   When the Office of Federal Housing Enterprise Oversight (OFHEO) released its first quarter data on June 1, we thought it incredible that real estate values rose 1.7% between January and March, and 8.8% since March of 2000. Well, its 2nd quarter data released last Saturday was almost identical.
   With values continuing to soar out of sight in the nation’s coast areas, OFHEO’s House Price Index shows the average American home gained another 1.7% in value from April through June, and 8.6% during the previous 12 months.
   Although headlines will likely tout the 8.6% rise, the data is somewhat deceiving as an illustration of the nation’s housing values as a whole. Of the 18 states (including D.C.) with appreciation rates of 7.8% and higher, all but 3 are on the east coast. And, of the top 20 cities, the first twelve are in Northern California (#13 & #20 are also in the Golden State), and 3 each in suburban Boston and Southern Florida.
   Michigan, which had ranked near the top of the nation since 1995, fell to 37th as values rose 6.3% over the past year. However, it still ranks 6th over the 5 year period since ‘96’s second quarter. It’s cities were led by Saginaw-Bay City- Midland at 7 percent. Flint’s 1.6% was the best quarter in the Metro-Detroit region with its values up 6.7% for the year (cities on pg. 12).

Local Sales Activity
A review of Flint Area Association of Realtors’ (FAAR) data shows Genesee County home sales down 13.2% in comparison with the first half of ‘00. The two areas showing the biggest decline in activity are the City of Flint (-22%) and “Grand Blanc” (-25% {31% from ‘99}), which is, by far, the leader in new home construction. The average price was up 5.2% to $117,914.

New Housing Construction
Genesee County’s permit activity continues to lead the state and region through July. Housing Consultants shows totals up 49.2% (17.7% excluding rentals), an the Commerce Department has us up 46.2% (15.9% for single family). Michigan as a whole remains down.

Business News & Issues

   And, they wonder why the surplus is gone! It was “Deja vu all over again” for congress and the current Administration, as they have every year since the Freedom to Farm Act became law, caved in to the Farm Lobby to the tune of $5.5 billion in emergency farm aid. The rescue package, to offset low commodity prices and stabilize farm income, is the fourth in as many years and, like all its predecessors, didn’t appear in the proposed “balanced budget.”
   What’s immediately different about the ‘01 supplemental welfare boondoggle is that it comes at a time when the nation’s fiscal condition is deteriorating, rather than in the previous instances when it merely lessened an improving situation. And, of course, it could have been worse as Democrats tried for an additional $2 billion in hopes of further electoral gains in farm states next November.
   But what really struck us this time was the introduction of the sprawl issue into the debate. The Wall Street Journal noted that supporters (of additional funds) are selling conservation programs as “helping the environment and slowing sprawl.” In the debate, the Junior Senator from that great farming state of New York expressed concern about the “loss of open space in Westchester County (one of her new homes).”
   Interestingly enough, the Fiscal ‘02 budget shows Agriculture Department spending at roughly $8 billion below the past two years. Of course, that assumes a 6% rise in farm income to $61 billion of which a third ($20.4 billion) comes from direct federal payments.
(Note: This appropriation was a reminder of an August ‘98 Veritas article just before that year’s bailout was approved)

   Michigan’s unemployment rate rose to 4.6% in July, a full point above the July 2000 rate and slightly above the nation’s average. The Flint area’s rate rose to 8%, up from 6.2% last year and 5% in July ‘99. What was, perhaps, most interesting about July’s employment data was the state with the highest unemployment rate. It turns out to be Oregon, home of the Money Magazine’s best place to live in America. It’s 6.1% rate is 1.1% higher than a year ago. Also, it’s home values seem to be on the decline, as suggested last spring ... don’t growth boundaries do wonders!

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Farmers whine; Americans pay!

  Last week I received a faxed invitation to another “Public Policy” forum in Traverse City. The invite suggested the direction of current growth patterns may have a devastating affect on the great Michigan industries of tourism, forestry and agriculture, and the participating “legislators and business leaders” must, as in ‘99 and ‘00, come together to solve this problem.
   Now it’s hardly an unusual event when I receive a message laced with anti-sprawl innuendo. But this one, like those I’ve received each of the past two summers, is particularly troubling due to its source: The Michigan Chamber of Commerce, the alleged bastion of free enterprise, fiscal responsibility and private property rights.
   Unfortunately, the Chamber, like so many pawns of West Michigan political leaders, has abandoned its ideals and embraced the distortions and exaggerations designed to broaden the base of the anti-sprawl coalition.
   First of all, the suggestion that growth is a threat to tourism is the most ludicrous charge imaginable. It was the development of tourist attractions that created the demand, and eventual growth, in Michigan’s resort areas. Further growth only enhances demand for its services and amenities. And secondly, the forest industry? Give me a break!
   But what’s most troubling of all is the reference to “agriculture,” an industry that’s collective greed has become a perennial burden to America’s taxpayers. While its media mavens and lobbyists paint a sympathetic portrait of an industry devastated by low commodity prices, Congress and the President appropriate billions to keep them around so they can collect the following year’s welfare.
   On page 4 we reported on the recent farm aid package of $5.5 unbudgeted billion. It reminded me of an editorial titled “put a sickle to farm subsidies” (USA To-day; 7/24/98) accusing congress and the Clinton Administration of “pandering to farm interests.” It noted how the Freedom to Farm act was supposed to reduce subsidies, but actually increased them by $8.5 billion in its first two years. And concluded that reality suggests “we have too many farmers producing too much grain.”
   Well, it’s been another $20 billion since. Now, to justify these endless expenditures, the rationale includes the concept that keeping farmers in business slows sprawl.
   So think about that! A primary reason to stop sprawl is to preserve agriculture as an industry. And a primary reason to subsidize agriculture is to slow sprawl.
With rationale like that, is it any wonder that the Michigan Chamber, Al Gore and Hillary Clinton can coalesce?

Barry

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Taxation and Finance ---- NEW RULES REGARDING MAKING MID-YEAR PLAN ELECTIONS

Many employees obtain their group health insurance coverage via a company cafeteria plan that enables the employee to pay the premium cost using pre-tax salary reduction dollars. In general, the choice of obtaining the health coverage through the cafeteria plan must be made at the beginning of the plan year and employees are locked in until the next open enrollment period.
Last year, however, the IRS issued regulations that permit employees to make mid-year changes when there is a change in legal marital status, the number of employee dependents claimed, employment status, the employee's residence or work site or some other qualifying event. Now, the IRS has issued additional regulations clarifying and expanding mid-year ca-feteria plan election changes. The new rules provide that:

· An employee's decision to decrease or cancel accident or health coverage because of eligibility under a spouse's plan is not contingent upon the employee actually obtaining coverage under the spouse's plan. In addition, the employer may accept the employee's certification that he or she will obtain the other coverage.

· An employee also is permitted to decrease the amount of, or cancel accident of health insurance for a dependent child is a divorce or separation agreement requires the spouse or former spouse (or some other party) to provide coverage for the child. The new regulations clarify that the employee can only make the change if the spouse, former spouse or other individual actually provides the health coverage for the child.

· An employee may drop a particular benefit if there is loss of coverage, such as when an HMO is no longer available in the employee's area. Similarly, an employee may elect different coverage if there is a curtailment in coverage provided under a health insurance plan, such as an overall reduction in the coverage or an increase in the deductible or in the co-payments. (Loss of a particular physician in a network would not quality.)

The new regulations became effective for plan years beginning on, or after, January 1st, 2001.

R, P & T

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What if home prices collapse?

  Two weeks ago we wrote of a suggestion that real estate appraisals are artificially inflating home values under pressure from brokers and lenders. In the same issue, we noted how the upturn in home sales and refinancings have raised the median mortgage payment 77% during the ‘90s, from $737 to $1,307 monthly, as home owners tap equity to finance everything from cars to credit card debt. These items are taking on critical importance as attention is being focussed on the impact of collapsing home prices.
   The current issue of Business Week contains an article, and corresponding editorial, regarding forecasts of, and scenarios if, the residential “bubble” were to burst. In one sense, there’s a belief that the impact the commercial real estate collapse of the late ‘80s had on the Savings & Loan industry would be similar to the impact on banks if residential prices were to collapse in the future. In the editorial, there was comparison to the Irrational Exuberance with Tech Stocks of the late ‘90s, under the premise that a “frenzy not unlike tech mania is gripping housing.”
   The latter becomes a stretch when we take into consideration that home values have appreciated less than 32% over a five year period (roughly 5.7% annually) at a time sales have been running at record levels. Furthermore, unlike Tech Stocks, homes have residual value in labor, land, materials and utility.
   However, the comparison regarding commercial real estate and the Savings and Loan with the potential for a banking crisis deserves considerable attention. We say this, particularly in reference to the report a month ago that the Bush Administration is planning considering proposals to overhaul the tax system.
   Each of the discussed plans (national sales tax, flat tax and value added tax) would eliminate or, at least, sharply reduce the value of the mortgage interest deduction, thereby by making the real cost of purchasing a home soar. As we displayed in early 1995, the enactment of a pure flat tax, as proposed by former presidential candidate Steve Forbes and House Majority Leader Dick Armey would have raised the cost of buying an average priced home by 35% and reduced the house purchasing value of the dollar by 27% (figures subsequently corroborated by DRI-McGraw Hill). The devaluation that would result would impact everything from bank portfolios to schools and local governments that receive support from property tax.
   The BusinessWeek report told of a “decade ago” when “thrifts got in trouble for making commercial real estate loans on inflated amounts to borrowers who could not pay.” It’s somewhat revisionist history, because those loans were made on property being refinanced, in most cases by the current owners. However, the outstanding debt was greater than the properties’ values due to the deflated price brought on by the elimination of passive loss deductions in the Tax Bill of 1986 (interestingly enough, the same bill that started the home equity loan and refinancing frenzy currently responsible for skyrocketing mortgage debt).
   According to the Federal Reserve, mortgage debt is up 40% over the past five years, standing at a cool $5.28 trillion. The mere institution of a pure flat tax would, in all likelihood, immediately bring the value supporting the $5.28 trillion down by more that $1.4 trillion ... and the ripple effect, as more houses go on the repo market would drive down values further, and literally bankrupt the nation.

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

“Big Brother” Comes Home to the “District”
With Flint’s budget problems, let’s hope they don’t look for a solution in the nation’s capital.
D.C. contracted with a company known as IMS, to raise its take from traffic violations. IMS supplied the city’s police with special cameras to photograph license plates of speeders. IMS not only supplied the cameras, but it will process the film, decide who gets the ticket, and send the tickets out as the agent for the city. And, they’ll keep 1/3 of a $120 million take over the next 2 1/2 years.
What’s this mean for D.C. drivers? According to AAA, it’s 960,000 tickets during the period, 3 for every motorist.

From the same region
“Political Correctness” caused EMU Hurons to become Eagles; Stanford Indians to become the Cardinal; and Miami Redskins to opt for RedHawks. Now, the state of Maryland is banning all Native American references from its high school teams. But watch out! Animal rights’ activists made it clear that animal names are the next PC target.

Dewey, Cheatem & Howe
The fictional law firm in an old “Three Stooges” episode re-emerged in a fraud scheme where a man used the name of the firm to obtain cashier’s checks from banks, which he then used to defraud credit card companies and casinos.
How was he caught? A Texas banker (obviously a “stooges” fan) recognized the fictional firm and contacted the FBI.

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Association News and Events -- Fall Schedule Begins; Parade set at 21

  As fall returns this month, the Association is about to begin its new autumn schedule of activities, starting with General Membership and Land Development Council meetings. As you may remember, we altered our traditional meeting schedule this year to times that have been more convenient to a majority of members. And, attendance was up dramatically in January, February and April.
   For fall, we’re meeting at the end of September (rather than just after Labor Day) and late October (rather than during the fall parade).
   September’s meeting is set for Wednesday, the 26th, and will be held at Walli’s WEST, at Pierson Road and I-75, and will include their full buffet and hors’ d’oeuvres. Social Hour, which now begins at 6 p.m., is sponsored by James Lumber. We’re also planning a special meeting for October which will highlight many of the association’s benefits in a social atmosphere, similar to the one at our annual exhibitor’s night, which draws around 200 each year.
   We’ll be finalizing details of all our late ‘01 activities, including our holiday celebration, at the directors’ meeting next Tuesday. Look for full details coming Veritas’.

Another special event for the association will take place at the Lansing Sheraton, Thursday evening, November 8th, as Rodney Rajala will be elected President of the Michigan Association of Home Builders, the first Genesee County resident so honored since Billy Pittman took office in 1975. Any association member wishing to join us that evening should call Barry at 603-2200.

The fall Parade will kick-off October 6th, with 21 homes by 20 builders. As promised last month, the participants include: Fischhaber Builders; Lexington Properties; HRC Building Co; Lausman Homes; The Fireside Home Company; Rajala Homes; The Attia Group; HCI LLC; The Dominic DiCicco Co; Creekwood Homes; Riske Custom Homes; Woods of Flagstone; Fairview Builders; South Shore Developers; Del Pratt Builder; Future Homes; Morris Developers LLC; Pratt Builders; Westminster Abbey Homes; Little Prince Properties; and Valley Ridge Construction.

Four additional builders have asked for entry after the deadline, and are on a waiting list if a participant drops out.

Economic Update: Growth, Surplus, Spending, Confidence

   Three weeks ago, University of Michigan’s reading on consumer sentiment in August surprisingly rose, despite negative employment and slow growth data. Well, apparently University researchers were so caught up in the euphoria of the approaching football season, they misread the data.
   Last Tuesday the Conference Board’s consumer confidence numbers were released, and its index fell two points, to 114.3, while a consensus of economists were expecting a (U-M euphoria induced) 1.2 point rise. Then, last Friday, U-M (apparently realizing that Drew Henson’s really playing baseball) revised its reading sharply downward.
   The confidence reports are in line with the Commerce Department’s report last Thursday that consumer spending grew 0.1% in July, its slowest rate since last October, after a 0.5% rise in June. The slow spending rate took place despite a big (0.5%) rise in personal income, the largest since last December.
   Economists are viewing consumers’ reluctance to spend as a short term retreat until they feel more secure about the employment situation. However, as we’ve been reporting for the past year, spending has been the last bastion of strength in the economy, as consumers have been showing a negative savings’ rate. Well, it’s become quite obvious that much of that spending has resulted from tapping home equity, and that equity is pretty much tapped out.
   So, it was no surprise the personal savings rate rose to 2.5%, the highest level in 25 months. However, the real question is, did the difference between after-tax income and spending go to savings, or to debt reduction?
   With the American consumer generating two-thirds of the nation’s economic activity, their confidence and spending patterns are critical. However, the big, media focussed, economic issues during the past two weeks related to the coming fiscal deficit and the anemic 2nd quarter growth (which could still end up in negative territory).

Where’d that surplus go?
Despite campaign promises, it’s become evident that the Federal Government will be forced to dip into the Social Security surplus to pay government bills as early as this year. In fact, congressional analysts say it will take $9 billion this year, and $21 billion more will be needed over the next three years, to cover shortfalls in the annual budget.
However, that doesn’t even take into account additional defense and farm spending expected to be proposed, that are expected to amount to as much as a half trillion over the next ten years (Oh, and what about another $200 billion for prescription drugs?).
In reality, the combination of the President's tax cut and slowing economy, has already killed the surplus, and we're not even into the first fiscal year of the Bush Administration. It shows just how precarious those 10 year surplus projections really were.
In April, the administration’s Office of Management and Budget (OMB) estimated the fiscal ‘01 surplus would be $281 billion (including Social Security). Last Monday an OMB leak said it would be just $158 billion, a figure the administration says will still leave Social Security untapped. HOwever, the Congressional Budget Office now projects a surplus of $153 billion and require the previously mentioned $9 billion from social security receipts.
Of course, that also brings us to the promise to continue paying off the $5 trillion or so Federal Debt ... but that will have to wait for another day.

Growth shrinks to 0.2%
The government’s revised estimate of 2nd quarter economic growth displayed the most anemic economy in 8 years. And, that 0.2% growth rate was better than most economists expected.
The nation’s output of goods and services was the weakest since the 1st quarter of the Clinton administration in winter of ‘93. The drop from the previous estimate of 0.7% growth primarily related to inventory liquidation, which was valued at $38.4 billion, the biggest decline since 1983’s first quarter at the end of the worst recession since the great depression.
What kept the economy in the black? How about a 5.8% rise in residential construction?

Still, no recession in sight!
One report that didn’t receive much attention was the Index of Leading Economic Indicators rising for the fourth consecutive month. A gauge of future economic activity, the consistently rising index suggests economic improvement’s not too far away.

Housing Industry Update

New Home Sales up 4.9%
New homes continued selling at their record pace in July as the Commerce Department reported a surprising 4.9% rise to an annual rate of 950,000 units. Sales were up 18% in the Northeast and 6.9% in the Midwest, while the remainder of the nation experienced smaller gains.
Under the department’s new method of measuring new home sales, the average monthly rate for 2001 is 927,000 units, 5.2% above the all time record set in 1999, when 881,000 units were sold. In fact, with the exception of May, each month’s activity’s exceeded the record rate.
The continued strength has encouraged NAHB to raise is forecast for the year to 925,000, a 5.5% rise over 2000.

Existing Home Sales Fall
Although sales of existing single family homes may have declined 3% from June, the July sales rate of 5.170 million units, it can hardly be indicative of any type of problem. First of all, the level is well above the July 2000 level. Secondly, median prices were up 6.5% from a year earlier and, perhaps more important, inventory fell 5.1% during the month.
For the first seven months of the year, the sales rate has averaged 5.271 million units, 0.7% above the January through July period of 1999, when sales set their all time annual record of 5.205 million. Still, despite the consistently upbeat data for over half the year, the National Association of Realtors continues to forecast its 2nd strongest year on record, at 5.18 million sales. If they’re correct, it means sales will have to run at a 5.05 million rate for the rest of the year, or a 4.2% decline in comparison with the first seven months’ rate.

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