In ‘98, the average thirty year fixed rate mortgage was
6.9%, exceptionally low by recent historical standards. So, it’s little surprise,
considering the economy’s expansion, that the nations builders and realtors
combined for record sales of 5.856 million new and existing homes.
Last year,however, mortgage rates were up a half point for the year as a whole,
and more than a full point for the last half of ‘99. So, how did the higher
rates affect housing sales? 1998’s record was shattered as 6.104 million units
were closed.
Throughout 2000, with mortgage rates averaging roughly 8.3% from
January through July, nearly every report on housing activity began with a
comment about the affect of higher interest rates. After all, January home
sales experienced a 13.4% decline from December, and analysts were anticipating
the certain demise of future sales. However, when we look at sales data for
the first seven months of 2000, we find that sales of new and existing homes
have been running at an annual rate of 5.813 million, 4.75% below last year’s
record level, and just 0.73% below the previous record, which was set when
mortgage rates were nearly 1.5% lower.
Why have higher rates had so little impact? Probably because home
financing is actually less costly today, in real dollars, than it was a year
ago.
For example, the monthly cost of conventional financing on a median
priced ($92,000) home in 1990 would have been $650. Six years later, the median
was up to $115,800, while mortgage rates fell from 10.1% to 7.8%.
A similar (80%) mortgage on the median priced house cost an average of $665
per month that year, just $15 more than 6 years earlier. However, during the
period, inflation had accumulated at 20%. So, in comparison with ‘90, the
real cost of principal and interest was more like $532.
For the first half of 2000, we can see that affordability of financing remains surprisingly high
— just $530 per month in 1990 dollars, for an 80% mortgage on a home costing
approximately $136,000.
There are other factors that make home financing costs extremely low in real dollars, such as higher incomes taking families into
higher tax brackets, therefore making the mortgage interest deduction even
more valuable.
In line with our article about the mild impact of higher interest
rates was a recent story in Business Week, questioning if the boom in sales
has reignited? It noted that mortgage rates fell from a five year high of
8.6% to below 8%, “spurring new home sales,” and pointed to a Mortgage Bankers’
report that applications jumped 17% during the last week in August. It also
noted that new home inventory shrank to its lowest level since December ‘98.
The story also said Toll Brothers is so backlogged it’s raising prices “to
hold down orders,” while Centex in sitting on a record
Back To Top
Job Creation
study’s analysis ignores local economic reality
According to a study on the nation’s labor market, Genesee County experienced
“sluggish” job growth during the ‘90s, ranking 301st of 318 metropolitan areas.
The report, by economy. com, said that employment in the area grew approximately
3% during the decade.
Economy.com’s Chief Econo-mist, Mark Zandi, told the Flint Journal that the data by itself means very little, but in most cases,
slower job growth suggests “slower growth in real incomes and living standards,”
which mean a lot.
However, median household income in the Flint area soared
nearly 42% during the ‘90s, from $36,000 to $51,000, according to data from
HUD, far beyond the national average. And living standards, at least as measured
by growth in personal wealth, housing starts and values, along with retail
sales, have also grown at rates well beyond the national average. But most
critical is the fact that the jobless rate during the period fell from double
digits to roughly 4.4%. Unfortunately, the economy. com study didn’t look
at the actual affects the area’s supposedly slow job growth.
The problem with studies that cover a national perspective, is the lack of knowledge about
the individual areas they’re studying, particularly when related to overlapping.
If an unemployed individual living in Montrose finds a job 50 minutes away
in Grand Blanc, the metro area has another job. But, if a jobless Grand Blanc
resident takes a new job in Auburn Hills, just 18 minutes away for example,
the area’s unemployment rate may fall, but the new job doesn’t even show up
as a Genesee County resident being employed.
That’s the reason Flint area employment data have been so consistently distorted over the past few years.
As we’ve noted in the past, according to the Department of Labor, the actual
number of jobs in the Flint area fell by 10,100 from ‘98 to 2000, a reasonable
assumption considering the loss of local GM jobs. However, the data also show
a decline of 11,300 jobs held by area residents during the same period.
Yet during those two years, the department’s data show the unemployment rate fell
16.7%, from 5.4% to 4.5%. Unless some 12,000 individuals either retired or
moved away from the area, the data’s drastically distorted.
It’s possible that the complete Census data will present a more realistic illustration of
Genesee County employment. But, don’t be overly optimistic.
Back To Top
Maybe it is time for a County Executive
The success of Oakland County in expanding its economic base is
matched by few locales anywhere in America. So, it’s no surprise that local
proponents of a County Executive form of government have often used the effectiveness
of Oakland’s L. Brooks Patterson as an argument to make the switch in Genesee
County.
Patterson has a history of using the prestige of his position as County Exec
to bring Oakland’s business community together in support of growth and development.
Since his first election near the early‘90s, and the results have been dramatic.
Whatever skepticism I’ve had about the concept of a County Executive dissolved
a week ago when I saw an article about Oakland County’s courtship of Covisint,
the high tech automotive parts exchange (created by the Big Three and a few
foreign auto companies), which is planning on choosing a site for its headquarters.
On Sept. 8th, Patterson hosted a “courtship breakfast” with 350 local business
leaders, many tied to the auto makers, with one primary directive: Lobby the
eight people who will decide Covisint’s location and bring it to Oakland.
And, according to reports, it made a solid impact.
Currently, Covisint is considered THE high tech prize sought from Boston
to Silicon Valley ... and if it comes the area, Patterson will have played
a significant role.
Perhaps it actually is time that Genesee County had a leader with the prestige
to unify it’s business community in similar efforts.
Barry
Back To Top
Taxation and Finance .. by Rachor,
Purman & Tucker
Your Success—Learning from Mistakes of Others
Although history is not a direct indicator of the future, we must learn
its lessons to avoid repeating the mistakes of the past. In the construction
industry, learning from the mistakes of others is crucial to success; so we
share with you 5 of the top reasons that construction companies fail.
Dun
& Bradstreet statistics indicate that approximately 10,000 construction companies
went out of business in 1998, leaving more than $1.5 billion in debts. Although
construction is a high risk business, it is possible to reduce that risk by
understanding the mistakes that can lead to failure. The most important item
to understand is that a single error or failure is seldom the cause of disaster
for a company. Instead, it is the compounding of errors that causes a downward
spiral.
The Surety Association of America reviewed more than 80 of its claims
arising from contractor failure, and detailed the causes leading to the demise
of the companies. The five more frequent causes are shown as a percentage
of cases in which failure occurred.
· Unrealistic expansion 37%
· Inexperience
issues 36%
· Financial Systems 29%
· Management Talent 29%
You will note that
these percentages add up to more than 100 because many claims were the result
of multiple problems. When characteristics of each problem are examined, you
can see how they have the potential to interlock or feed off of each other.
Unrealistic Expansion
Growing a business too rapidly is like putting too much
fertilizer on you lawn—the goal is growth but the result is burnout. In this
situation, the expansion of work outstrips the contractor’s ability to manage
it.
Developing a strong infrastructure including project management,
accounting systems and estimating is essential for the health of a construction
company. Unfortunately, what many contractors who are growing too fast first
notice is a rapid rise in their backlog prior to the development of adequate
project management resources. In a rapid growth scenario, the number of
projects managed by a single project manager may double or the lead time for
preparing bids may be cut in half.
Inexperience Issues
Clearly, all contractors are confronted
at some time with the inability to perform effectively on a project due to
lack of knowledge or resources. In the case of a company that’s growing too
rapidly, resources and knowledge may be taxed to the breaking point.
Taking
on projects that require an expansion of knowledge base and resources can
be a positive event for a company. However, constantly being challenged to
acquire new skills, develop new subcontractor relationships, or upgrade
financial reporting systems can deprive management of the ability to manage,
rather than to be managed. As a construction company addresses a new area
it must have the infrastructure, resources and time to manage its new skills
because learning curves can be steep and slippery, especially in the beginning.
Otherwise, the company will always be hampered by the mistakes and losses
that inexperience creates.
Financial Systems
The success of most construction companies can be tied to sound
financial reporting systems, including everything from profit-and-loss statements
to properly prepared and reported change orders. Management needs accurate
and timely cost data. Tight cash flow, slow accounts receivable and diminishing
profits are all key indicators of a weak financial system. A CPA specializing
in construction accounting on your team can help mitigate these types of problems.
Management Talent
In any business, capable top management is essential to coordinate
the activities of the enterprise. In the construction industry, which depends
on multiple departments and coordination with outside contractors, suppliers
and other parties, talented management at all levels is critical to success.
Failure to complete jobs on time, high claims rates and declining profitability
are clear indicators that management is insufficient or incapable at the top
or project level.
In summary, handling all these related issues requires great attention
to detail and the ability to coordinate and plan for contingencies. The key
to a business structured for success is a well developed business plan. A
business plan can help a company address all of the issues in this article
and establish the goals and objectives of the organization. In addition to
dealing with these large issues, a business plan provides insight and guidance
for your day-to-day operations.
R, P, & T
Back to top
It’s still
about "Nothing" in particular
A story made for this column became public earlier this
month when it was noted that Jason Alexander (who played George Costanza,
Jerry’s bumbling friend in the Seinfeld series), appeared in ads for
Norman Jackman, a candidate for the U.S. House in New Hampshire. According
to Alexander, Jackman has “focused on the interests of the little guy, the
Costanzas of the world.”
The interests of the Costanzas of the world? The same
Costanza who built a hideaway under his desk so he could take naps at work?
Or, perhaps the one who faked a handicap for special privileges? Or, maybe
the one claiming to be a marine biologist to score with a former college classmate?
In retrospect, it appears that the Costanzas of the world are well
represented in Congress.
“Subliminable” rats are not sublime! Unfortunately,
problems with the English language have not subsided for George W. over the
past two weeks.
After the Gore campaign accused him of using a subliminal
message (when the word ‘rats’ subliminally appeared in a TV commercial), Bush
argued that the ad wasn’t “subliminable,” which made David Letterman wonder
if Bush is “elecatable?”
Gore was on the Letterman show Thursday, reading the “Top 10 Gore-Lieberman
rejected campaign slogans.” Our favorite? “Remember America, I gave you the
internet and I can take it away.”
Another downside to the hot economy was evident last Friday when a
Jehovah’s Witness wandered into the association office, carrying a copy of
Watch Tower and looking to spread the word. With everyone working nowadays,
he said they just can’t find people at home. So, they had to shift gears and
begin targeting businesses.
Politics seems to be working in Washington, now that the Republican
Congress is pushing its new plan to put 90 percent of next year’s
surplus toward deficit reduction. Now that polling shows Americans prefer
deficit reduction to tax cuts, GOP leaders are proposing that 90% of the 2001
surplus go to reduce the $5 trillion or so debt, while the rest be used to
raise funding on education, defense, etc.
Now that the president vetoed GOP legislation to abolish the marriage penalty
and inheritance tax, the leadership has returned to the traditional GOP posture
of fiscal responsibility under Clinton cover. In other words, it can tell
its “con-servative” base that “we tried, but as long as the Democrats control
the White House we’ll never get real tax relief.” And, with it, they give
Clinton/Gore cover with their liberal base, as they can’t increase spending
because of the GOP congress.
So, what we’ve currently got is the continuation of “politics as
usual,” 1990s style. The President won’t let congress do anything too disastrous;
Congress keeps the administration in line; the economy continues to prosper;
and everyone gets to stay in office.
It may sound all too much like a game, but if it “ain’t broke,” then why try
to fix it?
Newsweek’s Conventional Wisdom Watch’s September 18th
issue was titled “Special Open-Mike Edition” noting that “George W. calling
NYT’s Adam Clymer a ‘major league a- - - - - - e’ kept us chattering all week.
A good start to ‘restoring honor and dignity to the Oval Office’."
We’re not sure exactly what Newsweek’s getting at, but we surmise
it’s an attack on Bush’s ability to evaluate talent from his days as a Texas
Ranger baseball owner/executive.
Back to top
Association News and Events Parade/HQ
Set; BAMF Elections; NAHB Shows
The fall Parade of Homes is set to open October
7th, with the 22 models announced previously .. everyone passed their five
week inspections. The locations break down with seven each in Flushing and
Grand Blanc; six in Davison; and one each in Swartz Creek and Fenton. The
event runs through Sunday, October 22nd.
This year’s Parade features primarily smaller homes, with seventeen
of the models under 2,000 square feet (Spring models averaged 2,600’), which
may well be a trend developing in relation to changes in demographics locally,
and across the nation as well.
A couple of articles in Housing Quarterly, which should
be in the mail by the end of this month, take a direct look at the new demographics
as a wave of the future.
The fall issue of HQ, kept to 64 pages, will be mailed to approximately
3,500 households, with the remainder being distributed at the Parade and at
local businesses. Anyone desiring additional copies for distribution should
call the Association office.
On a related note, the association received four requests to
enter the Parade, and several inquiries regarding HQ advertising well
after the final deadlines for each ... we would have loved to accommodate,
but once we set the Housing Quarterly pages, its just too late ...
which brings us to the next note:
Again, each year, we have a number of members trying to find accommodations
for the National Association’s convention and exposition, long beyond the
final deadline. So, we want to remind everyone that the deadline for the Michigan
Association block of rooms in Atlanta is October 16th this year, since the
event’s been moved to February 9th through 12th.
Since the Michigan delegation will be staying at the Hyatt Regency Atlanta,
a short walk from the convention center, all BAMF members are urged to register
early (remember, the last time the convention was in Atlanta, several members
complained of 90 minute to two hour bus rides to and from the convention).
If you need Registration materials, please call the BAMF office at 810-603-2200.
Also, if you haven’t registered for the Remodeler’s and Senior Housing
show at Cobo in October, but wish to attend the exhibits only, we have a few
free passes at the association office ... so again, give us call. The event
runs Thursday the 19th through Saturday the 21st.
On Friday, September 29th, the association’s Past Presidents’ Council
will meet in its traditional role as the nominating committee for 2001 Officers
and Directors. Anyone wishing to serve on next year’s board should call Barry
ASAP.
Mark Wednesday, December 13th, on your calendar for the Association’s
Christmas Party and installation ceremony. Look for details in the next Veritas
...
Economic Update: Great inflation
reports, but markets slide
It’s Tuesday morning and the financial markets won’t open for
another hour. Although their a semblance of optimism due to upturns in stock
and bond futures’ trading overnight, Wall Street remains jittery. The Dow
Jones Industrials have lost 500 points over the past two weeks, while the
NASDAQ exchange is also down 500 since Labor Day.
Stock market doldrums are, at least, understandable because of
concerns regarding corporate profits. But what’s seems more puzzling is the
past week’s direction for market driven interest rates. Despite extremely
positive reports on inflation since the middle of last week, the 10 year treasury
note has plummeted, driving interest rates from 5.73 percent last Wednesday,
to 5.86 percent at this morning’s opening.
Of course, the big concern regarding bond rates is the reflection
on mortgage rates. As is evident on our chart, 30 year fixed rates have, pretty
much, been on a steady decline all summer long, which many are claiming to
be responsible for the upturn in sales of new homes, along with some projections
of an improved fall market. However, there’s a likelihood that this week’s
report from Freddie Mac may well reflect the higher rates of bonds.
Inflation Reports
News on prices was good to excellent on all fronts last week, as import prices
rose modestly while, both, wholesale and consumer prices actually fell.
Last Wednesday, the Labor Department reported that prices paid for imported
goods were up 0.2% in August, as higher prices for petroleum and food
were partially offset by lower prices for capital goods and vehicles. Often
volatile petroleum prices were up 0.6% for the month, on the heels of a 1.6%
decline in July. However, over the past 12 months, prices of petroleum imports
are up a whopping 45.8%.
The following day, the department said the Producer Price Index (PPI),
its measure of inflation at the wholesale level, fell 0.2%, primarily due
to lower energy and food prices. However, even the core rate of wholesale
inflation (minus food & energy) was up a mild 0.1%, below expectations.
Then, we found that the Consumer Price Index (CPI) experienced its
first decline in fourteen years during August, as it fell 0.1%. The CPI’s
decline was also spurred by lower energy prices, down 2.9% for the month while
gasoline prices were off 6%.
For the past year, Consumer Prices, as a whole, are up 3.4%, while the core
rate of inflation is running at a far more modest 2.5%. The transportation
sector is up 5.1% and medical costs are up 4.2%. The housing sector
is up 3.5%.
“Rates Could Move Lower”
Last week a Wall Street Journal report quoted the President of
the Federal Reserve Bank of Dallas, Robert McTeer, as stating “once we get
over the energy hump, I wouldn’t be surprised if inflation declines and interest
rates are going to come down.” The remarks suggest there is some support within
the Fed’s policy making body for easing monetary policy in the not too distant
future.
McTeer did, however, say that market driven rates (particularly the 10 year
treasury note) would be the first to fall. Interestingly enough, rates on
ten year notes responded to McTeer by taking off following his comments.
Worker Productivity
Another positive sign on the inflation front was the upward revision of the
second quarter productivity rate, jumping to 5.7 percent rather than the 5.3
per
Back To Top
Housing Industry News’ Update - See
Article 1
Back To Top
Look Here for Previous Issues of Veritas
