December 19, 2002

Inside Veritas -
Article 1 -Health Benefits’ Costs Up 14.7% in ‘02; A drag on employment?
Article 2 - BAMF/Habitat for Humanity: In Progress on Nichols Ave.
Article 3 - Health Insurance: It’s “Deja Vu”
Article 4 - Taxation and Finance - Planning 2002 Stock Capital Losses
Article 5 - Sewer and Water Update
Association News Update From Laura
Economic Update - “Employment” remains THE issue
BS: Still about Nothing in particular
Housing Industry Update

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Health Benefits’ Costs Up 14.7% in ‘02; A drag on employment?

   During the first half of ‘02, the nation’s manufacturing sector experienced its first period of growth since early ‘00 according to Institute of Supply Management monthly reports. However, as the sector was expanding, employment in manufacturing fell from 17.1 million in December 2001, to 16.7 million in July of this year.
   So, while the sector’s activity was picking up, it was also cutting roughly 400,000 jobs.
   We note this point because of the release of a survey by Mercer Human Resource Consulting which found that workers’ health benefit costs soared 14.7 percent this year, and will likely climb another 14% in ‘03.
   The Mercer findings are hardly surprising. In late June, in conjunction with an article on the impact of subsidized European drug prices on U.S. health care costs, we explained how the association’s health premiums had risen 104% since ‘97, at a time when the rate of inflation was up just 11.25%. And, we couldn’t help but notice, at the time, how rates soared 55% since the end of ‘00, which was also the period when total U.S. employment peaked. In conclusion, we suggested there was a close relationship between the cost of health care, low inflation (the inability of firms to raise prices to cover costs) and declining employment.
   The “Mercer” survey goes a bit deeper, adding credence to our previous conclusion. It finds “the average employee costs his employer $5,646 in health benefits,” up 56% from $3,594 in ‘97. But it also said that medium sized companies experienced a rise in health care costs of 18.1% this year, or a rate that’s 23% greater than the average increase.
   Many of these companies have cut, or even ended, employee health benefits. For example, the survey found the percentage of companies with 10 to 49 employees that offer a health plan fell from 66% to 62% in the past year.
Of course, many large manufacturers, due to union contracts, don’t have the luxury of scaling back benefits. So, the only alternative when the rise in employment costs exceeds the corresponding rise in revenues is to cut jobs. And, that appears to be what’s taking place throughout the manufacturing sector.
   Manufacturing employment hit its peak in June 1998, with 18.96 million jobs. Two years later industrial production had risen 13.7%, but employment was down by 330,000 jobs, or 1.7%. Then, as manufacturing activity declined through last December, the sector’s employment plunged by an additional 1.54 million. However, as activity rose during the 1st eight months of this year, manufacturers cut some 300,000 more jobs.
   From mid ‘98 to this August wholesale prices rose 4.6%. But wages rose roughly 19% during the same period, while the rise health benefit costs jumped more than 50% (sub-stantially more in Southeast Michigan). It’s obvious that prices of manufactured products can’t keep up with soaring employment costs, particularly where health benefits are included.
   Last month the Labor Department said manufacturing employment was at 16.575 million, down nearly 2.4 million (12.6%) in little more than four years (down 1.86 million [10.1] in the past 24 months). One shouldn’t expect any major turnaround so long as the disparity between the costs of employment and wholesale price levels continue.

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BAMF/Habitat for Humanity: In Progress on Nichols Ave.

   As we were just about to break ground on the association’s project with “Habitat for Humanity” in mid June, a strange event took place. A moratorium was slapped on all “B” permits for Genesee County’s sewer system, in response to the lawsuit that’s dominated the building news in this community ever since. Then, after the moratorium was relaxed on July 16, we were able to begin construction.
   The “Habitat” project is spearheaded by outgoing BAMF President Steve Edwards, and has been supported by many members and non-members alike. Although the home’s still a ways from completion, we feel it’s time to, once again, recognize those who’ve made it possible. So, below is a list of all of those who have, to this point, donated (or pledged) time, materials and/or money to the home’s construction.
   Although the Builders’ Association began working with “Habitat for Humanity” more than a decade ago, this is the first time it’s built a home with the organization. And Edwards, who has supported the association’s involvement in community based activities since his first presidential term in 1989, felt it was time to get involved. As he noted in his message in Housing Quarterly this fall, “before homes were perceived as investments, job creators, or revenue enhancement, they were viewed as shelter for humans. It’s the creed of BAMF that every person should have the opportunity to live in a solid, safe, well built home.” So, it was clearly time to follow our creed.
   The home is at 2282 Nichols Ave, just off Saginaw and four blocks south of Maple. Stop by and take a look. Also, there’s still opportunity to get involved.

BAMF/Habitat Contributors

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Health Insurance: It’s “Deja Vu”

  For the past six months there’s been an evident focus on health industry costs in Veritas, from the disparity in drug prices between Europe and America, to the association’s Health Insurance program’s premiums rising more than 9 times faster than the rate of inflation, to the current issue’s lead article noting business health care costs rising 14.7% nationally this year. But there’s something else that caught my eye with the “Mercer” survey quoted in the article.
   Apparently, the average “employee is costing his employer $5,646 in health costs, up 56% from 1997.” Unfortunately, I’m aware of no substantial health policy covering more than one person that has so low a premium. In fact, nearly everyone I talk to who’s based in Southeast Michigan is spending in the $10 to $12 thousand range, and higher. So, it seems that local employers are at a competitive disadvantage regarding “costs of doing business,” much like the state’s plague on employers decades ago.
   This issue takes me back to the late 1970s, when I first left the security of a government job to represent the home building industry. It was back in those days that I learned such fascinating tidbits like state statutes were responsible for making the cost of doing business in Michigan uncompetitive with those of the rest of the nation. Workers’ Comp, unemployment compensation and property taxes each played a major role. But after the state’s devastation in the ‘80 to ‘82 recession, the legislature recognized the importance of being competitive. And, as we moved into the ‘90s, Michigan’s turnaround was of miracle proportions, as the state’s business costs were competitive, and the Michigan’s economy was booming.
   Now, I’m concerned that the state’s era of competitiveness is a thing of the past. Sunday’s Detroit News’ lead headline exclaimed “Michigan’s economy still limps ... state lags behind the nation.” It went on to note the “manufacturing segment, which drives the state’s economic engine, is sluggish, and job creation is moribund." What it didn’t question was why? After all, the manufacturing sector was heading upwards through the first three quarters, but there was no impact on employment.
   First of all, as our lead article says, the rising cost of employment to manufacturers is prohibitive in comparison to their inability to raise prices in a period of nearly “zero” wholesale price growth. And, secondly, if Michigan’s health benefits cost nearly double the national average, the state may be back at that competitive disadvantage it experienced in the ‘70s and ‘80s, even if manufacturing employment begins to pick up.

Barry

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Taxation and Finance ---- Planning 2002 Stock Capital Losses

   Now is the time to examine your anticipated 2002 taxable income. If you have sold any capital assets, such as stocks or mutual funds, for a gain, you might want to consider ways of offsetting that gain. In this weak stock market, you are likely to have in your investment portfolio holdings that are currently priced below your purchase price. Now might be a good time to sell those stocks or mutual funds to generate losses to offset capital gains or up to $3,000 of ordinary income.
   In the event that you wish to retain a loss security in your investment portfolio, you may be able to sell the stock to recognize the loss and then reacquire the stock to continue your investment. However, in order to use the loss on your 2002 tax return, you must wait 30 days after the sale to repurchase the security. If you anticipate that the stock price may rise during that 30 day period, you may also purchase additional shares of the security. After you have held the newly acquired stock for 30 days, you can sell the original shares at a loss. This loss could be used to offset capital gains or up to $3,000 of ordinary income.
   Please call your tax advisor if you have any questions about the sale of capital assets.

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

State to Mandate “Green” Brainwash Curriculum?

  Several months ago the creators of the irreverent cartoon “South Park,” which often does a better job of mocking extremism (both left and right) than a Wall Street Journal editorial or a Michael Moore movie, took up the issue of environmentalists’ attempt to “brainwash” elementary school students. In the episode they (environmental-ists) were ultimately outsmarted by Colorado nine year olds.
   Now we find there’s a Legislator who wants to make “environmental brainwashing” standard curriculum in Michigan schools.
   Chris Kolb (D - PRAA*), who still believes agriculture is a primary state industry, introduced a bill to require public schools to provide environmental “education” on at least 10 days each school year.
   After meeting Mr. Kolb at a session of the Democrat land use task force, we doubt his vision is for a fair and balanced curriculum. In fact, we would expect his follow-up legislation would mandate a statewide dress code for public schools. And, if you wish to capitalize, we suggest you invest heavily in “Brown Shirts.”

No more Al Gore to kick around?...we think not!

   For more than a decade, Al Gore has provided fodder for this column and all its predecessors. Between his environmental extremism and seeming inability to state a rational position on almost any aspect of Federal policy has given us countless opportunities to mock this avowed enemy of growth, development, and particularly the automobile. So, when he began his “book tour” (including a guest hosting opportunity on Saturday Night Live) we were looking at a potential windfall. Then, after the highly publicized SNL appearance, he took himself out of the running for (at least) ‘04. And, in doing so, said it was probably his “last chance” to be President. Well, don’t break open the champagne right away! Al Gore still wants to be President!
   Unless things change dramatically, Gore had no chance of defeating George W. Bush in a rematch. However, either does anyone else. So, in 2008, Al Gore will be the man who won the popular vote in 2000, and could easily be resurrected as the “most electable” Democrat in the (like Nixon for the GOP in 1968). And, unlike Nixon, Gore wasn’t dumb enough to run for Governor two years after losing the presidency.
   During this highly publicized “book tour” period, which took him to Leno, Letterman, Conan O’Brien, et al., Gore quickly learned he couldn’t generate book sales, let alone votes. But our best guess is, he believes he’ll be back, much stronger in 2008.

*PRAA - Peoples Republic of Ann Arbor

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Association News and Events by Laura

  

The 1st General Membership meeting of 2003 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 January issues of Veritas.    The annual Exhibitors’ Night, that has become one of our most highly attended events, is set for Wednesday, February 26th, also at Bonaparte’s. We’ve sent out table reservation forms to previous exhibitors in the past week, and will mail to other members at the first of the year ...still, if you wish to participate in this event for the first time, call the BAMF office for further information.    We realize it’s still 2002, but it’s time to be thinking about the upcoming Parades of Homes, so we’ll hold the annual “Parade” meeting on January 15th (Wednesday), at 3:00 p.m. in the association office. As always, we’ll finalize the parade dates, hours and additional details for the spring and fall events. Also, we’ll report on the findings of the Awards’ Committee, which has been investigating altering the awards process, including a survey of recent event participants.    Once again, we wish to take this opportunity to thank Hill Steel and Building Supply, along with Michigan Construction Industry Mutual, for their sponsorship of our annual Holiday Open House that was held December 4th.

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Economic Update: “Employment” remains THE issue
  

   Throughout this issue of Veritas, the references to employment permeate all too many of the articles. And, it’s obvious from reading each of these articles that, if their conclusions have any credence, the “problems” with the economy won’t be corrected with tax cuts or other administration proposed stimulus.
   This month’s economic reports show that productivity is historically strong, inflation is still non-existent, third quarter growth was solid, yet employment continues to lag. What they fail to point out is that many of these “positives” are having a negative impact on the negative employment data.
   Payrolls fell by 40,000 jobs in November, bringing the unemployment rate to 6%, the highest level since 1995. Of course, back then the conventional wisdom suggested that an unemployment rate below 6% was an indication that the economy was overheating, and a new round of inflation was in the offing.
   Now, we find that economic growth’s been solid for four quarters, manufacturing even showed signs of recovery for the first three quarters of the year, but there’s been notably no improvement in the employment picture. So, productivity grew at a 5.1% rate in the third quarter while growth for the year was running at 5.6%, the fastest rate since 1966. Wholesale prices are up less than 1% over the past year, as consumer prices are up only 2%.
   So, with strong productivity, where’s the need to employ more workers? And, with virtually no increase in prices, how can employers pay for rising employment costs (particularly as health care is rising 15 times faster than price levels)?

Housing Activity
   The first look we got at November’s housing activity suggests the industry’s continuing it’s banner year. Evident in the chart, single family starts remained strong, and guarantees another record year. And, the NAHB survey shows builder confidence at a 2 year high in December.

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

Appraisal Process Under Serious Scrutiny

   Last Friday’s Wall Street Journal lead article focused on the growing problem of Mortgage fraud, and the role of appraisers in this potential crisis. In fiscal ‘98, mortgage fraud was at federally chartered banks and thrifts was in the range of $55 million. By 2000, it was slightly over $150 million. And this year, the amount’s listed at $293 million, up 430% over four years, and nearly double over two. However, it’s believed the problem is “vastly understated,” because half of all mortgage firms operate without a federal charter.
   The article told of situations where appraisers conspired with builders or realtors, to artificially raise values to defraud buyers, along with the lenders who financed the homes. Furthermore, it noted that, in many cases, the lenders were willing victims since they weren’t expecting to hold on to the loan anyway.
   Noting that mortgage and refinancing activity is expected to rise to a record $2.4 trillion this year, the Journal pointed to the fear of some experts that “home prices could soon drop,” due to the softening market and cooling economy. If so, the WSJ says, “substantial blame may fall on the nation’s 40,000 residential appraisers — much as Wall Street securities analysts are being criticized for hyping overpriced stocks before the Internet bubble burst.” And, there’s data to support that theory, because the Mortgage Asset Research Institute, which follows fraud for the industry, told the WSJ that “21% of the cases it tracked in 2000 involved bogus appraisals, quadruple the percentage five years earlier, making appraisal related schemes (by far) the fastest growing form of mortgage fraud.”
   According to the appraising profession’s association (the Appraisal Institute), appraisers fear business repercussions if they don’t cave in to customer pressure. In fact, the article points out that “7,000+ appraisers have signed a petition saying they have been subjected to such pressure and calling on regulators to forbid the practice.”

S.E. Michigan Mortgage Payments 35%+ of income

In a recent issue we noted the growing number of mortgage delinquencies, explaining how today’s lending practices of low down payments and high loan to income ratios contribute to the problem. Well, the Sunday Free Press’ Real Estate section focused on the rising number of Detroit area households with house payments are running at 35% (or more) of gross income.
The article pointed to today’s buyers wanting more house immediately (unlike their parents), and how “much looser” mortgage lenders will allow households with “decent credit” to extend far beyond the conventional wisdom that the price of a house should not exceed 2.5 times your annual income. But the interesting factor in the article were the communities with exceptionally high rates of homeowners with over 35% of income going to monthly payments.
While it may not be surprising to find that high priced housing communities like Grosse Pointe Shores, Franklin and Orchard Lake had more than 20% of their homeowners with 35% plus debt, what about Detroit and Pontiac? Both central cities, with comparatively low home values and prices, had 20.4% and 22% of their homeowners with 35% or more of their incomes being directed to house payments. To put that in perspective, Ann Arbor, with the least affordable housing in the Midwest, only has 13.3% in that category.

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