December 3, 2002

Inside Veritas -
Article 1 -3rd quarter appreciation down slightly: “Flint” leads Michigan
Article 2 - Business/Housing News Notes
Article 3 - 2002 Elections’ Anecdotes
Article 4 - Taxation and Finance - Planning 2002 Educational Expenses
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - Confusion adds to confidence woes
BS: Still about Nothing in particular
Housing Industry Update

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3rd quarter appreciation down slightly: “Flint” leads Michigan
  
   This morning’s release of the 3rd quarter House Price Index of the Office of Federal Housing Enterprise Oversight (OFHEO) had contained some rather interesting data regarding actual appreciation of homes across the country, and particularly in the “East North Central” region, which includes Michigan and 4 neighboring states.
   For the nation as a whole, the HPI was up 6.16% in comparison to last year’s same period, which was well below 2nd quarter growth of 6.48%. However, a number of states, including Michigan, Illinois and Wisconsin actually showed reductions in values for the quarter.
   As we’ve frequently noted, the HPI is based on transactions involving the same properties, as tracked by Fannie Mae and Freddie Mac over the past 22 years. Since it measures the value of the “same” homes over and over, it’s not as subject to the market distortions that affect other price indexes, like median and average prices.
   For example, two weeks ago the Realtors announced their Metro area price report, noting the median price in metropolitan areas was up 7.2% during the previous 12 months. However, median prices have been particularly high due to the impact of low mortgage rates as home buyers purchase more expensive homes, often with lower monthly payments than a less expensive home months ago.

If we look at some of the areas where homes gained the most, we can easily see the discrepancies. The realtors reported the median price in the Monmouth - Ocean region of New Jersey was up 26%. But actual OFHEO number was 13.1%, or barely half.

Michigan gains just 3.63%
   Michigan homes appreciated at a mild 3.63% over the past 4 quarters, well below the U.S. average, ranking 30th of the fifty states. But more notable is that the state was one of 7 states where homes actually lost value during the July through September period of this year.
   The strongest rate of appreciation in the state was right here in the Metro-Flint area. In comparison to last year's 3rd quarter, Flint area homes were up 4.55%, while only Ann Arbor (at 4.39%) was reasonably close. And during the third quarter, "Flint" homes were up 0.61%, followed by Kalamazoo (0.34%) and Detroit (0.14%). The rest of the state's metro areas were flat or, as in Lansing and Saginaw, actually down.
   What's also notable is, after leading the nation in appreciation during the final half of the '90s, not one Michigan community has a 5 year average that's above the national average. In fact, for 5 year appreciation, the state's dropped from fourth at the end of the century, to 17th just seven quarters later.

   During the past 5 years, New Hampshire, Massachusetts & California, along with the District of Columbia, have all experienced 65 to 75% growth in their House Price Index level. Michigan's dropped from 45 to 35% over the past to years.

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Business News and Issues

   Once again, the Bush administration angered environmentalists, this time with a proposal to restore some semblance of sanity to U.S. Forest policy. The administration wants to allow more flexibility, and reduce obstacles, when considering approval of such activities as mining, logging and recreation in national forests, while “more effectively involving the public” in decision making according to the Forest Service. But environmentalists see it as a “blatant” attempt to boost logging and aid the timber industry.
   What’s at issue is the part of the plan that would allow forest managers the flexibility to “tailor analyses to the specific characteristics of their forests and grasslands.” In other words, the need for public input would come from those affected by the specific forest, not the general public (which we’re sure is the environmentalists’ concern). If we recall last summer, when fires were raging throughout the west, there were a large number of local officials claiming national forest policy that restricts logging was responsible for the severity of the fires. So, any modification of such policy that relies on local input immediately becomes a threat to environmentalists’ goals.

Mold: Property owners recently gained advantage over insurance companies in Federal Court when a judge ruled that the Property Insurance policy for a shopping center “covers damage caused by mold.” According to a Wall Street Journal article, the insurer contended that the policy didn’t cover mold damage because it (the damage) was not “fortuitous” or “caused by sudden discrete events.”
   The judge, on the other hand, defined the term “fortuitous” as “loss that could not reasonably be foreseen.” There’s a belief the ruling will have a critical impact on insurers claiming they cover only immediate catastrophic loss. But it will also cause more companies to specifically cut mold from coverage.

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U.S. Home Sales Still Hot on October

  By most accounts, it’s been a pretty dismal fall. With cold weather setting in early, auto sales plummeting in October, consumer confidence showing no sign of recovery, there’s not been much to cheer about (at least outside of Columbus OH). But despite all the negatives, one sector of the U.S. economy continues to stay on fire. And, that sector helped inspire skeptical markets again last week.
   Last Monday the National Association of Realtors reported existing homes sold at a rate of 5.77 million units in October, up 6.1% from September’s rate of 5.44 million. The October rate was highest since April. October’s data suggest homes have sold at a rate of 5.584 million for the first ten months of the year. To put it in perspective, the annual rate is 5.46% above last year’s record of 5.295 million units.
   The following day the Department of Commerce said that new single family homes sold at a rate of 1.01 million units, down slightly from the all time record high of 1.05 million in September (the 3rd consecutive month of a million plus sales rate). The “Commerce” data suggests homes have been selling at an average rate of 964 thousand through the year’s first ten months, nearly 6.2% above the 908,000 unit record set in 2001. And, as with existing homes, all but assure a record '02.

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Taxation and Finance ---- Planning 2002 Educational Expenses

   As you are probably aware, Congress has provided taxpayers with multiple tax incentives to help offset the increasing costs of higher education such as Coverdell Education Savings Accounts, the Hope Scholarship Credit, the Lifetime Learning Credit, education savings bonds, a limited student loan interest deduction, and the new above-the-line deduction for qualified educational expenses.
   While the various education tax incentives offer numerous ways to achieve tax savings, limitations exist that affect the amount of education expenses allowed as a deduction or credit for a given tax year, including income phase outs, effective dates, the number of students, and their enrollment status. Depending on your current situation as well as your plans for future educational expenses, it may be advantageous to accelerate some of your planned educational expenses into 2002 or defer these expenses to future years in order to maximize the tax benefits offered by these incentives.
   Please contact your tax professional to discuss the education tax incentives available to you and developing a plan to help you achieve the maximum tax benefits from these incentives for 2002 as well as future years.

R, P & T

Sewer and Water Update

   Last Monday (11/25) Circuit Court Judge Geoffrey Neithercut ruled to certify the Tobin/Gateway suit as a class action, noting that the future of the Capital Improvement Fees were in jeopardy even if the “class action” were not certified. However, this was still a blow to the industry since a ruling against certification would have allowed the Drain Commissioner to relax the moratorium, at least temporarily, to allow for approved plans to be authorized “S” permits. (There are currently around 30 plans in the late stages of the approval process, representing roughly 1,550 residential sites).
   Now the case moves on. The next important date is December 17th, when the parties will meet in front of Judge Neithercut in a “settlement conference.”
   Three days prior to the ruling, County Drain Commissioner Jeff Wright met with BAMF members to discuss the growing urgency of the situation, and the potential options if the lawsuit continues to hold up future development. Wright reiterated the problem that brought us to the need for the Capital Improvement fee (CIF) in the first place; that the region’s out of sewer capacity, and that the new projects (Western Trunk and Northeast relief sewers) were needed to allow for future use. Without the guarantee of the CIFs, he can’t sell bonds to build the additional capacity. So, there has to be another source (at least to tie the project over until the lawsuit is settled), and he vowed to look at other options.
   One temporary solution would be to go ahead with the Western Trunk line, which is the least expensive of the projects, and would allow for roughly 50 thousand additional units of capacity. The problem would be getting the county to back the bonds for the project, while funds to pay for it remain in jeopardy. However, as we wrote in the September 24th issue, in court earlier that week the plaintiffs made it clear that they were no longer challenging the validity of the fees, but the way in which their amounts were derived.
   We would think this would have an impact on the County board's decision if and when the need to move in this direction presents itself.

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

Would Jesus Drive “Environmentally Sensitive?”

  A few months back we wrote about the emergence of a coalition of environmental and religious organizations across the nation. Well, last week we discovered a new campaign to increase demand for cleaner, fuel efficient cars, based on “What would Jesus drive?”
   The campaign, a joint effort of the “National Council of Churches” and “Coalition on the Environment and Jewish Life” will begin television advertising in four states (Iowa, MO., Indiana, NC) to promote the cause. And it’s mailing to 100,000 churches and synagogues to “discuss the relationship between fuel economy and religious teachings.”
   Now, if this campaign’s successful, what can we expect to follow? Well, there’s the obvious anti-sprawl campaign asking, “Where would Jesus live?” He’d definitely want to be near the huddled masses, not in the far out suburbs!
   But we see this religious inspired campaign as opening up new opportunities for Madison avenue, as using Jesus to promote is no longer verboten. So don’t be surprised if he shows up hyping Lite beer because it’s less filling, feeding the masses with “Charlie the Tuna,” or turning water into Earnest and Julio Gallo’s wine.
   Of course, since Jesus was a carpenter, the BIG winner will depend on whether Home Depot or Lowes wins the battle for endorsement rights, which may be the biggest “war” since Nike v Titleist over Tiger Woods.
   But whichever wins, it should clearly answer the question, what would Jesus drive? The answer would obviously be a Chevy Monte Carlo (yes, with the Home Depot Winston Cup champs switch to Chevy in ‘03, both companies’ now have ties to the same model)!

Ronald McDonald: The new “Joe Camel?”

   More than a year ago we joked about coming lawsuits against “fast food” companies based on similar grounds to the suits against big tobacco. Last week a highly publicized “class action” was filed in New York Federal court against McDonald’s, claiming “Big Macs” and “Fries” were making kids obese. With no warning labels on the “Happy Meal” and a barrage of promotions targeting kids, conventional wisdom would suggest  that burger and fries’ dealers are far more vulnerable than cigarette manufacturers. But, what about those entertainment companies who join with McDonalds et al, to jointly promote movies and fast food? Will Disney, LucasFilm and Sony be enjoined as co-defendants?
   But what about States’ Attorney Generals? Talk about another source for funds to alleviate budget deficits. Figure it’s only a matter of time until we have to decide if “fat funds” should go to financing health or education programs.
  

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Association News and Events by Laura

  

The 1st General Membership meeting of ‘03 is set for Wednesday, January 29th, at Bonaparte’s, and will include recognition of this year’s leadership and the formal Installation of new officers and directors. Creative Wood Products will sponsor the evening, for which full details will be coming in the following issues of Veritas this month and in January. The annual Exhibitors’ Night, that has become one of the most highly attended association events, is scheduled for Wednesday, February 26, also at Bonapartes’. We’ll be sending out table reservation forms to previous exhibitors later this month ... if you’re not a previous exhibitor and wish to participate in this event, call the BAMF office for further information. Unless the holiday mail’s moving through the system without delay, the BAMF Holiday Open House probably has passed. However, we want to take this opportunity to initially thank Hill Steel and Building Supply, along with Michigan Construction Industry Mutual, for their sponsorship of this new annual event ... NAHB Convention Reminder! The final DEADLINE for advanced registration for the January 21 thru 24 event in Las Vegas is Friday, December 13th. If you plan on attending and want to avoid the lines at the convention, make sure you register by that date!

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Economic Update: Confusion adds to confidence woes
  

   For the past six months it’s been more than evident that Americans have little confidence in the economy. But, with the continuously conflicting reports on economic activity, one has to wonder if the real problem isn’t lack of confidence, but confusion. Perhaps the real question is, does anyone have a solid take on the current state of the economy?
   Just look at the Wall Street Journal’s “Economy” page headlines. On the day before Thanksgiving it read, “Economy Shows Surprising Strength.” The Friday after the holiday it read, “Fed Officials Retain Gloomy View.” The first article noted that Gross Domestic Product was revised upward, home sales remained exceptionally strong and consumer confidence rose for the first time since April (though it remained below even last fall’s post 9/11 levels).
   The second referred to the Federal Reserve’s “beige book” release, its survey of business conditions of the Fed’s 12 districts. The survey found manufacturing was “soft,” business capital spending was “limited” and, although retail spending was up in half the districts, the increases were “generally slight.” However, a secondary section of the article noted that orders for capital goods and durable goods were up in October, as were personal income and spending. But the “beige book” report commanded the headline.
   In reality, throughout the month of November, most economic reports indicated renewed strength. Homes continued to sell at record levels. The stock market continued an 8 week roll, and was still running strong this morning. Even filing for unemployment benefits fell dramatically at the end of the month. And, retail sales for the Thanksgiving weekend appear to have set a new record. However, there was no evidence of a manufacturing recovery, which is what’s really needed to assure the economy’s coming out of a weakened period.

3rd Quarter Growth
   Perhaps the best news was the Commerce Department’s upward revision of 3rd quarter growth. The economy grew at a 4% rate for the period, up from 3.1 percent from the initial estimate. The big difference between the third and 2nd quarter (when GDP was up an anemic 1.3%) was consumer spending, which rose 4.1 percent, led by incredible auto sales. Also, business investment was stronger than initially estimated.
   So, as is evident in the graph, the economy has experienced reasonably solid growth, averaging 3.25% for each quarter since it began its recovery process on the heels of September 11's tragedies.

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Housing Industry Update - U.S. Home Sales Still Hot in October

   Michigan’s permit authorizations soared to their 2nd highest October level in recent history this year, rising 19.7% from the September level according to a report issued last Wednesday by the Federal government. According to Census Bureau data, 5001 housing units were authorized by permit during the month, of which 4,109 were single family. Both numbers were the second strongest in recent history, being topped only in ‘98 when Michigan’s housing activity peaked at more than 54,400 units.
   Normally October accounts for just under 9% of the state’s annual units. So, the annualized rate of the month’s activity would be 55,755, the highest for the year.
   As we noted in the most recent issue, permit activity for the first three quarters of the year has steadily declined during the past four years. However, October’s data suggests that the Metro-Detroit area (including Flint & Ann Arbor) and the Grand Rapids area are running above 2001 levels. And, as we’ve previously reported, those are the only areas where federal data is remotely accurate, prior to it’s final revisions (in spring of the following year). So, it becomes a distinct possibility that 2002 will reverse the state’s four year downward trend.

   And, regarding Commerce Department data on the metropolitan areas referred to, we can see that single family activity is nearly a thousand units higher (4.5%) year to date than at this time last year. And, even the Flint area, which is off by more than 7%, is down just 128 units from the same period last year, when it led the state in growth.
   In total housing units, the combined areas have authorized an estimated 27,630 permits so far this year, up 2.4% (647 units) from last year. Flint, at 2,142 units, is nearly 600 (22%) behind its ‘01 level. However, it’s important to recall that the area had a surge in apartment building for the first time in decades last year.

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