   1994 brought about a new era for home building in Michigan. That was the year property tax relief went into effect and, in the midst of a growing economy, the level of single family housing activity began to soar from an annual 30,000 unit level to around 44,000 for the final half of the decade.
   Well, this fall, for the first time since the passage of proposal “A” in spring of that year, the state’s permit activity slipped to the levels of the pre-1994 era.
   In late October we reported that the previous month experienced a significant decline in activity from recent Septembers. However, that was expected considering that the immediate response to the events of the 11th took a full week out of business activity for the month. However, the October report, posted at the end of November, showed activity slipped dramatically all across the state, at the same time housing was regaining its strength nationally.
   The total number of units authorized during the month was 3,762, according to the Census, nearly 19% below the previous October, bringing our seasonally adjusted rate to 40,850, below the level of last December when much of the state was shut down by a snow emergency. And, the single family authorizations of 3,287 that month were, not only the lowest of any October in the post “Proposal A” era, but were 14% below the October average for recent years.
   From a regional perspective, the Southeast Michigan data were in line with the rest of the state as its 1,579 single family permits were 14.7% below last year’s number. However, as is evident in the chart on page 1, one section of the region continues to show an increase, and, that’s Genesee County, where single family was up 10% over last October, while total activity was up 19%, to 198 units.
   The October numbers present a continuation of a banner year for local housing starts that has been evident since April. While the total Metro-Detroit area (Ann Arbor, Detroit, Flint) is down by 5.8% for the first ten months of ‘01, the “Flint” sector is up 30%, with a total of 2,738 units. And, the area’s single family numbers are up 13.8%, to 1,728.
   One primary reason for Genesee County’s exceptional numbers this year is reflective of an incredibly large rise in rental permits. Housing Consultants’ report for October showed 711 rentals authorized during the 10 months, more than double ‘00’s year end total of 318. The other major reason is a tremendous rise in Grand Blanc Township, where total activity is already up 53% from 2001’s twelve month total. The township’s authorized 471 permits prior to November 1, of which 383 were for owner occupied housing.

Business News & Issues

After record sales in Oct. Cars sold fast last month
   Marx was wrong. O% financing, not religion, is the “Opiate of the people.” After free interest addicts snapped up an all time monthly record 1.73 million cars and trucks in October, an additional 1.3 million came in the next month to close a new car deal. So, in the midst of an apparent recession (many now say it began in March), it looks like auto sales for the year will end at nearly 17 million units, just barely below last year’s record of 17.35 million.
   GM led the way for the “Big 3” as November sales were up 12.9% from a year earlier, on a 36% rise in its SUV and truck market. Cars were down 11%, primarily because of an industry wide drop in rental fleet sales.
   Ford’s sales were up 4.9%, but troubled Chrysler saw sales fall 5.8%. In fact, Chrysler’s sales were only 35,000 above Toyota’s, who’s sales jumped 9.7% for a record November. Honda and Volkswagen also set November records, while Jaguar, Land Rover, Mitsubishi and Hyundai all had their best month in history.
Ford/GM Heading in Opposite Directions
   Last Monday General Motors announced it would boost its vehicle production 7.1% in next year’s first quarter to 1.3 million cars and trucks. On the same day, Ford said it would cut production by 9.3%, from 1.08 million to 980,000 during the same period. GM also boosted its output forecast for the current quarter by 1.2%, to 1.285 million vehicles.
Subsidies:Top State Crop
   There was a fascinating Flint Journal story in late November regarding subsidies to Michigan farmers. Often we’ve pointed to the hypocrisy of the farmland preservation zealots who continue to claim that costs associated with housing development put a burden on public resources, yet ignore the obvious drag on those resources by continual doles to farmers for everything from not growing crops, to growing too many.
   As we noted a few months ago, farm state legislators and farm lobbyists are pushing for a gigantic $170 billion farm bill that would become the law of the land for the next decade (the bill passed the house in October). Well, the Journal pointed out that leaders of the Michigan Farm Bureau would be among “the biggest winners” if the bill becomes law.
   Citing a study by the Environmental Working Group, the story noted that, “in the past five years, seven top officers of the Farm Bureau reaped $1.4 million in federal payments, while most farmers in the state collected less than $6,000 (Michigan farmers received a total of $1.22 billion during the period).”
   A spokesman for the Environmental group questioned the quality of representation the nation’s farmers are getting from the Farm Bureau. “Anytime you have an organization getting large subsidies, it has a larger voice in Con-gress,” he told the Journal’s Washington Bureau, noting, “it raises a question of who’s interest they are pursuing.”
   As would be expected, the Farm Bureau blasted the environmental group’s report. But the “fascinating” part of all this is the return of animus between farmers and tree huggers, arch enemies up until recent years. But, then again, perhaps “environmentalists” should read their own reports before distorting facts as they relate to farmland preservation.

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“Recession” Aside: It’s mostly a banner year for housing

   A week ago we received the final piece of housing data for October and, it’s become evident that, despite the economic downturn and events of September 11th, when all is said and done we’ll find that 2001 was a record setting year for housing at the national and local levels. However, it’s also become clear that Michigan, along with the rest of its Southeast region, are in the midst of a rather substantial downturn.
   October’s numbers were critical since they provide an indication as to how America’s housing market reacted once the immediate shock of 9/11 wore off. And they suggest the market’s quick return to its pre-September record setting sales pace, and continuation of its solid construction rate.
   Unfortunately, the solid housing data the rest of the nation is experiencing doesn’t appear to extend to Michigan. Recent months have shown a sharp decline in building permits, everywhere but the Metro Flint area, and the trend doesn’t look like it’s about to turn around in the near future.
· Nationally, sales of new single family homes in October were up for the second consecutive month to an annual rate of 880,000 units. For the first ten months, total sales are up 4% from ‘00, to 779,000, as they’ve been selling at a rate 904,000. The current record for sales is 885,000 units in ‘98.
· Sales of existing single family homes rose 5.5% during the month, to an annual rate of 5.17 million. For the year, sales are running at a 5.249 million rate, roughly 1% above the record set in ‘99.
· Often ignored by national stats, but still having a tremendous impact on the housing market, are condo sales, which have been running at a record pace all year (741,000 units). The previous record was 711,000 in 2000. A fascinating factor in the condo market relates to prices in the Midwest region, the only section were condos bring more than single family.
· Michigan’s permit activity is down 7.2% for the year, after a terrible month that saw activity drop 21% below average for the post “Proposal A” Octobers. Single family permits were at 3,287, a full 14% below the month’s average of 3,820.
· The Metro-Detroit area experienced its worst October in years. Traditional “Detroit” permits were off 20% (10.6% in single family) from last year, while the Ann Arbor area was down 46% and 37% respectively. Only the Flint area was up, by 15 single family units (10%) and 32 total units (19.3%) for the month and remains up for the year.

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Taxation and Finance ---- There’s Tax Relief for Bad Debts

   Companies with customers who are unable to pay their bills may be eligible for tax relief this year. A company that uses accrual method of accounting can claim a bad debt deduction for debts that are totally or partially worthless, and a partially worthless corporate debt can be deducted for tax purposes at any time between the year it becomes partially worthless and the year in which it becomes totally worthless. This provides an opportunity for a company to decide when to take a deduction in order to obtain the greatest tax benefit.
   There are two main conditions for taking a bad debt deduction. First, a company must have proof that the debt became partially or totally worthless in 2001. A bankruptcy filing would be a valid indicator, while slow payment or failure by the customer to pay on demand would not be a valid indicator. Second, the company must take a write-off of the specific debt that has gone bad.
   If you have doubtful accounts and would like to take a write-off this year, we suggest you take the following steps before the end of the year:
· Step up your collection efforts and document all collection attempts.
· Prepare and retain written demands for payment from the delinquent customer.
· Obtain financial statements, Dun & Bradstreet reports and other documentation that indicate the customer's inability to pay the debt.
· Turn the account over for collection and obtain an opinion from the collector as to the uncollectibility of the debt.
   All of these procedures will support your bad debt write-off and should deflect any IRS challenges. However, you should always consult with your professional advisor before making any decision regarding your business.

R, P & T

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Record Setting Condo Market Means More in the Midwest

   Several times over the past ten months we’ve said homes have been selling at a record pace. So, it was little surprise when the National Association of Realtors reported that sales of co-op and condominiums set a new record in the third quarter, up 5.1% from the previous record set in the first quarter. After all, with aging baby boomers in the process of downsizing, at a time the first time buyer market is booming, there’s plenty of reasons the condo market should be exceptionally strong.
   However, there is something else that caught our eye for the first time when analyzing the realtors’ data. We found a substantial difference in prices of condos on a regional basis.
   Historically, the Midwest is the least expensive section of the nation, with single family home prices historically running some 11.5% below the rest of the nation’s. However, its condominium prices are currently 8% above the nation’s median.
   America’s median priced single family home was $151,200 in the third quarter, while the median priced condo sold for $123,500 (27.7% less). Midwest condo prices ($133,300), on the other hand, are nearly identical to the median single family price of $134,200.
   So, while other regions tend to consider the condominium market as low cost housing, its 10% growth rate (over ‘00) in the Midwest is far more significant.

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

What do you call a Lawyer with Morals?
Like reformed smokers, lawyers who've found a better way to make a living keep hitting at their former way of life. A couple of weeks ago we took note of a quote by David E. Kelly who made a successful transition from lawyer to the top producer and writer of television drama and semi-comedy (Practice, Boston Public, Ali McBeal, Picket Fences, L.A.Law) in late 20th and early 21st Century America.
In one of his frequent ethics v. morality plays, a lawyer broke a client's confidence to save the life of a young boy. At a hearing regarding his "ethical code" violation, the chief judge on the hearing panel drew the following conclusion: :Legal ethics and morality are not only two distinct concepts, they are quite often mutually exclusive."

Advertising and your health care premiums
   Anyone who has they're television set on realizes that prescription drugs are among the most highly advertised products in America today. And, apparently the warnings at the end of commercials don't hold much deterrence for the average patient. Because, while they may cause vomiting, internal bleeding or diarrhea, their sales are soaring. And, when your health insurance premiums force you into bankruptcy, you may wish the September 11th hijackers had targeted Madison Avenue rather than Wall St.
   A recent study by the National Institue for Health Care Management found that spending on prescription drugs rose by $20.8 billion last year, and half of the increase came from the 50 drugs that were most heavily advertised. Those 50 make up 1/2 of 1% of the 9,900 prescription drugs on the market.
   The study found the makeer of Vioxx, an arthritis drug, spent $160.8 million to promote it to consumers, more than PepsiCo spent on Pepsi, or Budweiser spent on beer. And, its sales jumped 400%, to $1.5 billion.
   The other major advertisers include Celebrex, another arthritis drug, the cholesterol drugs Lipitor, Pravachol and Zocar, along with Prozac and Viagra.
Over all, total consumer drug adveertising was up 35% in '00, to $2.5 billion from $1.8 billion in the previous year.
   As would be expected, the big drug companies objected to the study, claiming "their research showed no direct link between advertising and rising drug expenditures (must be attempting to promote quality programming)."

New York; New Record
   Would you pay $68,968,185 for a new job? N.Y. Mayor elect Michael Bloomberg did, and it works out to a cool $92.60 for each of his 744,757 votes. The N.Y.Times called it an "Election Record," but we've heard of association candidates spending over $1,200 per vote.

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Association News and Events

   Believe it or not, it’s time to begin planning the 2002 Parades of Homes (Mothers’ Day is just five months from yesterday). We’ll be holding a meeting of BAMF builder members next Tuesday (12-18) at the Association office. The meeting will begin at 3 in the afternoon and shouldn’t last more than an hour.
   Although the spring parade is expected to open on May 10th, and the Fall event is set for October 12th, there still remain a number of issues to discuss. For example, this fall there were a number of suggestions regarding cutting weekday hours, while a few participants this spring suggested expanding them.
   Also, at this meeting, which normally brings a large number of builders, we want to discuss the rationale of holding quarterly “Home Builders’ Council” meetings.
   Last week’s first “Holiday Open House” was an enjoyable event, as some 130 by for hors d’oeuvres, refreshments and great conversation. Although the weather was more conducive to a golf outing than Christmas party, it was a great time and, it’s rather obvious, it will become an annual event.
   Although tradition has it that the Association office is technically closed between Christmas and New Years, the staff will be in, almost daily, throughout the week long period. So, if you wish to reach us, just leave a message on the recorder. members & guests stopped

Economic Update: 1 negative quarter a recession makes?

   Throughout the expansive 1990s it was often said that economic standards no longer apply under the precepts of the “New Economy.” Well, apparently that concept must apply to definitions since, late last month, the National Bureau of Economic Research (NBER) declared the U.S. economy is not only in recession, but has been since March. Though the technical definition of recession remains as 2 or more quarters with negative growth, the NBER believes the term recession represents a significant decline in activity spread all across the economy and lasting more than a few months. So, despite the fact that the third quarter was the first with negative growth (-1.1%), the nation, or at least the news media, was ready to accept the NBER definition, and began to broadcast that the recession is on.
   However, if we’ve been in a recession for nine months, it sure is a strange one: One where homes sell at record levels and their values rise at record rates; and, one where cars and trucks sell at near record levels. But there’s something else that may be more unusual about this recession: It may be over before it registers.
   Now, a growing number of forecasters believe the economy is already on the way to an early recovery next year. First, fears of a post September 11th collapse were greatly exaggerated and, secondly, recent data show the economy experienced a significant bounce back in October. Furthermore, stocks have more than recovered their losses from the aftermath of 9/11.
   What seems to bring the most optimism relates to the reports of soaring orders for durable goods and a rebound in the November industrial purchasing managers’ index, suggesting that manufacturing is beginning to show signs of recovery, particularly since inventories continued to decline. Actually, inventory liquidation in the third quarter took place at the fastest rate of any 3 month period since the early 1940s.
Leading Indicator Index
   A sign that recovery may be in sight came late last month when the Conference Board announced that the Index of Leading Economic Indicators rose 0.3% (its biggest rise since July). Six of the 10 indicators were up, including orders for plant and equipment, stock prices, and consumer goods orders.
Confusing Consumer Sentiment
   On November 21st, the University of Michigan announce its closely watched consumer sentiment index rose for the second straight month. However, six days later the Conference Board said its Consumer Confidence Index fell sharply for its third consecutive decline. Noting that “rising unemployment and continuing layoff announcements are dampening confidence," the Conference Board doesn’t expect a “turnaround in confidence levels” before the end of the year.
Manufacturing
   The pace of manufacturing picked up last month as factories received a rush of new orders after inventories continued to decline in October. The National Association of Purchasing Management’s index of manufacturing rose to 44.5 from 39.8, well above the consensus forecast of economists by Briefing.com.
   Still, despite the substantial rise, manufacturing continues to contract (numbers above 50 mean the sector’s expanding and vice versa). Furthermore, the association’s “new order index” rose 10.5%.
Employment
   The U.S. unemployment rate climbed to 5.7% last month, the highest level in six years, according to the Department of Labor’s monthly report, as America’s employers cut payrolls by 331,000 jobs during November. Furthermore, the combined job cuts over the past two months are the most since late spring of 1980, a time the nation was entering its worst recession since the Great Depression. However, in the overall scheme, jobs’ data only looks weak due to the strength of the past six years. In fact, in August ‘95, the last time the unemployment rate was this high, the concern was that a tight job market would soon put inflationary pressure on prices. And, at that time, there was a belief among economists that 6% unemployment was the normal, or full, employment rate.
   To put the jobless rate in perspective, the nation was under 5% through the third quarter of this year (now considered six months after the “recession” began). Prior to ‘97, one has to go back, at least to the 1960s, to find the jobless rate that low.

Housing Industry Update

3rd Quarter Values Soar Across the Nation
   Monday, the Office of Federal Housing Enterprise Oversight (OFHEO) posted its house price index (hpi) for the third quarter of ‘01, showing the actual value of American homes increased a whopping 8.39% over the previous twelve months, despite the continued downturn in the U.S. economy. Furthermore, there were ten states experiencing 10 percent or higher appreciation, mostly on the coasts, during the period.
   Michigan home values grew at a historically strong 6.03% rate since October ‘00. However, the rate was rather anemic in comparison to the nation as a whole. In fact, it represented the third consecutive quarter that Michigan’s appreciation rate was below the national average, and its rank fell to 36th.
   Of its major metro-areas, Lan-sing (6.51%) experienced the strongest rate during the twelve month period, followed by Detroit (6.31%). Saginaw (5.17%) was lowest. The rest of Michigan, including Flint (5.5%), were in the mid 5% range.

Existing Home Sales Recover after 9/11
   Sales of existing single family homes rose 5.5% in October, to an annual rate of 5.17 million units, putting the nation’s realtors back on track to beat their sales record set back in 1999. Although the National Association of Realtors (NAR) continues to forecast 5.19 million units for the year, slightly below the ‘99 peak, they’ve been running at a 5.249 clip for the first 10 months.
   Furthermore, as we point out on page 8, the record number of condo and co-op sales almost guarantee a record year for total sales activity.
   At the beginning of ‘01, NAR’s Chief economist, David Lereah, predicted that new single family homes would, however, sell at record levels for the year. Well, it’s looking more and more likely that he was correct on that forecast, considering the Commerce Department’s recent data.
   In October, new homes sold at a rate of 880,000 units, just under the 885,000 record rate of ‘98. However, the October rate was one of the lowest all year.
   For the year, new homes have been selling at an average rate 904,000 for the ten months, over 2.1% above the ‘98 record, and with interest rates near historically low levels, it’s unlikely there would be a significant enough drop-off in the final two months to bring year end sales under the record.   Which takes us back to existing homes. Even in the immediate aftermath of September 11, combined sales for the 2 months remained above the five million unit threshold. And, despite the recent upturn in mortgage rates, the 30 year rate remains below August’s level, when the sales rate was 5.5 million.
   Six of the first ten months, homes sold at a higher rate in ‘01 than in ‘99. And, a 5 million sales rate for the final months of the year would pretty much assure a new record. So, it continues to seem likely that existing home sales will set a new record when the realtors report in January.

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