Existing home prices finally reflect national market conditions

The reports on home prices over the past month clearly show what market conditions have been suggesting longer than a year: Price levels of re-cent years can not be maintained. Despite the National Association of Realtors denial (as late as June), home prices could no longer hold as costs of buying continued to rise.
In mid December the NAR reported a 3rd quarter decline in the median sales price for all Metropolitan areas. Weeks later they reported a decline of 3.5% decline in prices from October ‘05 to this October.
The October data make the 3rd consecutive month prices have declined on a year over year basis, something the anti bubble theorists said wouldn’t happen. After the Metro price report’s release, we looked at our January column regarding prices falling in the new year. Its basic premise related to the appearance that “no one” was paying attention to the rising costs of home buying, and the impact on prices was all but ignored.
While analysts wrote about housing market fundamentals (growth in jobs & households) they ignored the fact that buyers were paying less for the median priced home in early 2005 than they had in 2000 in real dollars. And, that was un-der the premise they took out a conventional loan. But most buyers (particularly in pricey markets) were financing with ARMs, or even gimmick loans that were well under market rate.
In November ‘05, however, we found that combination of higher prices and higher rates had taken the monthly payment to a level that, if adjusted for inflation, was above the year ‘00 cost for the first time in that five year period.
But, what was more telling at the time was the rising cost of purchase on a one year ARM which, unlike thirty year rates, had soared with Federal Re-serve policy. What we noted then was, “while the median price jumped 26.4% from the 1st quarter of 2004 to the 3rd quarter of 2005, the costs of financing on a one year ARM soared 50%. And, that was during a period household incomes were virtually stagnant.
Since we wrote that article, the number of sales have been running about 12% below their levels of the previous period, while inventory’s risen 35.4%, creating the proverbial “buyers’ market.” However, due to the higher borrowing costs, fewer buyers can afford to purchase the homes on the market, even at substantially reduced prices.
In all likelihood, the only reason prices are even at there current level is due to a large number of upscale homes being sold at heavily reduced prices. As we show in an example on page 4, even when a home is discounted by $100,000, it can still raise the median price.
What we also found interesting was the Federal house price in-dex (HPI), which showed values up 7.73% over last year’s third quarter. However, it also showed an even bigger decline in the actual 3rd quarter activity, to an annual rate of 3.45%.
However, like price levels, the HPI can be distorted despite its use of data only on “same properties.” For example, it showed a 14.5% rise in the Ft. Myers area, while prices tumbled 8% according to the Realtors.
What we did find notable in the 3rd quarter HPI was the number of California metros experiencing declining values during the period. We’d be shocked if this doesn’t intensify in the next few periods.
State and Local
As you can see below, activity remains down 14 to 15%; price levels off 9% locally (2.3% state) through October. What’s more interesting however, were the Realtors’ metro median price for “Detroit” (down 8%), and the HPI for the state (down 0.55%) over the past year. In that HPI report we found eleven of the 20 lowest appreciating metro areas were in Michigan, with Ann Arbor losing value at a rate of 2.02% in the quarter (annualized at 7.8%)
Flint was one of a few Michigan cities to show a 3rd quarter gain (0.76%).

Housing and Economic Briefs: Manufacturing contraction?

We haven’t focused on the monthly manufacturing activity report of the Institute for Supply Management for several months as it seemed to have little, if any, relevance to reality. However, as the November report showed a contraction in the manufacturing sector’s business activity for the first time in forty-three months, we took note. So, we looked at the “employment component” of the index and found, despite the small “contraction,” the employment data were still at a level that’s expected to result in a rise in sector employment, according to the Institute.
So, what’s actually been the impact of the (roughly) 3.5 years of growth in the manufacturing sector? Well, in April 2003, the last month the index contracted, manufacturing employment was at 14.61 million. This November, after 43 months of growth, it’s at 14.16 million. And, that’s more than a 3% decline.

The manufacturing report got us thinking about Michigan, with the employment impact of auto industry buyouts not fully materializing at this point.
According to Bureau of Labor Statistics (BLS) data, manufacturing jobs in the state fell to a level of 640,000 in October (11% below April ‘03 for perspective). Their data also show that, while the state lost nearly 80,000 jobs in manufacturing during the period, it’s total job loss was merely 65,000, meaning a total gain of just 15,000 in other sectors.
So, how much growth have we had in “non-manufacturing” jobs over that 42 month period?
Well, in Michigan, those 15,000 jobs represent a rise of 0.4% (or four tenths of one percent). For perspective, non-manufacturing jobs in the nation increased by 6.6 million over the same period, or 5.7%.

Real “Jobs’ Irony:” Now that over half Ford’s hourly employees took buyouts, the company says another 14,000 “white collar” employees will have to go ... Yet, one “Ford” employee that’s still got a job is Lions CEO Matt Millen. What’s that tell us?

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House Price Index: Messages for Michigan; Fla; Cal.

While it appears the government’s 3rd quarter House Price Index (HPI) has some accuracy problems, the trends it displays are clear: House appreciation is on the decline, and turning negative in many metro areas.
Many of its accuracy problems are evident in Florida, where it still shows solid growth in prices despite contrary evidence. Look at the discrepancies in the HPI v Median price:

City	HPI	Median
Miami	22.6%	- 5.6%
Ft. Myers	14.5%	- 9%
Sarasota	12.2%	- 9.4%

Much of the HPI’s problem re-lates to newer homes without a price history falling on the market, but not showing up on the HPI report.
We can also find a message for California, where the market’s been in the “pits” for more than a year and “appreciation” rates were cut in half from the 2nd to 3rd quarters. What was interesting is that (at least) ten Golden State metros finally ex-perienced a certified decline in prices for the quarter (although we believe prices have declined for over a year).
And, finally, there’s Michigan, with 11 of the 20 lowest Metro rankings in the nation and continuation of its dead last ranking of all the states. Again we can see just how far we’ve fallen in the 21st Century. This state was ranked at the top of the scale in the final half of the 1990s, and quickly hit the bottom.

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Taxation and Finance by Rachor; Purman & Tucker CPAs
Plan for '06/'07 tax years

The period until the end of 2006 holds unique opportunities to save taxes. It is the ideal time of year for tax planning for at least three reasons:
1) You have a fix on what your taxable income and expenses will be for 2006, and for months into '07, allowing you to use acceleration or deferral techniques to maximize your total tax savings.
2) Time remains to take advantage of new-for-2006 tax laws before the door to shuts tight.
3) Last, but not least, you can use this time to fully prepare for new tax breaks that will begin on January 1st.
Shifting income and expenses
Having only a few months left to the year, you usually can forecast fairly well what income and deductions you will be reporting on your 2006 tax return next April if things continue the way they have been. You can also forecast fairly well your income and expense situation for the first few months of 2007. Therein lies an opportunity to shift some income or expenses into one year or the other depending on what will save you the most overall taxes.
Income and expense shifting is the "bread and butter" of year-end tax planning. It requires information gathering and a proactive approach in determining your final tax bill. It allows you to do something about your taxes rather than "just writing the check out" to the IRS at tax time.
The year-end techniques that may be used to accelerate or defer income and/or expenses are as varied as there are situations to be addressed. Some of the more frequently used strategies include:
* Smoothing out taxable income between '06 and '07 by accelerating and postponing transactions that either produce income or yield deductible expenses;
* Matching long & short term capital gains with losses to cut overall capital gains tax and maximize the $3,000 amount of capital losses that offset other income;
* Bunching deductible expenses into either year, depending upon whether the standard deduction may be taken in one of the years, or whether adjusted gross income limits for medical (7.5%) or miscellaneous itemized deductions (2%) may be more easily met;
* Maximizing legal limits on annual contributions to your retirement plan accounts, since one year's limits cannot be added to the next year's when not taken in time;
* Business taking full advantage of the $108000 expensing deduction for 2006 and the $112,000 deduction available for ‘07; and
* If you're an S corp shareholder, making certain that your stock basis is high enough to entitle you to any available loss deductions.
2006 opportunities and pitfalls
Scores of changes have been made to the tax law that impact 2006 tax year returns. Among those most notable for impacting the largest groups of taxpayers are:
* Start of the extended "kiddie tax" under which a child's income is taxed at a parent's tax rate, under age 18 (up from age 14 and applied retroactively from January 1, 2006);
* Start of the hybrid vehicle credit available to purchasers, along with its reduction once a manufacturer sells more than 60,000 units (which is already the case for Toyota hybrids starting October 1, 2006);
* Start of the residential energy credits of $500 for residential energy improvements, $2,000 for solar equipment and $500 for fuel cells per half kilowatt capacity, restricted to 2006 and 2007 only;
* Start of strict limitations on the quality of clothing and household items that are entitled to a charitable deduction, starting August 17, 2006;
* Start of the new (and generally unfavorable) limitations on the housing allowance for those working abroad, retroactive to January 1, 2006; and
* Start of allowing direct, tax-free charitable contributions from IRAs for those 70 1/2 and older, for 2006 and 2007 only.
2007 opportunities and pitfalls
2007 is set to inaugurate several changes of its own. Here's a list of some of the major changes beginning January 1st:
* Cash donations must to be backed up by paperwork (a cancelled check or a written note from the charity indicating amount, date and charity’s name);
* Businesses will face a more generous, but stricter, domestic production activities deduction that includes a rise in the deduction cap from three percent to six percent and a restriction of the W-2 wage limitation to manufacturing activities only;
* Fixed contribution limitations on individual retirement accounts will be inflation adjusted, including Roth IRAs income limits of $156,000 for married individuals filing jointly and $99,000 for most others;
* Inflation adjustment of the Saver's Credit for lower income taxpayers means higher income levels will qualify.
Also noteworthy, starting in 2010 there will be no maximum income level to restrict conversion of regular IRAs into Roth IRAs. Maximizing that opportunity, however, can begin immediately for those taxpayers presently over that limit. This strategy calls for making annual contributions to a nondeductible IRA that can then be converted into a Roth IRA in 2010 when the income cap is lifted.

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And the #2 'U.S.' auto firm is?

While U.S. auto sales fell to their lowest (seasonally adjusted) figure in 13 months, a new milestone was reached in Novem-ber, as Toyota sold 197,000 vehicles and became the nation’s #2 auto seller. Ford, on the other hand, left its usual #2 ranking and fell to #4.
The 1.2 million sales for the month represented a 16.1 million unit annual rate, roughly 5% below recent year averages. In response, both GM and Ford said they would cut production in the 1st quarter.
Year to date, the trends all continue, as you can see in the chart, as Toyota’s hold on the #3 spot strengthens. What we’ve failed to note in recent columns, however, is the climb of Honda, as well. Japan’s second largest auto maker’s U.S. market share’s up 5.8% this year.

Barry

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

Dealing with N.Y.'s Slowing Market

If you think this is a “make good” for featuring Jennifer Granholm and Hillary Clinton in November’s column, thank CNBC for running a feature last Wednesday on “Models” in Real Estate. With a little research, we found that the “Australian” ran an article last month, focusing on Para-mount Realty, with six fashion model brokers, and an ‘07 Rolls for driving clients to house showings (and complimentary lunch).
“We’re transforming the experience of buying and selling real estate,” said Paulo Zampolli, the co-chair of Paramount, who is also President of “ID Models,” who hires “model/ brokers” from other modeling agencies as well. His best known recruit is Angie Everhart who, now 37, told CNBC she needs to find a way to support herself as she’s growing older. And, she noted in another article that she knows “a lot of wealthy people, so it made sense to get paid to show them apartments.”
But, despite Ms. Everhart’s fame, we’re more intrigued by Maria Markova, a 21 year old Russian model who completed her real estate licensing a year and a half ago. Maria’s “already sold 2 multi- million dollar apartments at 55 Wall Street,” a development we featured in the ‘06 Spring Housing Quarterly, and didn’t even get a thank-you. We’ll give her a chance to rectify that with a special appearance at the opening of next Spring’s Parade.

"Seinfeld" Brief:

On a seasonal note, we’re disturbed to find the state of Maine denied an application for the beer label at the right for containing an “undignified or improper illustration.” Of course, the distributor for English brewed “Santa’s Butt Winter Porter” filed a Federal suit with the aid of Maine’s ACLU. Dan Shelton, owner of the distributor, said, “I don’t know where they (states) get the idea they can ignore the constitution.” But they do!

Barry

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Association News and Events by Laura

Member Rebate Program (MAHB)

Late last month the Michigan Association of Home Builders announced its “Member Rebate” program in cooperation with 15 industry suppliers. If you’ve been using the products of from 2 (or more) of the following manufacturers:
180 Connect; Bryant; CertainTeed; Duron; Heatilator; Jacuzzi; Progress Lighting; Wolverine Siding Systems; Sherwin Williams; Moen; Daltile; Heat&Glo; Carrier; Honeywell; or Bradford White; you’re more than likely eligible for immediate rebates. And, if you register by the end of December, those rebates will be made retroactive to last January.
To register, go to www.mahb.com/, or call the association office (810) 603.2200 for a brochure with a faxable registration form ... And, we suggest you hurry to take advantage of the retroactive offer!

The Michigan Association raised dues $10 this month, despite the objections of many of the locals .... however, since BAMF believes this is the worst time imaginable to raise costs of membership, we decided to hold dues at their current level, and “eat” the additional $10 per member.
* * * *
As you can see to the right, Exhibitors’ Night is set for February 28th. As many of you know, that’s our best attended member event each year, and we even invite “non-member” builders to attend as a service to the participants.
Since we’ve moved the site, previous exhibitors have until mid January to pick there space, then its open to everyone. If you’d like information, call Laura or Tracey at the BAMF office ... 810.603.2200 ...

New Construction and Sales Activity

After the surprising rise in the previous month, it was hardly a shock when single family housing starts fell 15.9% in October, taking year to date data down 12.5%. Nor, was it a surprise to find new home sales off 3.2% for the month, and 17.9% year to date.
However, what received head-line attention in the new sales’ report was the rise in median price of 13.9%, to $248,500, on the heels of its sharp decline to $218,200 the previous month.
As you can see in the chart below, new home prices actually fell below existing prices during September, then rebounded above their summer levels.
What was more interesting is that, following the October data release, a number of “analysts” were suggesting the “worse is over” for housing. Of course, at the same time, builders across the nation were still attempting to unload inventory through discounts and incentives. So, several individuals have asked if the data are legitimate?
Well, legitimate? Yes. But not necessarily “meaningful.”
While the median price probably did rise, it was, more than likely, the result of builders cutting prices dramatically on high price homes. For example, we heard about a Michigan auction where two homes were sold for roughly $300,000 & $350,000. However, the original price on each was $100,000 above the sale price, meaning they were discounted 22% to 25%. Still, these homes sold at 20 to 40% above the national median, distorting the relationship between median prices and values.
Furthermore, actual prices are being distorted by some incentives like mortgage rate “buydowns” and seller aided down payments which raise the price that’s reported.
In reality, only 77,000 homes sold in October, off 26.7% from October ‘05’s level. With builder incentives considered, the real price was likely well below the $243,900 of a year earlier.
Local/Regional Activity
Again, the comparisons with recent years show just how far (and quickly) the industry’s fallen. The region is down 47.6% from last year (58% from ‘04), with Genesee Co. now 65.1% below 2004’s level. There were only 30 permits pulled locally in October. That compares with 95 last year, and 204 in 2004.

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