October 29, 2002

Inside Veritas -
Article 1 -New Home Sales break record for second consecutive month
Article 2 - Business/Housing News Notes
Article 3 - Leadership Set for 2003
Article 4 - Taxation and Finance - Cost Segregation
Article 5 - Pretty Quiet for an Election Year
Association News Update From Laura
Economic Update - Housing impact even more dramatic
BS: Still about Nothing in particular
Housing Industry Update

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New Home Sales break record for second consecutive month
  
   The Housing Update section that begins below notes single family housing starts hit a “24 year high” in September. Well, Friday (10/25) we found a good reason why we can expect similar results in next month’s report.
   In August, new single family homes sold a record pace of more than 1 million units, stimulating building activity in the upcoming month. Now we find the Commerce Department’s estimate for September was even higher, with the rate coming in at 1.021 million units, suggesting housing starts continued at exceptional levels in October, and that sales for the year will surely beat their record level set in 2001.
   In fact, the average monthly rate for the year has been 956 thousand units, roughly 5.3% above last year’s record of 908 thousand. Furthermore, each month’s rate since January was above the ‘02 level.
   Indicating the housing market has broad based strength, the National Association of Realtors reported that existing single family homes sold at a rate of 5.4 million units, up from 5.3 million in August.
   Last year, realtors sold 5.295 million existing homes to set a new record. This year, they’re expecting total sales to rise to 5.47 million. However, the rate of sales through the 3rd quarter indicate a higher level, in the 5.56 million unit range.

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Business/Housing News Notes

   A new study by the American Farmland Trust claims “the U.S. is losing two acres of prime farmland every minute to development,” and the “problem is worsening.” Now, we’re willing to accept this claim under the following condition: All government payments to farmers be based on acreage as claimed by the Farmland Trust. That we go back to pre-Freedom to Farm Act doles, and index annual bulk payments accordingly, taking inflation and the alleged declines acreage into account. By such method, we could probably trim $6 to $8 billion off the national budget.

   The real news in September’s auto sales report was the plunging market share experienced by GM. After approaching the 30% level in August, the nation’s #1 auto producer saw its share slip back to 25.2%.
   However, GM’s exceptionally strong sales activity of July and August depleted its inventory of 2002 models, while competitors were offering big discounts on a much greater inventory. So, as GM’s sales fell 13% from a year ago, Ford sales were up 3.5%, and Chrysler’s up 18.6%, giving it a 14.9% share of the month’s market. Chrysler’s at 14.5% for the year, just 4.1 points above Toyota’s 10.4% share.

   Well, it looks like the price bubble DID burst, and it wasn’t home prices. An article in Tuesday’s Wall Street Journal told of plunging existing car prices, in response to the glut of used vehicles now on the market. As new car buyers, enticed by incentives, are trading in their existing models, they’re finding the value’s not much. It turns out that the values of a large number of 2000 models fell 40 to 60% over two years, and a number of new car buyers owe more on their vehicle than its book value. So, many of those 0% interest loans are for the cost of the new car, plus what’s owed on the old one.
   To put the prices in perspective, the value of a ‘00 Taurus SE fell from $19,440 to $8,302 over the two years; Ford Expedition, $30,440 to $15,974; and a Ford Football Team? From 9 wins, 7 losses to WORTHLESS.

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Leadership Set for 2003

  Steve Lissner will head the Builders Association of Metro Flint next year, while Dave Crawford (HRC Building Co.) is set to become an Association Officer. Lissner, the 2000 BAMF President, will serve in the same capacity in 2003, as the nominations for association officers and directors were closed at the October General Membership meeting after the Past Presidents’ Council’s report. Crawford, who has been an Association Director since the end of 2001, was nominated as Secretary by the "Past Presidents" at their October 11th meeting. Also nominated for Officer positions were Mark Nemer (1st Vice President) and Larry Corbett to continue as BAMF Treasurer. Bob Vance was elected to a two year term as 2nd Vice President a year ago. Also nominated for continuing terms were Doug Graham,Jr., Dan Fralick, Vic Lukasavitz, Keith Kirby, & Randy Haney. And, first time Builder director, Steve Steffey (Vantage Homes) was chosen for a two year term.

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Taxation and Finance ---- Cost Segregation

   We would like to take this opportunity to describe a very important tax break approved by the IRS for owners of residential rental property and other types of buildings purchased or constructed after 1986. This tax break is called "cost segregation." The tax savings can be very substantial and realized immediately.
   Most owners of residential rental property depreciate the entire cost of their building over 27.5 years. Owners of other types of buildings, such as offices, retail space, grocery stores, restaurants, warehouses, and manufacturing plants often depreciate the entire cost using a 39-year or 31.5-year depreciation period, depending upon the date of acquisition. Under IRS cost segregation guidelines, however, a significant portion of a building's cost can be depreciated over much shorter periods, usually five or seven years!
   The cost segregation rules are complicated, but in brief, they allow a taxpayer to separately depreciate components of a building that are unrelated to its "operation and maintenance" over the shortened depreciation periods. In addition, these depreciation deductions are computed using an accelerated depreciation method (the "200 percent declining balance method") which allows costs to be recovered at twice the rate that applies under the "straight-line" method. The slower straight-line method is used to depreciate residential rental property and other types of buildings.
   Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. It would be impossible to list them all, but common examples include molding, millwork, and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, specialized machinery and equipment (such as kitchen equipment), and the costs of plumbing and electrical allocable to such equipment. In addition, certain land improvements located outside of a building may be depreciated over 15 years. Land improvements include items such as landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts, and playgrounds. Depending upon the type of building, you can expect to deduct between 10 and 60 percent of its cost over the shortened recovery periods.

R, P & T

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Pretty Quiet for an Election Year

  Believe it or not, there’s more on the November 5th ballot than the Granholm-Posthumus race. Two years ago the air waves were dominated by political advertising. This year, one would think the only contest going is for Governor of Michigan.
   In 2000, the heaviest political advertising in the nation took place right here in the Flint area market. Along with hundreds of thousands spent locally on the Bush-Gore race, we had two of the most highly contested congressional races (Stabenow v Abraham and Rogers v Byrum), along with millions of Business dollars fighting millions of Trial Lawyer & Labor dollars for control of the Supreme Court. This year, you wouldn’t have known there’s a Senate race until Carl Levin began running commercials this week about Canadian versus U.S. drug prices. And, at most, there’s only one contested U.S. House race in the state. Of course, that shouldn't come as a surprise. This past weekend nationally recognized political consultant (and former NAHB employee) Charlie Clarke said there were only 18 (of 435) U.S. House districts that were actually competitive.
   You see, this is the first election after reapportionment, and Legislatures around the nation seemed to agree to safe districts for one and all (save Gary Condit and a few others). So, except for roughly eight senate seats, it’s pretty quiet all across the country.
   However, there are a few contested races you’ll be voting on next month, that are critical to the future of housing and economic growth in Michigan, with the Governors’ race being most notable. Following are the candidates with MAHB’s B-PAC endorsements:
Governor Dick Posthumus (R)
State Senate - 26th District Deborah Cherry (D)
State Rep. - 51st District Dave Robertson (R)
*Michigan Supreme Court* Elizabeth Weaver & Robert Young

   In the other contested race with impact the housing industry, B-PAC chose Cox over Peters for Attorney General.

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

"Bowling for Columbine," Beecher et al.

   Give Michael Moore credit. He knows how to push the proverbial “buttons” of the liberal elite. From corporate responsibility in “Roger & Me;” to government incompetence in “Stupid White Men;” to his current dalliance with the “gun” issue in “Bowling for Columbine,” Moore’s been able to carve a niche for himself as a valued critic of American society. And, quite frankly, his use of humor makes his presentations more than palatable to those of who vehemently disagree with his conclusions.
   However, we have to wonder if there’s someone else pulling Michael’s strings, particularly after this “Columbine” episode.
   By now, you all know that the Davison’s contribution to American culture was in his adopted home town (Flint) last Monday for a showing of his latest entry. Prior to the screening of “Columbine” he reportedly told the audience that John Engler was responsible for Kayla Rolland’s death. Why? The mother or her killer was forced to work due to his (Engler’s) welfare reform.
   Now, where have we heard that before? Last winter, while acting as “representative” of the killer’s mother, Sam Riddle, an “advisor” to Moore since the early ‘70s, made a near identical statement. Mr. Riddle also “represented” the family of an actual Columbine victim.
   Could Riddle, whose occupation is listed as “activist” and is really from Flint, actually be the brain behind Moore? It’s something only “Flint” would ponder.

Even locally, it's Lawyers for Granholm

   Prior to the August primary we received reports that an unbelievably high percentage of the primary election funds for Jennifer Granholm came from attorneys. Well, that apparently holds for the Flint area in the General Election.
A look at the sponsorship of her October fundraiser in Flint shows 50 sponsors at $500 per person. Of the 50, at least 29 (58%) were lawyers. Add to that 8 (16%) Democratic Politicos, and you quickly surmise that few others are all that excited about her campaign.
   It’s an interesting note that the Dems are running ads that tie her opponent to Insurance, noting “he’s not on your side.” At least not if you’re a Lawyer.

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Association News and Events by Laura

  

A special Thank You to James Lumber for their sponsorship of the October 23rd General Membership Meeting and for our Guest Speaker, Steve Easley (arranged through fellow member Hansen Marketing). Mr. Easley was quite informative and with the new meeting format, those in attendance were pleased with the evening. We’ll be listing the meeting schedule for 2003 in the near future. If you’re interest in sponsoring a meeting, please contact the Association Office at (810) 603-2200.

HOLIDAY OPEN HOUSE Everyone loved it last year, so we’re doing it again. The BAMF Holiday Open House will be held on Wednesday, December 4th, at the Association Office. Hors d’oeuvres (by Elegant Catering), desserts and drinks will be available from 4:00 p.m. to 7:00 p.m. Invitations will be sent out to all members in the middle of November and we ask you to RSVP by November 29th if you will be attending. (810-603-2200) There is absolutely no charge for this event....this is just our way of saying thank you. The Office will be decorated in the spirit of the holiday so please stop by and help us kick off the season. We look forward to hearing from all of you with your responses (you may also e-mail RSVP’s to tracey@bamfhome).

HABITAT HOUSE Work is still continuing on the BAMF sponsored Habitat House on 2282 Nichols Ave. We are still in need of donations (money, labor or materials) and we’re running out of time. Everyone should have received a letter from our Treasurer, Larry Corbett, with a formal request for contributions. If you have pushed aside the request temporarily, please re-focus and send in your contribution today. THANK YOU!

 

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Economic Update: Housing impact even more dramatic
  

   For the past 30 months we’ve been stressing the importance of housing on the nation’s economy. And, throughout 2001, it was often stated that housing’s growth was “ALL” that was keeping the nation out of recession (of course, that was before government altered growth data for ‘01). The point was simple: as housing’s growth historically pulled the nation out of recession, its unprecedented growth at the end of an expansion period was keeping the nation out of recession.
   More recently, there’s been considerable attention focused on the impact of rising home values. As low mortgage rates, coupled with appreciation based gains in equity, spur refinancing, home owners received the double benefit of lower monthly payments and the ability to cash in on that equity. And, the cash from refinancing activity’s played a significant role in keeping consumers on a spending binge, despite the economy’s over all downturn.
   Now, a new study by economist Jan Hatzius, of Goldman, Sachs & Co. suggests this phenomena is “having an even bigger effect on consumer spending than commonly realized.” A recent BusinessWeek article says the Hatzius study calculates a broader measure of cashed out equity, based on Federal Reserve data, showing that, during the first half of ‘02, “Americans’ pulling cash out of their housing assets was a huge contributor to economic growth—equal to over 2% of disposable income.”
   Hatzius’ broader measure is called “mortgage equity withdrawal,” consisting of mortgage borrowing minus net spending on the purchase or upgrade of houses. Along with refinancing activity, mortgage equity withdrawal also includes home equity loans used for purposes other than home remodeling (a measure Veritas used recently in calculating outstanding mortgage debt); cash-out refinancing; and capital gains from home sales that are not reinvested in the housing market.
   Because of the low level of savings in the first half of the year, along with the proceeds appear to be going right into spending.
   From 1994 through ‘99, mortgage equity withdrawal was in negative figures as a portion of disposable income. It reached positive figures in late ‘00, as mortgage rates fell to the 7% range, then jumped to more than 1% last year and over 2% for the first half of ‘02. And, with rates tumbling through the third quarter, it very likely had an even greater impact as the year continued.
   However, Hatzius concludes, if house prices stop rising and interest rates stop falling, “let alone reverse course,” consumer spending will take a hit.” Or, in other words, “consumers are living on borrowed time!”

Economic Notes: It remains quite obvious that inflation shows little sign of becoming a problem, as the CPI is up just 1.5% over the past 12 months, while the core rate (minus food and energy) is up 2.2%. However, there’s a notable difference between goods and services. Core services were up 3.6%, while goods were down 1.1%. As we’ve been noting for some time, manufacturing hiring won’t pick up until prices can make up for higher costs, and that insurance cost problem (up dramatically since '00) will keep employment from rising.

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Housing Industry Update - Single family starts at 24 year high

   Housing starts surged to a 1.8 million unit rate last month, the highest level since 1986. But more notable was the rate of single family starts, soaring to a rate of 1.477 million, up 18.2% from August and the highest level in 24 years.
   Last week’s Commerce Department report confirms that the housing industry remains exceptionally strong as it enters the final quarter of 2002, with mortgage rates at the lowest levels since monitoring began. As we noted in recent issues, by September’s end, rates had dropped below 6% in most areas of the nation.
   Regionally, starts rose across the board in September, led by a whopping 24.2% rise in the West. Closer to home, starts were up 11.4% in the Midwest.
   Furthermore, there’s likely to be a continuation of solid data in the near future, as building permits were up 3.7% for the month, with single family permit activity up 3.2%, to 1.33 million.
   For all of 2002, single family activity’s been running at a rate of 1.35 million units, which is 3.6% above the record of 1.303 million, set in ‘99 and 6% above last year end total of 1,273,000. Although we’ve often noted the likelihood of a new sales record this year, it’s beginning to look like single family starts are also going to set a new record. In fact, single family starts have run above the rate of ‘99’s final number for 6 of the 9 months.

Locally, it looks like housing activity’s made a mild recovery from the early part of the year, as we got our first look at September’s permit numbers with Housing Consultants’ release last week. At the end of the second quarter our data showed single family permits were off 11.5% from ‘01, but the latest data shows owner occupied homes being down just 7%, with total activity off by 5%.
   Grand Blanc Township’s issued 585 permits through the month, which is 29.4% of the county’s total. However, 220 are rentals, as the township’s other units are up marginally, but still representing 26% the Genesee County total.

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