   Buffett’s statement raised the ire of Schwarzenegger’s opponents, many of whom believe the “Terminator” is far too liberal and the attacks began. Even the Wall Street Journal’s editorial board (which gave up on the concept of fiscal responsibility when Clinton balanced the budget the spurred growth with tax increases) went on the attack, noting that California’s problem isn’t “Prop 13,” but its “high tax, high regulation government.” Which is, exactly, the point!
   Proposition 13 was quite simple. It cut property taxes to 1% of value, then froze the growth of taxable value at $2 annually, at a time the rate of inflation was about to go “double digit.” In fact, it’s frequently been called the “father” of Michigan’s “Proposal A,” which wasn’t as extreme, but went into effect in ‘94.
   Shortly after the passage of “Prop 13” the state, and its local units of government, began using excessive regulatory fees and targeted taxes to make up for the revenue lost. And, the growth in those fees and taxes were not limited, so they exploded with rising costs.
   The result? Californians became the overtaxed and their cost of doing business non-competitive, putting its economy in shambles. However, their property taxes remained extremely low.
   In early August, a report came out of Washington that California dominated the market for million dollar plus homes in the year 2000. In fact, the “Golden State” was home to 128,619, or 41% of the nation’s total. Now, at 1% property tax, those $1 million plus homes would generate some $2 billion in taxes. At Mr. Buffett’s rate, however, they would generate roughly $110 million.
   But that just refers to those $1 million plus homes. The median priced home in Northern California’s “Bay Area” is at $560,000, while South California’s Orange County’s median’s at $472,000.
According to the government Office of Federal Housing Enterprise Oversight (OFHEO), home values in the state are up more that 263% since 1980 on the average (a number that’s held down by declining prices in L.A. during the early ‘80s). So, taking it back to ‘78, we can estimate that the average value’s risen 281% since “Prop 13” went into effect. Anyone living in the same house today has experienced, at most, a 64% rise in property taxes. So, a home valued at $100,000 then, is likely worth $381,000 today. However, its tax bill is $1,640, or 4/10 of 1% of its value. If the tax was 1% of value, it would be $3,810.
   Obviously this is an extreme example since few households remain in a residence for 25 years. However, as we can see by looking closer to home in the past ten years, freezes have a significant impact in a much shorter period of time.
   From the 1st quarter of ‘93 to the 1st quarter of ‘03, the average home in Michigan experienced an 83.6% rise in value. However, the rate of inflation, which was the limit for assessment increases under proposal A, was roughly 28.7% during the period. The chart above shows the difference between taxable and real value on a home selling for $100,000 in 1993 (“Prop A” provisions were effective in ‘93, but full details were voted on in early ‘94).

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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 ---- Business and Nonbusiness Bad Debts

   It is virtually inevitable that all of us will at one time or another incur financial losses in our business and personal lives. One frequently occurring type of loss is a bad debt. Whether made in the course of business, or to a friend or relative, sometimes a loan simply cannot be repaid despite the best intentions of the debtor, and if there is little prospect that repayment can be made in the future, you may have a bad debt. From a tax standpoint, the question is how to handle bad debts, and what steps to take to at least derive the maximum tax benefits available from them. Although this subject is fraught with complexities, we will outline the basic principles here to give you an idea as to whether the bad debt rules may apply to you.
   The first step is ascertaining that a real debt exists. There must be a valid and legally enforceable obligation to pay you a fixed or "determinable" sum of money. Loans between family members, or other related parties such as corporations and their shareholders, are particularly scrutinized to make sure that they are really debts rather than disguised gifts, dividends, or contributions to the corporation's capital. Therefore, if you are contemplating a loan to a related party, you must ensure that you treat the transaction as a true loan by taking the steps that an “arm's-length” lender would take, such as putting it in writing and charging a reasonable rate of interest.
   It then must be determined if, and when, the debt has become totally or partially worthless, i.e., a bad debt. The problem here is that the IRS often requires taxpayers to play a guessing game. If a taxpayer claims a bad debt loss when nonpayment is only probable, rather than a virtual certainty, the IRS may disallow the loss as premature because there is some possibility of repayment in a later year. On the other hand, if the taxpayer waits until repayment is clearly hopeless, the IRS may maintain that the debt was really worthless in an earlier year and the loss should have been taken then. Because of potential statute of limitations problems, we generally recommend that the loss be claimed in the earliest possible year that it can reasonably be argued to be worthless. There are a number of facts which might indicate worthlessness, including the debtor's bankruptcy, but no one of them is decisive; it is the totality of circumstances that’s determinative.
   Once it is established that a bad debt exists, the business or nonbusiness nature of the debt decides the outcome. As you might expect, a business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt. A nonbusiness debt must be completely worthless before a loss can be taken, whereas a loss on a business bad debt can be taken when partial worthlessness can be established. Furthermore, nonbusiness bad debts are subject to the limitations on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income. As we said above, this is a complex topic and the preceding discussion can give only a rudimentary overview of all of the tax rules involved.
   If you are, or may be in a situation where these rules could affect you, please contact a tax professional for assistance.

R, P & T

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

   A Day that will TRULY live in infamy

   And we’re not talking about December 7, 1941!
   While most of us remember (or were taught) that President John F. Kennedy was assassinated November 22, 1963, the event has little impact on most of us today (except for Californians who must listen to his Austrian nephew’s [by marriage] campaign commercials). It’s another event of 11/22/63 that’s tormented Michiganders for 40 years, threatening to make Southeast Michigan a national “late night” laughing stock whenever fall rolls around. You see, hidden behind the next day’s headlines was the news that William Clay Ford bought the Detroit Lions in full, after owning just 2% of the franchise.
   Last Wednesday, Free Press columnist Drew Sharp wrote about the special shareholders meeting 11/22/63, where Ford invoked a provision in the deal that gave him his 2% share, allowing him to purchase the Lions for $4.5 million. “It was a sad, terrible day,” Ford recalled recently, in reference to the assassination. But it was also a “sad, terrible” day for Southeast Michigan generations still unborn.
   Forty years with just one playoff victory (and even that was a fluke as the 3rd string quarterback rallied them into the playoffs, then picked apart the Dallas defense). Notable about Sharp’s column, was its title: “After 40 years, Ford is down to his last chance.” We say this, particularly, since his lions destroyed how many coaching careers over 40 years ... coaches that never got a second chance, let alone 40 years.

“Seinfeld” Briefs:
   Couldn’t help but chuckle at the Wall Street Journal’s property management section on August 28th. Across from an article titled “Blackout offers Property Managers Lessons in being Prepared” was an ad for a building in White Plains, N.Y., stating “It can’t happen here! 100% Back-up Generator Power.”
# # #
   In local politics, some people want to use front running Mayoral Candidate Don Williamson’s criminal past to discredit his campaign. If there successful, we have some advice for the millionaire candidate: Move to Fenton Township, where criminal behavior is rewarded. Since township voters recalled 4 officials for obeying state law, we can only surmise that they’d look favorably on a candidate with a criminal past ... in fact, we’d suggest the Democrats attempt to win the traditionally GOP leaning municipality by nominating 4 felons to replace the ousted.
# # #
   Lieberman Lite? The Democrat’s race for the presidential nomination is on the verge of becoming hilarious. As Joe Lieberman’s campaign’s been plagued by his moderate nature, opponents dubbed him “Bush Light.” Well, in recent weeks the campaign of Senator John Kerry in falling apart in the Liberal Democrat contests (Iowa & New Hampshire) ... so, he’s now targeting S. Carolina. On “Meet the Press” he’s talking about keeping tax cuts and strong defense...i.e. Lieberman lite?

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Association News and Events by Laura

  

Industry Issues Highlight September Meeting   Summer was a busy season for the individuals and groups that create the proverbial “Pain in the ass” for the homebuilding industry. Obviously, we’ve had the Michigan Land Use Leadership Council (the focus for the 9/19 meeting) working on its version of a utopian society throughout the period, but we’re also hit with a couple of other issues. 1st, there’s an attempt to bring back the ‘7/11’ stair geometry (see page 7) the industry was able to stop when the Michigan Residential Code was first written. And, there’s our old “friends” from the “Peo-ples Republic of Ann Arbor,” attempting to bring their own vision of land preservation to Southeast Michigan.    These issues will all be on the agenda September 10, at Bonaparte’s, with the meeting sponsored by PrintComm.    Also, remember that we’ve added a November meeting in ‘03. So, make note of 2 additional dates: October 22, and November 12, both Wednesday evenings, at Bonaparte’s.

BAMF NOTES:   As we noted in the 8/15 edition, BAMF has joined with the Tri-Cities local HBAs for a two week “image” advertising campaign on channels 5, 12 and 25, beginning the third week of September. The ad, which will run 78 times, will stress the comforts of home, with the theme that your local associations are working to preserve “your vision of the American dream.”    The campaign will run to the end of the month, leading up to the Fall Parade of Homes’ promotional blitz.    Fall Events Set: It looks like the final number of Parade entries is 28 (although that could be altered after next weekend’s inspections) for the October 11th through 26th event ... Housing Quarterly (mailing on October 3) will be 72 pages ... look for in depth articles relating to the Land Use Council and the page 1 article regarding California and Michigan property tax reform.

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Economic Update: Sometimes you just have to laugh

  “Analysts say recovery really is here” claimed a Reuters headline on the web Sunday. Recovery? Is that the recovery that began late in the third quarter of 2001?
   Let’s get this straight! In August ‘02 the Commerce Department revised the previous year’s GDP to show that the economy (previously believed to be in mild growth) was in recession during the 1st three quarter of 2001. And, it further said the recession ended in late October, as the nation began its recovery from 9/11. And since that time, the economy’s grown at rates from 1.3% to 5% each quarter.
   Now, 23 months after the “recovery” supposedly began (12.5 months after the recession was called, which was 10 months into recovery), those “analysts” who we rely on to forecast economic expectations say recovery’s here. Yet, we must wonder, are “they” sticking their necks out because the Commerce Department announced growth of 3.1% last Thursday? If so, they’re taking quite a risk ... after all, the Department could change its mind in 15 months.

Growth Upgraded to 3.1%
   As noted above, Commerce revised 2nd quarter growth upward, from the original estimate of 2.4% to 3.1%. The rise, as reported last month, was due to strong consumer spending, along with the rise in defense spending brought on by the war in Iraq. However, the truly favorable sign was a rise in business spending, which likely continued into the current quarter, as stronger than expected sales brought inventories down to “rock bottom” levels. While consumer spending was revised upward to a 3.8% annual rate of growth, business increased spending at an 8.2% pace.
   The “implicit price deflator” in the report showed prices rising at a 0.9% rate during the 2nd quarter, down from a 2.4% rate in the first, meaning no evidence of inflation is emerging despite the reasonably strong growth.

Jobs still the problem
   While the national jobless rate gives cause for concern, Michigan’s problem is worse. The state’s rate was at 7.4% in July, the highest since ‘93. But more significant is that Michigan’s rate’s 1.2% above the nation's. During the '90s, we reversed the long time trend of lagging behind the nation in employment. Now, we're back in our traditional position.

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Housing Industry Update: starts; sales; etc.

   Despite the rise in mortgage rates (or perhaps due to it), the housing data for July was significantly stronger than expected. Beginning with housing starts, and continuing through the two sales’ reports, July data suggest that, even with a serious downturn during the remainder of the year, 2003 will set a number of new housing records.
   Prior to the July releases, the NAR’s Chief Economist, David Lereah, said fixed rates should stay under 6.5% through 2003, with record sales for both new and existing homes.
   Still, when mortgage rates rise there’s normally a rush to buy while they remain low. Whether July’s data resulted from a rush, or continuation of an exceptional market, remains to be seen.

   Housing starts were at their highest level in thirteen years in July, as builders began work on 1.87 million units. More notable was single family activity, rising up 1.9% from June to 1.52 million units. For the year, single family starts are running at an annual rate of 1.44 million, 6.1% above last year’s record of 1.36 million. And, single family permits, though below June’s level, came in at a rate of 1.423 million, holding pace with the rest of the year, and almost assuring a new record will be set.

# # #

   While new home sales were off slightly during the month, an upward revision in June’s estimate was responsible for the decline. While sales were revised upward in June, the July numbers were the 2nd highest on record, and passed the million mark for the fifth consecutive month (10th of the past 12 months), bringing ‘03’s rate up to 1.065 million units. Through July, new home sales are running 9.4% ahead of last year’s record level, nearly assuring a historic breaking of the million unit barrier.

# # #

   Existing homes sales rose to another record breaking rate of 6.12 million in July, surpassing January (‘03) and December's (02) 5.94 million. July's numbers bring the year to date average up to 5.876 million units, which is 5.6% above that year end record set in 2002.
What may have been more surprising was an enormous surge in median prices, jumping to $182,100, a rise of 12.1% from July ‘02, and representing the largest twelve month increase in nearly 23 years. While the “Realtors” attribute the rise to “tight inventories in a record market,” it may reflect fears that mortgage rates will continue to rise. In other words, paying the asking price may be cheaper, in the long run, than waiting for acceptance of an offer.

# # #

Builder confidence surged in August, according to NAHB’s Housing Market Index. It gained 6 points from June, jumping to 71, its highest level since June 2000. And, the section on future sales expectations hit 78, the highest since December '99.

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