December 8, 2004

Inside Veritas -
Article 1 - Auto/Manufacturing Downfall’s Impact on Regional Economy
Article 2 - State House Prices Continue to Lag
Article 3 - Are homes selling 58% faster than in the ‘90s?
Article 4 - Taxation and Finance:‘04 Tax Bills: Breaks for Individuals
Article 5 - Energy Code Reminder - Date delayed to Feb. 28
Association News Update From Laura
Economic Update - Jobs Slower; Growth Stronger
BS: Still about Nothing in particular
Housing Industry Update
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Auto/Manufacturing Downfall’s Impact on Regional Economy

  The employment news was somewhat baffling: While the manufacturing employment index of the Institute for Supply Management showed expansion for the 13th consecutive month, the sector’s employment declined for the third straight month. And, while Michigan’s primary industry is experiencing solid sales for the year, the state’s companies in that industry are in the midst of a sales decline. So, not only have Ford and GM announced production cuts, but we’ve even learned that Michigan lost its leadership in auto production to, of all places, Ontario.
Combine these factors, and the impact on the local and state economies is clear. While the Flint area was losing manufacturing jobs in the ‘90s, the loss was offset by gains in surrounding areas. However, as is evident in the graphs of Department of Labor data, Michigan’s been experiencing a similar decline since the turn of the century.
During the ‘90s, the Flint area’s loss of roughly 20,000 manufacturing jobs was more than made up for by the 23,400 rise in residents who commute to jobs outside Genesee County. In that period, Michigan added nearly 100,000 manufacturing jobs, while the “Detroit” area alone experienced a rise of 35,500, and a large number of those went to workers who had lost jobs locally.
However, since the middle of ‘00, the state’s lost nearly 200,000 jobs in the sector, while “Detroit’s” experienced a decline of 25% (roughly 100,000 jobs). So, it’s easy to conclude that the former holders of the 10,000 factory jobs lost in “Flint” during that period didn’t have the commuting options of those losing jobs in the ‘90s.
What’s equally disturbing about the state’s loss of manufacturing jobs is the similar situation across the nation. And, as the manufacturing index continues to show expansion in sector employment, jobs’ data show little impact. While the sector’s employment has been relatively stable for the past year, ‘04’s year end will come in below ‘03’s. And, in comparison to 2000, it’s down roughly 2.9 million jobs (16.3%).
But here’s the kicker: U.S. auto and light truck manufacturing jobs have held their own during the decade, with numbers in 2003 nearly identical to 1999. In fact, outside of Michigan, motor vehicle production has, apparently, been a sector of manufacturing that’s added jobs in the past four years.
To understand why, all we need to do is look at auto market data. Michigan’s auto makers, or the “Big 3,” controlled just 56.6% of the US market last month, and just 58.7% for the year. And GM, which vowed to gain better than 30% in ‘04, was lingering at just 25% in November (27.5% y-t-d).
The companies gaining market share are, primarily, Asian, with Japan’s “Big 3” (Toyota, Honda, Nissan) taking over 26% of the market for the year, as their share grown consistently through this century. So, we find the expanding jobs in the industry are with those firms, and none have much of a presence in Michigan.
However, Toyota and Honda have recently built plants close by, in our neighboring province of Ontario. Which takes us back to the line in the opening of this article about Michigan losing its leading car maker status this year.
While the state is expected to produce 6.3% fewer vehicles this year than last, Ontario’s production is up 1.1% according to “Ward’s Auto.” Accordingly, 2.61 million will be produced in the state this year, while Ontario’s production will hit 2.7 million.

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State House Prices Continue to Lag

Over the past year the nation’s median existing home price jumped 7.7%, while Americans’ home values rose 12.97%. In Michigan, however, average prices were up just 3.3%, while values rose 5.3%.
That’s the summation of the third quarter reports from Realtors and the government “watchdog” over Fannie Mae and Freddie Mac (the OFHEO). But the average data really don’t tell much of the story, because of vast disparities between regions, and even between price levels and values.
For example, while 36 metropolitan areas experienced OFHEO values soaring above 20%, there were 16 that had growth below 3%. And while 13 metros saw rises in price levels of more than 20%, there are 11 that experienced an actual decline.
As has been the custom for the past 12 months, the fastest growing city in America, Las Vegas, led the way with incredible numbers, including a 53.7% rise in the median price, and a 41.7% increase in home values. While at the opposite end (at least of major cities) was the once robust home of the Ewing family, Dallas, which we cited for exceptional home values in the fall issue of Housing Quarterly. The average home in the “Big D” area appreciated just 2.7% in the past year, while median prices fell 1.6%.
As we frequently point out, median prices result from all properties sold, while values come from the continuous monitoring of the “same” properties giving a more accurate illustration of real appreciation. And, of the “Top 20 Areas” in value gains, 11 are from California, 4 from Florida, and 2 more from Nevada.
As has been the norm through this decade, Michigan was near the bottom of the list, with values up 5.8%, with Lansing (7.58) and Jackson (7.4) leading the way. “Flint’s” values were up 5.1%, and “Detroit’s” up 4.6%. While few Michigan cities show up on the median price list, Kalamazoo did .. and, it tied Toledo for the biggest decline (-3%) in the nation.

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Are homes selling 58% faster than in the ‘90s?

  During the 1990s, new home sales (as measured by the Commerce Department) averaged less than 700,000 per year. But since August of 2002, the rate of sales has consistently remained between 1 and 1.3 million each month. So, one could surmise the new housing market’s 58% stronger than it was back then.
But reality suggests otherwise. So, one might ask, why have sales numbers soared out of sight?
Well, we can only speculate, but the answer is conceivably found in an issue we’ve been writing about since 2002, when we found that the top building corporations had doubled their market share from 1997 to ‘01.
Last month we noted in the “Activity Update” section that sales figures ignore “homes built on owners’ lots,” which is a shrinking segment of the market. We’ve also found that the ratio of sales to single family starts has jumped from 59% in the 1st half of the ‘90s to 73% today (see graph).
Since the Census numbers ignore certain types of transactions, it’s far more likely the incredible sales data of the past 26 months are due, as much, to a shift towards the dominance of the builder/developer as it is to the over all strength of the market. In other words, a much higher percentage of total sales are showing up in census data today, than they were before ‘96 when the trend was first becoming evident.

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Taxation and Finance:‘04 Tax Bills: Breaks for Individuals
by Rachor; Purman & Tucker CPAs

 There have been important new tax laws that have passed Congress during this fall's pre-election period. Two major tax laws have been approved: the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 . Both new acts have important effects on your personal tax return. They also affect many individuals as small business owners and as investors in multinational corporations. This letter outlines the changes that impact your personal tax situation and recommends some initial steps that you might take to maximize your tax benefits.

Working Families Tax Relief Act - ’04

Child credit. Parents of children under 17 can continue to claim a $1,000 child tax credit for every child through 2010. Without the new law, the child credit would have dropped to $700 per child in 2005.

Marriage penalty relief. Married taxpayers filing jointly will continue to benefit from full marriage penalty relief. Through 2010, joint filers will pay tax at double that of single filers for the 15 percent rate. For 2005, this means having the high end of the 15 percent tax bracket pegged at $59,400, rather than $53,450. The change in the standard deduction for married couples filing jointly is equally as dramatic, $10,000 in ‘05 instead of $8,700.
The 10% tax bracket's upper limit for married taxpayers filing jointly stays at $14,000 ($14,600 inflation indexed) for 2005 rather than dropping to $12,000. For single taxpayers, it stays at $7,000 rather than dropping to $6,000.

American Jobs Creation Act of 2004

If you run a small business, many benefits in this new law will show up on personal tax returns. A broad-reaching manufacturers deduction (even reaching service-intensive businesses), S corporation reform helping family businesses, and an extended accelerated "Section 179 expensing" deduction are among the more important small business provisions. Farmers also share in additional tax breaks.

Coming In January: Several notable provisions in the Families’ Tax Relief Act of 2004 will have a direct impact on individual tax returns. In next month’s issue we’ll take a look at the changes in deductions for vehicle donations, SUV purchases incentives and, the provision that allows for “Sales Tax” deductions (as an alternative to deducting state and local income taxes).

Energy Code Reminder - Date delayed to Feb. 28

As we noted in November, thanks to an agreement between the State and members of the BIA of Southeast Michigan, implementation of the code that will require “R-21 wall insulation; R- 49 roof insulation; R-11 Basement; and R-2.85 windows has been delayed while negotiations take place. Again, Veritas will update this issue whenever news occurs.

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

State of the Economy? It’s GRRRREAT!
It’s been a proverbial “field day” for comedians with the appointment of Kelloggs’ chief Carlos Gutierrez as the new Secretary at the Department of Commerce. The man who’s used “Tony the Tiger” as his corporate symbol will now be delivering most of the reports that tell us about the current state of the economy, and will have to meet the press in presenting a positive outlook. So we can’t help but wonder if “Tony,” the most optimistic Tiger in America (including Detroit) will appear as an economic spokesman (and symbol) for the Bush Administration. Perhaps the Department will incorporate the symbol in a new logo. After all, he sold a lot of “Frosted” Flakes.

Making Lemons from Lemonade?
One has to almost laugh at the Flint-Genesee Growth Alliance “wage-survey” that was reported in Sunday’s Flint Journal. While the Alliance’s web site state the “area is listed as having one of the highest median family income rates in the country,” the survey found otherwise.
Of course, for many years we’ve known the “area’s” median income’s been below the national average (it fell below in ‘99 and has been heading south since), but apparently that’s a “good thing” according to the “Alliance,” which was put on this earth to bring economic growth and development to Flint and Genesee County.
We find that, despite the fact the findings discredit it’s web site, the Alliance now says low wages present a “wage advantage” to help the “Flint area” recruit business in comparison to metro Detroit. Of course, as is evident in the lead article in this issue, as a region in Michigan, “Detroit” must not be doing all that well.

"Seinfeld" Briefs:

With Flint area economic development on our mind, here’s one we just can’t resist. Remember when “Auto World” (at a cost of $81.5 million in ‘81) was going to resurrect Flint as a tourist Mecca? It’s ultimate salvage value was $1 from U-M Flint. Well, it seems the Canadians have outdone us.
A report out of Toronto last week said the “Blue Jays” of early ‘90s fame would purchase their “home” (the Sky Dome), retractable ceiling and all, for $25 million Canadian dollars. Problem: It was built for between $500 and $600 million “Canadian” in 1988-9.

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Association News and Events by Laura

  

New Members' Applications Received Oxford Bank & Mortgage, Tracey McIntosh Sponsor: Barry Simon Dow Building & Construction, Tim Ballard Sponsor: Doug Graham Locke & Textor Landscape, Chris Locke Sponsor: Mary Locke RRR Building Company, Karl Rehschuh Sponsor: Mark Nemer Welcome New Members !

GENERAL MEMBERSHIP MTG. SCHEDULE FOR 2005 (All meetings will be held at Bonaparte’s unless noted. Meetings start at 6:00 p.m. with sponsored refreshments. Hors d’oeuvres buffet is open until 7:00 p.m. The business portion of the meeting starts at approximately 7:20 p.m. Reservations must be made one week prior to the meeting date. All guests are $20.00 and must be paid in full the night of the meeting.) The Schedule is: January 19, 2005 Sponsor: Franklin Bank February 16, 2005 Exhibitors’ Night March 16, 2005 Sponsor: KSI Kitchens & Baths April 20, 2005 Sponsor: Siding World .....Summer Recess.... August 8, 2005 Golf Outing at Flushing Valley September 21, 2005 Sponsor: BKR Dupuis & Ryden October 19, 2005 Sponsor: James Lumber

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Economic Update: Jobs Slower; Growth Stronger

It was kind of the same old story for the economy over the past month. As growth and consumer spending were reported as stronger than expected, the employment report came in weaker. So, thoughts on the state of the economy seem to hinge as much on oil supplies as they do on sales and profits. In just the past week we found the following:

Economic Growth
While most economists expected the first revision of 3rd quarter Gross Domestic Product to match the original estimate of 3.7%, it came in at 3.9%, primarily due to consumer spending rising at a 5.1% annual clip, the strongest since the end of 2001’s recovery from 9/11. The data show the economy’s been growing at a rate between 3.3 and 7.4% for six consecutive quarters (re-member when the Federal Reserve target was in the 2.5% range, and anything above that was “unsustainable” without inflation?).

Manufacturing Stronger?
The Institute for Supply Management (ISM) monthly report on manufacturing is 1 we’ve been watching closely over the years, due to regional reliance on the manufacturing sector. And, as its index seldom disappoints, neither did November’s report. Again, manufacturing activity was growing at a faster rate than the previous month (while analysts had expected a slowdown). And, its jobs’ index showed employment conditions expanding for the 13th straight month, after more than three years of decline (and doing so at a faster rate). Problem? As we noted in the Page #1 story, manufacturing employment was lower for the third consecutive month, as the Labor Department released the November employment report.
On another ISM front, it’s service sector report also showed a greater expansion than expected.

Employment
Well, it’s been all over the news, but we’ll still note that, despite the jobless rate dropping to 5.4%, the economy’s job creation was far weaker than anticipated last month with only 112,000 new jobs added. What didn’t receive much attention was that September and October data were revised downward by a total of 54,000 jobs.

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Housing Activity Update:

While the reported the rate of single family “housing starts” jumped 5.7% last month, to an annualized rate of 1.645 million units, the real story is in the "actual" year to date data showing that work began on more than 1.38 million during the first ten months of the year. Those y-t-d data mean the single family sector's running 9.3% ahead of '03's record pace, suggesting a new record at year's end in the 1.6 million range.
Local: Owner occupied new housing activity up a solid 7.4% regionally, as single family and condo permits are up by 1,462 units in the nine county southeast Michigan region (accord-ing to Housing Consultants of Clarkston). Included in these data are 74 additional units in Genesee County, representing a 4.3% increase over last year.
The government also reported new homes sold, by builders, at an annual rate of 1.23 million in October, slightly above Nov., making it the 20th consecutive month the rate's been above the 1 million unit level. What's amazing is that, historically, the million unit level was unthinkable until mid 2002.
October's data suggest the new record to be set by year's end will beat last year's level by roughly 100,000. Through the first 10 months of the year, sales are up 9.9%, with sales only 58,000 units short of ‘03's year end numbers. (Note: New home sales first hit the million unit rate in August 2002, and have only dropped below that level for one month since. The 1.2 million unit rate was first hit in March, and the level has been maintained 4 of the subsequent months. (Why have these numbers been so strong? We speculate on page 3).

Existing homes sold at record levels again in October, but the median price remained below summer’s level. And, sales continue at a higher pace than in ‘03 locally, up 2.85%.
However, most notable in real estate sales data are state and local prices and values, noted in the second feature that begins on page one.

  See Feature Article

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