Veritas

This past winter and early spring we were hit with a series of reports showing that local real estate prices barely rose in 1998. Median prices of existing homes through December 31st of last year were up just 1.2% from the end of 1997, according to NAHB’s Housing Opportunity Index (HOI) while the Flint Area Association of Realtors’ year end report showed average prices of homes sold in Genesee County school districts as statistically identical to the previous year’s numbers.
However, with further analysis of the Realtors’ data we discovered that, with the exception of very few communities, nearly every local district experienced significant growth in values during the year. What had distorted the county’s over all numbers was an explosion in sales activity in a number of areas with lower than average housing prices. And, those areas experienced tremendous growth in values during the year.
Since, prior to 1998, Flint area housing values had been growing at a rate that was better than double the national average throughout the ‘90s, there were reasons to be somewhat apprehensive as 1999 data began to come in. After all, overall home prices reflect on the perception of the total community (Click here for Article 3) and potential new home buyers have considerably more faith in their potential investment when the region’s price level is on the rise. So, it was quite a relief in June when NAHB’s 1st quarter HOI showed median existing home prices up 5.4% to $97,000. And the relief continued in July when the Office of Federal Housing Enterprise Oversight (OFHEO) reported that Michigan’s prices, after a slow fourth quarter, had recovered so well that the state was back up to 4th in the nation for the past 12 months.
But it wasn’t until the Realtors’ sales data for the first half of the year was reviewed that we could actually feel confident that housing’s value as an investment was clearly re-established.
The data show that from January 1st through June 30th, average existing ome prices were up 12.1%, to $115,217. Also, suburban prices averaged $132,143, up 10.6% for the first six months.
Every school district experienced growth during the period, with the exception of the Lakeville district. However, Lakeville’s decline was based on just 40 sales, so the decline has relatively no market significance.
The most explosive growth in selling prices took place in the area within the Lake Fenton school district where the average price was the highest we’ve seen for any period at $213,854, up a nearly unbelievable 46% from last year’s average. However, a closer look at the sales found that nearly a third of the homes sold during the six month period were waterfront properties. The median price in that area was in the more moderate $157,000 range, pretty much in line with the rest of the “Fenton/Linden” community.
It was, in fact, the Fenton/Linden school districts, which include parts of Livingston County, which led the area in value, with an average sale of $173,148, up 15.4% from all of ‘98. What was interesting about the data in the area is that each district was home to between 31% and 38% of the total sales. In the past, the Fenton district was substantially higher than the others. Flushing (13%), Davison (9.6%) and Swartz Creek (10.5%) all experienced substantial growth.
We were also able to establish median home prices for the 6 areas we’ve been monitoring since 1995 (below). All but Grand Blanc, which experienced a significant rise in moderate priced condo sales, showed a significant rise.

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“A Bumper Crop of Subsidies”

(Editor’s Note: Farming and development have become closely tied industries. In recent years the demise of the “Family Farm” has been used by opponents of sprawl in attempts to gain support for their anti-development efforts. And, they’ve had considerable success in the press, and even in the legislature, as a myriad of bills have been introduced (one even passed) to keep farms out of the hands of developers.
Although we normally counter with the direct benefits of development, the truth is that farms, in this day and age, have become somewhat of a burden on American taxpayers with subsidies that no other businesses are entitled to, from property tax breaks to billions on billions of dollars in federal bailouts. But, is it really the family farmer who’s gaining the benefits?
Victor D. Hanson is a California farmer and professor who had some interesting comments on the subject in a Wall Street Journal op. ed. piece shortly after the senate passed a $7.4 billion farm compensation package. Following are excerpts of Mr. Hanson’s column:)

Hanson calls the $7.4 billion farm aid bill for growers of certain “targeted” crops as the “latest example of government endowment (that) is nonsensical and wrong for a number of reasons.” He explains “there is no uniformity or logic to federal help,” then points to previous farm disasters where “none of those beleaguered agrarians asked for government quarter and none was given.”
Hanson then notes the federal government’s “never adequately explained why some farmers are deemed in need of help and others are not, why some growers are allowed to perish under globalization and others are rescued. The suspicion grows that wheat, cotton, soybeans, milk and other targeted crops are subsidized because these acreages are now mostly in the hands of large corporations that give liberally to politicians in key farm states.”
As an example, he writes that $2.4 billion was doled out to 16,000 farmers between the years 1985 and ‘94 ($150,000 per recipient) in California, most of whom “did not live on their land and were mostly indistinguishable from their affluent suburban neighbors.”
“Even by the standards of the farm program, the latest handout represents a new low” according to Hanson, who then turns his attention to the 1996 Freedom to Farm act, which “dispersed $36 billion to farmers without restrictions during its purported 7-year-life span. ‘Freedom,’ we were told, meant that to receive public cash, farmers were no longer subject to government acreage limitations or crop set-asides. Nor was such government help tied directly to market prices. (Farmers) were free to plant any crop and sell it for profit. In turn they promised to get off the dole in seven years.”
“Some farmers in the Midwest are to receive money because there are too
many harvests, others in the East because there are too few.”
However, Hanson points out, “a mere 3 years into the program, growers are back wanting more beyond the $16 billion that has already been paid out to them this year. If the promise of a phase-out after seven years led to legislation with the word ‘freedom’ in its title, does the return of dependency mean an Unfreedom to Farm?’” he asks.
Hanson then hit on “another absurdity arising out of the latest farm bill: How can Congress consider relief simultaneously for poor prices and poor production?” Noting that farmers are receiving money because prices are low, while others are getting relief in response to drought caused low yields, Hanson adds, “by this strange rationale, farmers are to be paid whether they lose their crops to drought, or produce to surfeit, and thus help saturate the market.”
Now, the federal government, like the anti-sprawl activists, invoke the specter of family farms in distress to gain sympathy (and support) for their actions. “But in fact,” Hanson writes, “family farms have all but vanished at precisely the time subsidies are at an all time high.” His figures show that “1% of America’s farmers accounts for over 50% of farm income, while nine out of ten earn less than $20,000.” And, perhaps most notable, “5% of American landowners own 75% of our land.”
Farm preservation issues are as phony as Bill Clinton denials, whether they relate to federal corporate welfare expenditures, or to the preservation of investments in urban areas allegedly threatened by “sprawl.” But one commonality remains at both levels...the primary beneficiaries of farm preservation policies are not the family farmers, but powerful corporations and individuals with millions of dollars to gain, and substantial investments to protect.

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The Image that Just Keeps on Haunting

Forget that Genesee County is leading the region in housing growth. Don’t even consider the fact that bond rating agencies have given the county several upgrades during the final half of the ‘90s. The perception of the Metropolitan Flint area remains somewhere between soup lines and plant closings.
Last Monday I got another one of those calls, the kind where someone needs data to save a deal. This one came from a financial services company in Bloomfield Hills, attempting to get Insurance Company financing for two Grand Blanc projects. Two insurance companies were balking because, after all, isn’t that near Flint? And didn’t they just close down another auto plant, putting the whole town out of work?
Unfortunately, with the exception of Michigan State basketball telecasts, whenever “Flint” gets national attention, it’s always negative. In the early ‘80s it was “Flint” that was hit harder than any community in the nation by the worst recession since WW II. Then, along came “Roger and Me,” suggesting that the early ‘80s disaster had continued.
Last summer we were on the national news daily for the strikes, and this year it was the Buick closing. Is it any wonder the perception from “Roger and Me” continues 12 years after the fact?
Of course, the data was sent, the "deal" may be saved, but will it change anyone's perception?

Barry

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The Seinfeld Section (it’s still about Nothing ; in particular)

All too often, society’s ills are reflected in the sports and entertainment industries. Be it drugs, greed, or just plain lack of honor, America’s celebrities (including politicians) seem to be leading the nation towards total acceptance of behavior that would have been perceived as intolerable just two decades ago.
Last Thursday a story surfaced that reminded me of a statement made by Al Taubman, best known for shopping mall development, when he sold the Michigan Panthers football franchise (which by the time had merged with the Oakland Invaders) back in the mid ‘80s. Taubman expressed shock at the operation of professional sports, noting that it was the “only” business where a contract meant nothing and, quite frankly, he wanted out..... .....which takes us to the story regarding “retired” Detroit Lion Barry Sanders; a story that epitomizes Taubman’s shock.
At least twice during his 10 year career, Sanders refused to play (even though he was under contract) unless his contract was renegotiated.
The last time he did so was in 1997, when he ultimately signed a six year deal which included $11 million up front ($1.83 million of each year’s salary paid in advance). Now, after retiring with 4 years left, he’s threatening the Lions if they try to collect the $7.3 million he rightfully owes.
What’s fascinating about Sanders is that, despite his history of reneging on contracts, his quiet demeanor has always given him the image of being a good role model...fascinating because over the past few months we’ve been hit with a number of situations where homebuyers are attempting to renege on their contracts. Role model? We’re afraid so!

Congratulations are due to BAMF’s leadership Farm team for its most recent exemplary ranking. The school that guided the intellectual development of half of our Presidents of the ‘90s was rated the #3 “party school” in the nation, probably equal to its pre-season basketball rating.
Although Michigan State’s recent escapades may be legendary in the Midwest, the institution ranked behind the two football powers from the Sunshine State (Florida State -#1; Florida-#2), which brings us to this week’s BAMF Trivia test: Which ‘90s’ BAMF President recently took a step UP from his alma mater (MSU) by entering the graduate program at the #2 party school?

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Association News Update

In the August 18th Veritas we noted the Michigan Legislative and Business Leader Forum on Growth Management that will be held next week at the Grand Traverse Resort. Immediately following Wednesday evening’s meeting, Barry and Lisa will be heading to the conference, joining as many as a dozen state association members and staff (includ-ing Rodney Rajala). As we noted in the last issue, this conference is extremely critical since it’s supposedly “Business oriented," but was developed from the premise that “sprawl” is the culprit for too much per capita development and cities that rank “worst in concentration of poverty” in all of America. In otherwords, the forum agenda is stacked against the position of the building industry, and it uses the same distorted data that are usually reserved for Al Gore and his environmental an anti-development friends.
The unfortunate problem at this point is that there’s likely to appear to be a business position on growth management coming out of this forum, and it’s critical that our representatives temper the potential damage.........
......so, the September General Membership meeting will deal with growth management from a local perspective, with a speaker on the subject.
This Veritas is being mailed early to beat any Labor Day delay, so check the website at www.bamhome for an update.
Also, this month’s social hour will be sponsored by S & M Lumber.

Well, the Parade entries are final, and 22 homes are in the October 2nd through 17th event. The community breakdown is 7 in the Grand Blanc/Burton area; 6 in the Davison/Burton area; 4 in Fenton/Linden; 2 in Swartz Creek; and 3 in the “Flushing” section of Flint Township.
Despite the lower than normal participation, there are still sufficient funds to run an exceptional local advertising campaign. In fact, the only noticeable difference between this and other recent fall parades will be the lack of a heavy “Detroit” radio schedule. ........
And, with the smaller than usual number, Housing Quarterly magazine will be mailed to more recipients than usual....furthermore, we’ll be able to distribute the magazine through businesses the way we did in the mid- ‘90s. So, if you would like to distribute the magazine in your business, they’ll probably be available if you call the BAMF office by September 24th.

Economic Update: Surprise? The Fed raised rates & rates fell

Well, the big economic news during the past two weeks was about as anticlimactic as it gets. As was written in this column for each of the past three issues, the Federal Reserve did raise rates last Tuesday with nary an aftershock felt. In fact, the Fed’s action was so strongly anticipated by the middle of last month, the markets reacted well before the event occurred.
So, when the federal funds rate was finally raised to 5.25% (and the discount rate to 4.75%), the markets acted like it was just a good news day.
That “good news” came in the form of the Federal Reserve’s announcement of its action which stated that last week’s tightening, along with its previous rate increase in June, “should markedly diminish the risk of rising inflation going forward.” But, as we’ve recently noted, markets seem to react more to what it perceives is the Fed’s collective frame of mind then inflation, so, when the report added that the central bank now has a “symmetrical” outlook (meaning it has no plans to take additional action in October), the response was favorable as stock values and bond prices rose, while long term yields continued to fall (see Housing/Mortgage Update Article).
(Note: All the news regarding the Federal Reserve wasn’t positive. We don’t know when it happened, but sometime between Thursday and Friday Fed Chairman Greenspan apparently commented to someone about “overvalued stocks.” So, all the markets went into a tailspin on Friday.
Still, long term bond yields stayed well below 6% and mortgage rates didn’t appear to be too adversely affected.)

Gross Domestic Product
The Commerce Department’s revised report on second quarter GDP showed the nation’s growth for the period moving downward, to 1.8% from the original estimate of 2.3%. However, there was better new on inflation in the report, as the implicit price deflator, long considered a key indicator of whether inflationary pressures are appearing in the economy, was up a mild 1.5%, below the 1.6% level first reported.
The 1.8% represents the slowest quarter of growth in a year, equaling the second quarter of last year when the G.M. strike and Asian crisis helped keep the economy under wraps.

Economic Notes:
There was good news from the Treasury Department last week. It issued it’s July report showing that the deficit for the month was less than expected, suggesting that the fiscal ‘99 surplus may well be over $100 billion...... another sign that may have a settling effect on the markets was the report that Personal Income rose slower in July (0.2%) than it has for any month since December; however, there’s no sign of the consumer driven economy letting up, as consumption rose 0.4%, while the savings rate fell to minus 1.4%.

Housing Industry/Mortgage Market Update

Although sales of existing homes fell from their record pace of June, the July rate of home buying remained at an almost incredible level. Homes sold at a rate of 5.41 million units last month, above analysts expectations and well on the path to destroy the all time sales record of 4.97 million units set in 1998, according to the National Association of Realtors.
As would be expected, analysts attribute the July downturn to higher interests rates and anticipate further declines in the sales rate, “particularly in light of the Federal Reserve’s decision to raise short-term rates for the second time in two months.” Of course, rates have come down since the Fed action and, as we reported in this newsletter some time ago, in recent history, 30 year fixed rates have fallen considerably following two Federal Reserve tightening moves. From that historical perspective, we’ve seen the bond market respond favorably once it became evident that there was little likelihood of an upturn in inflation, and mortgage rates followed yields downward.
During July, inventory of unsold units fell 7.3% to 1.91 million, and median prices fell slightly over 1% to $135,400.

New homes continued to sell at a near record level in July, as buyers appeared to be looking to lock in low financing rates, according to figures released this morning by the Department of Commerce. Sales of newly built homes rose 0.1%, to a seasonally adjusted rate of 980 thousand, just off the record set last November.
The July figures followed the upgrading of the June report to a 979,000 unit rate, a revised 7.3% above May’s level.
Sales took a tremendous leap in the Northeast, up almost 34% for the month, with the Midwest following after a 9.9% gain. The South posted a modest gain, while the west experienced a substantial decline.
Median prices were also up slightly, 0.6%, to $156,000 for the month.

As we suggested in this column in the August 18th issue, mortgage rates fell from their 8% range, as bond traders accepted the inevitability of Federal Reserve action under the premise that inflation is not a problem and no further interest raise would be forthcoming.
Last Thursday, Freddie Mac reported that the average mortgage rate, which had already dropped below the 8% level a week earlier, fell to 7.8%. Then, on Friday, the weekly survey of local lenders by Residential Mortgage Consultants found an average quote of 7.43% with 1.7 points. Most local lenders were quoting 7.375% or 7.5%, with 2 points.

Note: Long term bond rates were back up to 6.05% by Monday afternoon, shortly after the new home sales data was released. So, mortgage rates are likely to continue to gyrate from week to week.