Housing Impact by Sector
While some people inexplicably continue to deny the impact of Housing, the reality-based community is taking the measure of the actual net results of the slowdown.
Slate's Dan Gross looks at all of the industries now feeling the pain from the housing slump. It is not just companies whose "fortunes are directly tied to housing and to housing credit" like home builders (Toll Brothers, Pulte, Lennar) and rating agencies (Moodys, S&P). Rather, the decrease in economic activity related to the slowing real estate sector cuts across industries and regions, and even nations.
What other sectors are showing quantitative data reflecting the slowdown?
• Railroads: CSX reported volume of shipments down 4%. Union Pacific said Q1 carloads fell 2%. Revenue was down 3%.
• Recreational Boating: West Marine's quarter showed sales were down 4%. Marine Max cut forward guidance and earnings estimates for 2007 by over 60%. Marine Max also happens to Brunswick's largest customer -- and they report tomorrow (4/26).
• Latin America: As we noted yesterday, monthly remittances from the U.S. to the region (Mexico, Latin America) have dropped by some 30% or so.
• Automobiles: The Fed spurred a huge run-up in car sales when they dropped rates to 46 year lows. Zero % finance became ubiquitous; that was followed by MEW funded car purchases. GM noted the entire market was "a little weakish." Why? Reduced ability to pull out equity and spend it, not just at GM, "but across the industry."
• Luxury Homes: Even within the housing sector, the results have been surprising. Forbes notes that its not just the lower end sub-prime credit/entry homes that are being effected: there is something of a fire sale in the luxury sector as well. "Even wealthier households use ARM products to finance the purchase of luxury homes in expensive areas. The rate resets combined with declining house values are creating a problem even in this sector of the housing market."
Remember, a lot of economics takes place at the margins. Why? (I know this is economics 101 but bear with me).
In most markets, there is a fairly stable equilibrium between supply and demand. That balance -- just enough goods to meet the needs of those who want/need to purchase them -- maintains price stability. It also allows companies to plan and execute their production and distribution fairly smoothly.
Once either side of the equation moves out of balance, shift happens. If supply builds too high, you end up with too much product. Prices drop until increase in sales (at lower margins) reduces the inventory build. When demand drops due to credit or financing issues, a mere price drop will have little effect. This is why the decrease in Housing activity -- Resales, HELOCs, Refis -- is potentially so important.
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Let's do a little crowdsourcing: I am sure that the many readers of this site can come up with a long list of other companies/sectors/regions that are impacted by the ongoing Housing slump.
Hit the comments -- that's what they are there for!
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UPDATE April 25 2006 9:46am
A few stories have hit the tape after this was posted:
Greenspan Says Consumers Fund More Spending With Home Financing
Bloomberg: Former Federal Reserve Chairman Alan Greenspan said the share of consumer spending that Americans funded from extracting cash from the value of their homes doubled in the five years to 2005.Subprime Bondholders May Lose $75 Billion From Slump
Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in sub-prime loans. They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co., manager of the world's biggest bond fund. Some of the $450 billion in sub-prime mortgage-backed debt sold last year has lost 37 percent, according to Merrill Lynch & Co.
To repeat the original question, what sectors are slowing in the US relative to Housing
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Source:
The Real-Estate Blame Game: The unlikeliest victims of the housing slump
Daniel Gross
Slate, Tuesday, April 24, 2007, at 3:12 PM ET
http://www.slate.com/id/2164915
Wednesday, April 25, 2007 | 06:44 AM | Permalink
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Comments
Other sectors impacted include:
-- personal computers - evidenced by Dell's weaker results and CompUSA closing 104 stores
-- home entertainment systems - Circuit City layoffs and wage reductions
-- casual dining - the decline in this sector has been well-documented
We'll know when consumers are really strapped when Starbucks' same store sales begin to decline.
Posted by: Jed | Apr 25, 2007 7:21:07 AM
Arkansas Best (ABFS) said its first-quarter net income dropped 22% to $4.8 million, or 19 cents a share, as tonnage declines at its ABF Freight Systems unit continued into 2007. The quarter also included a 3 cents a share charge for pension settlement accounting. Revenue fell to $422.6 million from $425 million.
No International sales or earns here.
Posted by: tjofpa | Apr 25, 2007 7:55:03 AM
Construction Equipment:
As the larger developers slow down there is less use for heavy earth movers, bull dozers, etc.
Convention Centers
With the RE industry, the construction suppliers, and boating concerns trending down there will be less need for the largest spaces.
Posted by: Peterpaul | Apr 25, 2007 7:55:10 AM
Luxury car leasing. Every realtor I know has a leased Lexus, Jag or Benz. They'll be driving used Corollas like the rest of us soon.
Posted by: semper fubar | Apr 25, 2007 7:56:55 AM
You'd think the small law firms (real estate is bread and butter) would be feeling the crunch, but at least here in Central Mass, despite the drop in residential real estate transactions, commercial activity seems to have taken up the slack: (anecdotally) little change (so far) by comparison to same period last year.
Posted by: gbridgman | Apr 25, 2007 8:15:54 AM
Circuit City layoffs may be more about Walmart's price cutting on big screen TVs than about the housing slump.
Walmart itself is probably a fairly good indicator of the impact on undocumented jobs.
Posted by: Kevin Rooney | Apr 25, 2007 8:18:11 AM
WaMu: Michael Shedlock (aka Mish) wrote a piece showing how half of their reported earnings came from shifting around their balance sheet. Unless the housing market turns around, it's only a matter of time...
Circuit City: Best Buy does the same thing and is better. Best Buy has to worry about CostCo. Being #3 to those two, the recent wage cutbacks to sales staff, etc., I don't see how barring a new high margin technology emerging (CC came back based on plasma tvs) Circuit City can stay in the game.
Kohl's: $70+ for this stock? Unless Eddie Lampert is running it as a hedge fund, they're still struggling to sell off winter product (at least the one near me) at 80% off now.
In fact a walk through the mall can yield multiple chains which are going to have a difficult time making their margins in a major spending downturn. This would be a middle class mall; the upper end one still packs them in.
And what's with Dick's sporting goods? Seems they're pricing like the Nordstrom's of sporting goods. How long will folks continue to pay their prices when you can get the same thing at Target for half the price?
Posted by: Chief Tomahawk | Apr 25, 2007 8:19:03 AM
Toyota: Sales up 11.7% in the first quarter.
Amazon: Profit up 119% in the first quarter.
Median house sale prices virtually unchanged over a year (217.0K in 07 vs. 217.6K in 06).
Yep, that subprime contagion is destroying everything in its path.
~~~
BR: Those are global numbers. We are discussing US effects. The question is what is being impacted -- not what is NOT being impacted -- by the slowdown.
You want more? Mercedes, Audi and BMW sales are doing great. Lexus (a Toyota nameplate) is also doing great. Ferrari and Bentley are sold out for the year in the US already.
Back to the question at hand: Toyota makes high quality cars, and they are not inexpensive. How are the lower Toyota models doing in the US? Other lower brands?
Posted by: Nova Law | Apr 25, 2007 8:20:32 AM
Boeing Co., the world's second- largest maker of commercial airplanes, said profit rose 27 percent as it delivered on record orders
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BR: Fat Mary:
Are you arguing that Boeing sales have any correlation with Housing Sales, HELOCs or Refis? I am not sure if I get your point.
Posted by: fat mary | Apr 25, 2007 8:33:28 AM
Those railroads are taking a beating. they are all at 52 week highs.
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BR: To repeat the question: What is the impact of the Housing slow down on their business: CSX reported volume of shipments down 4%. Union Pacific said Q1 carloads fell 2%. Revenue was down 3%.
Posted by: fat mary | Apr 25, 2007 8:35:11 AM
I had a chance to see some numbers from a large retailer of RV's. His numbers had not been affected by the last round of gas prices, but they have been severely impacted by the reduction in refis. Turns out that a lot of the people who were buying $100,000 RV's were taking the money out of their house to do it.
Similarly, as I've been working on remodeling a bathroom, every tradesman I talk to has noted a tremendous slowdown in the remodeling projects that have continued to keep tradesmen employed in an area that's built out with little new home construction.
Finally, I talked to an attorney who works with Homeowners' associations here in Southern California. As delinquencies and foreclosures increase, millions of homeowners in California will see increases in their assessments to cover bad debt writeoffs and legal costs. There are scads of twenty to thirty year old condo associations with huge deferred maintenance issues. If they haven't funded their reserves, they are facing $10,000 to 20,000 special assessments - one more reason for owners to walk away from loans they can't afford, and there are some aging low-end condo associations which will fail.
Posted by: Critic | Apr 25, 2007 8:48:46 AM
State tax receipts - and sales tax receipts - are reported down in many states even as government stats say sales are strong.
I'm sure many states are now looking at the decrease in remittances to Mexico and Central America and adding up the taxes they SHOULD have collected from homebuilding labor.
Posted by: wally | Apr 25, 2007 8:49:52 AM
it just doesn't matter.
http://www.youtube.com/watch?v=tbZFU7X3Qjo
you'll see why if you watch this.
smile.
~~~
BR: That's the best thing you've posted all day!
Posted by: fat mary | Apr 25, 2007 8:56:39 AM
Business Week has an article in the April 30, 2007 issue about Sherwin Williams. According to the article the paint seller has no fear of a housing cycle, without a Bloomberg screen I can't see what their stock did in 1991 and 1981, but I'm guessing it wasn't gangbusters.
The big one will be employment. With sales and starts down 40%, no change in construction employment is NORMAL. It isn't until later that you get the drop in employment and that's when you get the big impacts. Laid off workers don't consume as much and the ripple effects move thru the system.
As crazy as this sounds, we are still very much in the opening act of this play.
Posted by: Michael Donnelly | Apr 25, 2007 9:06:23 AM
Be patient in waiting for and watching problems in housing spread to other sectors. Bulls have pointed to the employment numbers in the sector (not going down as anticipated) as proof that it's all a bagatelle. But looking at the dramatic reduction in money being sent south to Mexico, it seems plausible that undocumented workers have been the first to be hit, so their layoffs have not hit the official numbers.
Similarly, understand that people do not give up their lifestyles willingly--they go down fighting. Watch credit card borrowings--they will spike as people increase debt where they can to defend their lifestyles. So expect the deteriorating numbers to come out slowly, but come they will. There's $860 billion in mortgage resets coming between the 1st of May and the end of the year. They will hit hard, but again with lagged effect. Anecdotally, consider the $2.5 million house, in Alpine NJ--a lot more like Greenwich than Newark. Introductory teaser monthly payment, $11,000--no problem. Payment moves to $17,000 on the reset, and the house is gone. This will hit all segments of the market, and consumption will suffer from bottom to top.
Short HOG, KMX, GM, WHR, THOR, PSS, and AMZN, on direct effects on the consumer.
Posted by: Scott Frew | Apr 25, 2007 9:08:12 AM
One reason that the downturn in the housing market hasn't had a huge effect on the larger economy must be because of the high proportion of illegal aliens amongst the construction workforce. Yes, their remittances back to Latin America are down, but these people were not the backbone of the economy in the first place - though it might seem cold, they essentially low-cost, unskilled, expendable labor. When they're laid off, the suffering doesn't spill over to the larger society beyond the illegal alien enclaves.
In a perverse way, the market itself may do more to solve the illegal immigration crisis than any Act of Congress ever could.
Posted by: Nova Law | Apr 25, 2007 9:10:11 AM
Thoroughbred horse auctions have seen their gross and median prices decline in California, Maryland, Florida and Kentucky.
Posted by: Chad | Apr 25, 2007 9:10:13 AM
Fat Mary, you may want to read a little bit deeper into those durable goods orders. The headline reads +3.4% and +1.5% ex-transportation but these figures are month over month! The Year-on-Year figures are a better indicator and total orders were -3.1% YoY and -1.2% YoY ex-transport.
Posted by: lloyd | Apr 25, 2007 9:21:22 AM
From Reuters:
Norbord posts Q1 loss on prices, construction drop
http://www.reuters.com/article/marketsNews/idUSN2525063520070425
Norbord Inc. (NBD.TO: Quote, Profile, Research) said it swung to a first-quarter loss on Wednesday, as plunging prices for a key wood panel product in North America overshadowed its profitable push into Europe.
…
Oriented strand board prices, a replacement for higher-cost plywood, dropped to their lowest level since 2001, Norbord said. That coincides with a decline in housing starts over the past year as well as the impact of tighter mortgage lending conditions due to higher default rates in the subprime segment of the U.S. mortgage market.
Difficult market conditions are seen persisting into next year, the company said. Norbord cited industry experts who forecast housing starts in the United States ranging from 1.5 to 1.6 million for the year, well below 1.8 million in 2006.
North American oriented strand board prices will “bounce along at the bottom” throughout 2007, Norbord forecast, while European panelboard prices will continue improving.
Posted by: James Bednar | Apr 25, 2007 9:27:27 AM
Apart from large scale earnings manipulations, which I do not believe is happening, how does one explain the continued growth in earnings/sales? Durable goods recovered some lost ground as well. There are ample signs that the impact is not as widespread as the doomsday forecasters like Roubini believe. I am not saying that the stock market is right. However, I think that that the evidence is mixed at best. Economy is not falling of the cliff yet.
Posted by: js | Apr 25, 2007 9:30:01 AM
Earnings go from double digits to 9% est, then down to 3% est, and guess what?
Who'dathunk it.
GE had great Q1 earnings also.
U just have to admire these Wallendas who go out there every day, tight rope walking at 3000 ft above the earth. Wondering if "they're" going to throw out the net again today.
"Hankie, who's supposed to be watching that fire up thar in Canada? He must be sleeping on the job."
Posted by: tjofpa | Apr 25, 2007 9:47:09 AM
js, interesting questions. The reason why I'm sitting in cash is because US stocks aren't cheap and earnings are weakening. Of course there will always be companies that report solid figures such as Amazon since not all are on the road to Shitshowville. The headline index P/Es hide poor fundamentals and earnings growth has been driven by financials. Profit margins are at all time highs and a contiuation of this seems to be baked into analyst forecasts. US growth is slowing dramatically and incidators such as the yld curve, building permits, housing starts, housing completions, construction spending, Real M-prime, and durable goods orders (look at YoY and don't fall for the sequential noise) point towards a good chance for a recession. With companies taking on too much debt (again, don't just look at the publically listed companies because TOTAL non-financial sector corporate debt was +8% YoY last year), valuations and the trend in the US economy, I just don't like the risk/reward in here.
Posted by: lloyd | Apr 25, 2007 9:49:47 AM
Barry, Toyota's unit sales IN THE US were up 11.7%. Those are certainly NOT their global numbers.
http://www.washtimes.com/business/20070403-100307-2677r.htm
Please explain why Toyota's sales in the US are up if the consumer is unable to buy because of the housing "crisis."
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Unless total sales are inreasing, Market share is a zero sum game.
Consider: FORD'S NET LOSS narrowed in the first quarter, helped by a stronger performance at its international units and higher revenue.
Nissan posted a 54% drop in net profit due to restructuring costs.
With Nissan down, Ford up overseas, picking Toyota as proof of no domestic housing impact on auto sales proves nothing at all --
Posted by: Nova Law | Apr 25, 2007 9:51:24 AM
Once again, Nogo, shows his inability to stay on point and shift the topic to what HE wants to talk about.
Don't you ever get tired of being wrong?
AS far as the suggestion to short AMZN.....Ha look what that got you in the last three months, today's squeeze is on nothing more than a tax rate change....actual earnings are not to good but then again nobody reads any longer....just like Nogo...
Ciao
MS
Posted by: michael schumacher | Apr 25, 2007 9:53:23 AM
Coming from the fool who yesterday said that GM doesn't do any international business, Michael, your latest stupidity does not surprise any of us.
Posted by: Nova Law | Apr 25, 2007 9:59:02 AM
