November 10, 2004

Inside Veritas -
Article 1 - 3rd quarter housing data solid, but real concerns developing
Article 2 - Affordability decline at wrong time
Article 3 - BAMF Directors 2005
Article 4 - Auto Sales Strong but U.S. Share Shrinks
Article 5 - Energy Code Update
Association News Update From Laura
Economic Update - Strong "Service" Jobs' Report
BS: Still about Nothing in particular
Housing Industry Update
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3rd quarter housing data solid, but real concerns developing

  While it’s been obvious for months that 2004 will end by smashing housing activity records set a year earlier, the likelihood of a fifth consecutive record breaker in ‘05 is becoming dubious at best. Though starts and sales remained solid at the national, state and local levels during the 3rd quarter, those clouds are beginning to form on the horizon, despite forecasts for another strong year coming out of the Washington based trade associations, as costs of ownership grow much faster than buyers’ incomes.
First, let’s look at 3rd quarter data, like the state and local single family activity that’s charted above. We can see Michigan’s permits climbed 10% in the past 2 years, while the Flint area's numbers are up 17% during the same period. And, while local existing home sales activity jumped 8.7%, state wide sales rose 8.4%. It also shows “average” prices rising 2.4% & 7.7% respectively.
However, when we consider that the average price rose 18% nationally during the same period, we see the problems of comparative value that plagued Michigan homeowners prior to ‘94 rearing its head. However, this time, it’s not the problem of comparative costs that retard the growth in values, but stagnant income and job creation.

Local Permit Data
Housing Consultants continues to show the Southeast region of the state running a solid 10% ahead of last year in authorizations for condo and single family dwellings. However, once again, rental activity is off by 12%. However, that means only 1,327 rental permits have been pulled, suggesting rental activity will be cut in half since 2001 when 3,200 units were in the hopper. To put those two years in perspective, Genesee County issued 835 rental permits back then. Through September it’s issued just 24.

New Housing Activity - U.S.
New single family homes sold at a rate of 1.21 million units in September, returning back to the level of July, as starts experienced a sharp decline of 8.2% for the month. Still, the starts’ rate, though one of the lowest for the year, was well (9.4%) above the all time record level set last year. And, it represents the 19th consecutive month new homes have sold at a rate above the million unit level.

Existing Homes - U.S.
It’s hardly a surprise the rate of existing home sales was at 6.75 million during September or, that ‘03’s record of 6.1 million will be smashed by year’s end. There were clearly more significant data released by the Realtors last month, that point to potential problems in the real estate market. Following are items to watch in the coming months:
First, the median existing price came in at $186,600. While this is significantly up from 9/03, it represents the 3rd consecutive month prices have declined. As mortgage rates and insurance costs impact monthly payments, this conceivably could become a trend.
Secondly, a Realtors’ study released last week notes the “large pool of first time buyers” that account for 40% of all homes sold. With declining personal income, low levels of job creation, and tightening of credit, along with the costs referred to above, this segment of the market appears precarious at best (see “Affordability” note on page one).
The same report also notes that 94% of home buyers believe their home purchase is a good financial investment. If lower rates of appreciation become the rule, while costs rise, the “investment” perspective of home buying takes a hit.
And finally, the GOP increased its majority in both houses, and appears hell bent on, at least, “simplifying” the tax code (even considering a national property tax). There’s virtually no chance of any reform having a positive impact on housing costs, but considerable likelihood of a negative one.

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Affordability decline at wrong time

While noting “general housing affordability remained favorable,” the National Association of Realtors reported its Housing Affordability Index declined 3.7% in the third quarter, and was down 7.6% since the same period in ‘03. Still, the over all affordability index of 128.6 means a median income family has enough income to afford a home that’s 28.6% more expensive than the national median price.
However, when it comes to the first time buyer, we’ve got another story. The “first time” index shows a “typical buyer with an income of $31,225 having only 74.7% of the income necessary to purchase a typical starter home, valued at $160,200, but could afford a home costing $119,700.
The problem with this scenario is that the typical first time buyer has a household income of $54,500, and is purchasing a home for $139,000, with just 3% down. This, according to an “NAR” survey of home buyers and sellers released this past Saturday at their annual Conference and Expo in Orlando.
So, when we talk about those “first time” buyers who make up 40% of the existing home buying market, we’re actually talking about the upper income level of non-homeowners. And, with affordability declining (due primarily to higher prices) at a time lower income Americans are experiencing declining personal earnings, the “first time” segment of the market will have an exceptionally tough time keeping pace with the past couple of years.
In other words, “Realtors’” numbers don’t add up to their expectations that sales will run in the 6.3 million range in 2005. That is, unless sellers are willing to take substantially less than they believe their homes are worth.
# # #
Here’s an interesting note from the same Realtors survey: The median price of homes “sold directly by an owner was 15.4% less than agent assisted transactions.” The survey found the biggest problems for non professionals selling homes are “getting the right price, prepping the home for sale, and understanding and completing paperwork.”
# # #
And, here’s NAHB’s take: Activity in the nation’s booming housing industry should hold up at robust levels into 2005, according to the consensus of economists participating in the (NAHB) Construction Forecast Conference at the National Housing Center in Washington. The conference brings together top experts from across the housing industry to discuss topical issues.
Panelists were largely optimistic about prospects for the residential construction industry, economic growth, job growth and inflation as the Federal Reserve continues to gradually push up interest rates and the fiscal stimulus of the Bush Administration’s tax cuts begins to fade.
High oil prices were identified as the wildcard in the scenario. While hard to predict, energy costs were expected to subside next year from today’s record levels after taking a small bite out of economic output and consumer confidence in the short term.
“The housing market has been nothing short of phenomenal, especially anything that smacks of home ownership,” said NAHB Chief Economist David Seiders. But the nation’s housing market is in the process of “reaching its limits” and “topping out.” With activity “flattening in 2005,” Seiders is forecasting a decline in housing starts next year of about 4.2% to 1.85 million units, down from the 1.935 million starts projected for this year. Sales of new single-family homes are forecast to drop 5.2% from a record of more than 1.16 million this year to about 1.1 million.
Single-family production is poised to set another record this year, Seiders said, and the fundamentals of the market will remain good in 2005 even though some households may have moved up their home-buying plans from next year when they saw mortgage interest rates starting to rise.

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   BAMF Directors 2005

  Your leadership for 2005 includes:

OFFICERS
President — Dave Crawford
1st Vice President — Steve Steffey
2nd Vice President — Bob Vance
Treasurer — Larry Corbett
Secretary — Ted Macksey
Immediate Past Pres. — Mark Nemer

DIRECTORS
Dan Fralick
Doug Graham
Randy Haney
Keith Kirby
Dave Keene
Scott Sharp

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Auto Sales Strong but U.S. Share Shrinks

 While cars and trucks were selling at a healthy 17.1 million unit clip in October, up 2.2% from a year earlier, GM and Ford each experienced a 5% decline. At the same time, Japanese firms’ sales surged, narrowing its gap in market share with the Americans. While GM’s share of the market fell to an anemic 25.6% (remember, it’s been shooting for 30%), Toyota took 12.8% of the American market. And while Ford fell to 20%, Honda jumped to 8.3%.
Overall, the “Big 3” held just 56.8% of the nation’s market share (off 3.4% from 10/03) the Japanese took 31.7% (up 2.7%). And, year to date, they’ve got 30.4%, up 1.4% from 2003.
While Daimler/Chrysler was the only U.S. company with higher sales last month, its share fell 0.1% and, it was only 1.3% above Toyota. Year to date the margin's just 2.1%.

Energy Code Update - Effective Date Delayed to Feb. 28

In recent issues, we've warned the state intends to mandate the International Energy Conservation Code, to replace the Michigan Uniform Energy Code, at the first of the year. Provisions include: Wall insulation requirements jump from R-13 to R-21; roof/ceiling requirements climb from R-30 to R-49; Windows go from R-1.9 to R-2.85; and R-11 insulation will be required on all basement walls.

Thanks to an agreement between several members of the BIA of Southeast Michigan and the State Department of Labor and Economic Development, implementation of the new code has been set back to the end of February, in hopes of reaching a compromise between negotiating parties. Obviously, we’ll provide continual updates (on line and in Veritas) as negotiations and legal posturing progress.

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

 A Seinfeldian Recap of Tuesday, 11/2/04

While we normally consider “politics” worthy of “news” pages, this year’s election activity (particularly the logic behind it) clearly appears more in tune with “Seinfeld” episodes than reality TV.
For example, the vast majority of voters believing the “Economy” is the most critical issue voted for Kerry. After all, jobs, growth, stock values, income and confidence had plummeted over the past four years. So, not surprisingly, stock values began to climb Tuesday morning, and continued their rally well into the afternoon.
However, late that afternoon, word was leaked that exit polls had Kerry winning. The market turned tail, and the Dow Industrials ended the day 20 points down. But the following morning, in response to the Bush reelection, the market began a massive rally (which continued at least thru Friday).
Go figure: the Dow lost over 800 points in four years under Bush; His term was the first to experience a decline in jobs since Hoover; The nation’s budget went from its largest surplus to largest deficit in 4 years; Personal Income declined for the first time in history over 4 years; voters who consider the economy important want him replaced; So, his election sets off a stock market rally (Not that there’s anything wrong with it)!

Local Perspective
What stood out at the local level was the way in which voters flocked to the polls, standing in line for hours, only to “rubber stamp” the primaries of August 3rd. In our letter to BAMF members in late July, we noted that virtually ALL races would be decided in the primary, yet most people would only vote in the General. So, while a contested State Representative was “elected” with 4,800 votes in August, he was anointed by 27,000 voters in November. And, while some 20,000 plus voters could “elect” a prosecutor in August, it took nearly 140,000 to anoint him in November.

"Seinfeld" Briefs:

An interesting note: On the average day, roughly 20,000 Americans inquire about Canadian citizenship. Last Wednesday, that number rose to 115,000. Now, most people think that relates to an anti-Bush reelection statement. However, it may just relate to Michiganians fearful of living under control of the Native American tribes who manipulated the state’s voters into giving them total control of gaming within state borders. With that success, and unlimited resources, they may seize control of the state as a whole.
In reality, the battle over proposal 1 showed us how unprepared state leaders were to do battle with the Chippawas. Perhaps one will run for Governor in 2006.

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Association News and Events by Laura

  

New Members' Applications Received Riley Construction, Inc. Jeff & Kerry Riley Sponsor: Vic Lukasavitz Parker's Maint. & Remodeling Robert Parker Sponsor: Larry Corbett

In opening, we want to congratulate the following Officers & Directors that were elected at the October General Membership Meeting Your leadership for 2005 includes: OFFICERS President — Dave Crawford 1st Vice President — Steve Steffey 2nd Vice President — Bob Vance Treasurer — Larry Corbett Secretary — Ted Macksey Immediate Past Pres. — Mark Nemer DIRECTORS Dan Fralick Doug Graham Randy Haney Keith Kirby Dave Keene Scott Sharp While the above officers and directors will assume office on January 1st, their formal induction will take place at the January 19th General Membership Meeting. Mark your calendar for that evening at Bonaparte’s. And, look for details in upcoming issues of Veritas. On another note, your NAHB and MAHB dues will be rising once again at the end of the year. NAHB dues will be up $10 to $150; MAHB will rise $9 to $70; so total dues will rise from $480 to $500 (yes, BAMF will get a $1 increase). # # # On another interesting note, while MAHB membership is down substantially this year, BAMF is one of the few associations with a plus in members.

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Economic Update: Strong “Service” Jobs’ Report

Had it come four days earlier, there may have been skeptics. But on the heels of the President’s solid electoral victory, an exceptionally strong "jobs" report buoyed the nation’s economic psyche last Friday, adding to the positives of oil backing off record highs and retail chains reporting better than anticipated sales.
Not only did the nation’s businesses create 337,000 jobs in October, some 80% above expectations, but the government also revised its September and August data upward by 113,000, meaning the economy is just 135,000 jobs short of where it stood in January 2001, when Mr. Bush first took office. And, while the jobless rate actually climbed, upward to 5.5%, the rise was merely a result of 367,000 additional people entering the job market, which some analysts call a positive, as it reversed two consecutive months of labor market contraction.
The rise in employment was led by the service sector, adding 272,000 jobs for the month (97,000 in business and professional services; 62,000 in education and health services). Construction industry jobs soared by 71,000 during the month, due in large part to hurricane rebuilding efforts in Florida and other hard hit parts of the Southeast.

What about Manufacturing?
The Institute for Supply Management said the nation’s manufacturing sector is continuing its growth spurt, now in its 18th consecutive month, despite its rate of growth slowing slightly. And, even its employment component continues to show growth for the twelfth consecutive month (following declines for the previous 37 months). But employment data, which were expected to show an additional 11,000 manufacturing jobs, actually show factory jobs down 5,000 last month, and 14,000 in September. Furthermore, actual production jobs fell by 28,000 over the past two months.
Still, total manufacturing jobs are up 42,000 from October ‘03, with the number of production workers up more than 76,000 during the same period.
Economic growth remained solid with the 3rd quarter’s first estimate of Gross Domestic Product, despite coming in below expectations. While a consensus of economists expected a growth rate of 4.3%, there was little, if any, negative response to the Commerce Department’s report showing growth in the 3.7% range, which was up from 3.3% in the 2nd quarter. For the past year, growth has consistently remained between 3.3% and 4.5%, after the big jump of 2003’s third quarter.
Most notable in the 3rd quarter report was consumer spending growing at a 4.6% rate, nearly 3 times the 2nd quarter rate of 1.6%.
# # #
An interesting lead article in this past Sunday’s News/Free Press pointed to a decline in Michigan retail jobs outpacing Michigan’s decline in manufacturing employment for 2004. Not only has the state lost 17,000 retail jobs this year, sector employment is off 57,000 jobs since the beginning of the century.
The article noted the loss comes from “mom-and-pop shops to large chains, from auto dealerships to department stores, and from restaurants to the corporate offices of retail companies.” While the sluggish economy and weak population growth are given much of the blame, it’s clear the “rise of mega retailers like Wal-Mart and Home Depot has killed scores of shops, large and small.”
The article also notes that Michigan had been home to a host of major retailers, with corporate offices in the state. However, Crowley’s, Jacobson’s and Winkelman’s are closed; Frank’s Nursery’s in liquidation; and K-Mart not only cut thousands of jobs, but is threatening to move out of the state.

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Housing Activity Update:

  See Feature Article

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