September 27, 2006
Housing Becoming a Bigger Concern for Retailers
A weakening housing market is beginning to pinch consumers and retailers alike.
Lowe’s reported on Monday that it expects its profit numbers to come in at the low end of its forecast because of a softening market for sales of new and existing homes along with a slowdown on home remodeling and improvement projects.
“We remain focused on strategies to drive market share, however near term pressures on the U.S. consumer have led to a more cautious outlook for the second half of the year,” said Robert Niblock, Lowe’s chairman, president and CEO in a company press release. “Despite the backdrop of declining housing turnover, elevated energy costs and difficult comparisons resulting from active 2004 and 2005 hurricane seasons, I’m confident we have the plans and people in place to ensure we continue to meet the needs of consumers and gain market share.”
The National Association of Realtors announced recently that existing home sales have continued to decline and the nation’s median home price dropped for the first time since 1995.
Discussion Question: What impact will the housing market have on the broader retail industry?
Falling home prices can be bad news for retail businesses.
Consumers may spend less in stores as they see what for many is their biggest asset reduced in value.
Many also find themselves dealing with home equity loans and refinancing made with the belief that housing prices would continue to rise. Now, many find
themselves with having to make repayments while their investment has been sunk into a property that is less valuable than it was. Selling their way out of the situation may be
a money losing situation for many in this scenario.
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So a declining market price is a bad thing? I am not so sure. It could be, if you are a seller, yet it’s a very small percentage in the grand scheme of things – really. Does it impact confidence? Well it could, yet on the same day there is a study that says confidence is up based on other factors. Yesterday, the Conference Board said consumer confidence rose even higher than expected. The DOW closed yesterday at its second highest close ever. Unemployment is down, yet there remain regional pockets of medium to high unemployment. Interest rates remain low – only slightly higher than all time lows. Gas prices have fallen to their lowest levels in months; there are reports of $1.80 per gallon in Missouri today. So which factor is it now? Which one causes retailers to be concerned?
Pessimism is the charge of the day for the mass media – even in spite of the dozens of factors that might indicate otherwise.
Certainly there’s no doubting the fact that home sales may have dropped within a period. Yet, even so, a different point of view might think that this could not be such bad news for a retailer like Lowe’s. It just might indicate that D-I-Y activity could increase. That is, if you can’t sell, you might stay put and improve what you have today. That would be optimisim though, wouldn’t it?
What’s really at the root of the message here? Is this possibly a guise for expected performance? When I see reports such as these, I tend to question the motivation of predictions of the negative. I am wondering if there’s something else at work here. Certainly I am not a conspiracy theorist, but….
Everyone knew the market was going to slow down. So Lowe’s and Home Depot are the recipients of the market, and should have had alternative marketing plans in place.
Home Depot may have the buffer needed, with the current CEO’s widely talked about new strategic direction and initiatives.
Can’t gain blood from a turnip, anymore! A lot of home equity is gone. So what is next? More pensions? Hmmmmmmm
It’s been demonstrated time and again that when mortgage interest rates are low, a higher proportion of household income is devoted to mortgage payments. Then, according to the same studies, when interest rates rise, income is most often redirected to food-based expenses such as restaurants and eating at home. High interest rates encourage obesity, so to speak.
The psychology is this: The same number of dollars exist regardless of the prime rate. When the housing market is booming, usually fueled by favorable interest rates, consumers “pay it forward” using available dollars. But when the housing market becomes less favorable, consumers redirect disposable dollars to other things – like hi-def video screens and, most of all, food. Fewer home sales equals more food sales. Always has and always will.
The price of goods will always be important to many consumers, but so is selection, convenience, and service. Having the right balance of all these factors at retail is key as consumers are feeling more cost conscious. One bright side for retailers to counter a weakening housing market is lowered gasoline prices which are ever present in the minds of consumers.
A weak housing market with falling housing values and slower turnovers is only one of many factors which serve to impede consumer spending and impact our retail sector.
Its impact may be less on the pocket book and more on consumer confidence as this reality along with the inescapable facts of rising energy, healthcare and retirement costs combine with the generally sluggish economic outlook to dampen consumer spending.
Let’s face it, the majority of what non-grocery retailers sell is non-essential and discretionary. Commodity products which include basic food staples, home maintenance and healthcare products do not make up the majority of a retailers assortment, and in fact are some of the most unprofitable items within an assortment (due largely to the highly competitive nature of highly recognizable items). Therefore as the consumer spends less on non-essential product, it squeezes retailers profitability.
A healthy Retail market is dependent upon strong consumer spending which is dependent upon plenty of discretionary/disposable income which is fueled by a vibrant growth oriented economy, which in turn is dependent upon consistent growth in consumption.
It is a closed loop system. When some of the parts are at sub-performance, the engine can keep running, but its performance suffers. The greater the number of parts which are impacted, the greater the impact to the overall performance.
Combine the softening of the economy with the general declining level of consumer confidence and the consumer generally finds a way to tighten their belts and spends less of their disposable income.
It will all turn around when the positive economic data reports exceed the negative; we’ve been here before.
I don’t think the housing market is making any dramatic changes. Sure there are markets that are oversold, overbuilt or overpriced. As long as interest rates stay reasonable, the above will shake out. Oversold will experience more building, overbuilt will experience some deflation and over priced will not turn until equilibrium occurs. Housing is always an up and down proposition but when I see older homes being bulldozed to make way for new construction and construction cranes littering the skyline of so many cities I cannot see a housing recession. Lowe’s has experienced a boom market for over five years and a boom market should not be considered “normal.” Lowe’s does a magnificent job of managing their business and I personally will be looking for any dip in their stock price as a buying opportunity.
Over the past 4-6 months, the media has been saturated with doom and gloom about the housing market bubble bursting. Therefore consumers have a heightened awareness of the housing situation – whether they are directly impacted or not. (Certainly those home owners who are highly leveraged with adjustable rate mortgages have every reason to be concerned). I think this concern and unease translates into consumers giving second thoughts to purchases generally and may lead to postponing purchases – especially big ticket purchases that they were planning to fund with home equity. This will have a ripple effect across many segments like the D-I-Y industry, car dealers, furniture and appliance retailers as well as folks more directed connected such as home loans & mortgage lenders and new home builders. While homeowners may delay the big re-model or not put in that beautiful swimming pool, I don’t see much of an impact on day-to-day household purchases.
Employment is the strongest driver of retail sales. Construction is one of the largest industries (10 million workers), and although housing is not the only source of construction employment, it’s a major source. See http://www.bls.gov/oco/cg/cgs003.htm
The housing slowdown leads to construction employment declines, which lead to declines in service and manufacturing employment in many sectors. Construction can’t be imported, and it’s very labor-intensive, so when people buy less of it, the impact is completely domestic. When unemployment rises, retail sales suffer. And the graying of America also depresses retail sales since older people generally spend more on medical care and less on nonfood retail.
When home values are rising, people don’t just waste their money. They “invest” by improving their homes. Sometimes, when prices fall, they invest in order to gain competitive advantage. But with no more money available to borrow, it’s belt tightening time. Cut back as well on energy use, cable TV, new appliances, furniture, car, etc. It’s the feeling as much as the amount.
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So a declining market price is a bad thing? I am not so sure. It could be, if you are a seller, yet it’s a very small percentage in the grand scheme of things – really. Does it impact confidence? Well it could, yet on the same day there is a study that says confidence is up based on other factors. Yesterday, the Conference Board said consumer confidence rose even higher than expected. The DOW closed yesterday at its second highest close ever. Unemployment is down, yet there remain regional pockets of medium to high unemployment. Interest rates remain low – only slightly higher than all time lows. Gas prices have fallen to their lowest levels in months; there are reports of $1.80 per gallon in Missouri today. So which factor is it now? Which one causes retailers to be concerned?
Pessimism is the charge of the day for the mass media – even in spite of the dozens of factors that might indicate otherwise.
Certainly there’s no doubting the fact that home sales may have dropped within a period. Yet, even so, a different point of view might think that this could not be such bad news for a retailer like Lowe’s. It just might indicate that D-I-Y activity could increase. That is, if you can’t sell, you might stay put and improve what you have today. That would be optimisim though, wouldn’t it?
What’s really at the root of the message here? Is this possibly a guise for expected performance? When I see reports such as these, I tend to question the motivation of predictions of the negative. I am wondering if there’s something else at work here. Certainly I am not a conspiracy theorist, but….
Everyone knew the market was going to slow down. So Lowe’s and Home Depot are the recipients of the market, and should have had alternative marketing plans in place.
Home Depot may have the buffer needed, with the current CEO’s widely talked about new strategic direction and initiatives.
Can’t gain blood from a turnip, anymore! A lot of home equity is gone. So what is next? More pensions? Hmmmmmmm
It’s been demonstrated time and again that when mortgage interest rates are low, a higher proportion of household income is devoted to mortgage payments. Then, according to the same studies, when interest rates rise, income is most often redirected to food-based expenses such as restaurants and eating at home. High interest rates encourage obesity, so to speak.
The psychology is this: The same number of dollars exist regardless of the prime rate. When the housing market is booming, usually fueled by favorable interest rates, consumers “pay it forward” using available dollars. But when the housing market becomes less favorable, consumers redirect disposable dollars to other things – like hi-def video screens and, most of all, food. Fewer home sales equals more food sales. Always has and always will.
The price of goods will always be important to many consumers, but so is selection, convenience, and service. Having the right balance of all these factors at retail is key as consumers are feeling more cost conscious. One bright side for retailers to counter a weakening housing market is lowered gasoline prices which are ever present in the minds of consumers.
A weak housing market with falling housing values and slower turnovers is only one of many factors which serve to impede consumer spending and impact our retail sector.
Its impact may be less on the pocket book and more on consumer confidence as this reality along with the inescapable facts of rising energy, healthcare and retirement costs combine with the generally sluggish economic outlook to dampen consumer spending.
Let’s face it, the majority of what non-grocery retailers sell is non-essential and discretionary. Commodity products which include basic food staples, home maintenance and healthcare products do not make up the majority of a retailers assortment, and in fact are some of the most unprofitable items within an assortment (due largely to the highly competitive nature of highly recognizable items). Therefore as the consumer spends less on non-essential product, it squeezes retailers profitability.
A healthy Retail market is dependent upon strong consumer spending which is dependent upon plenty of discretionary/disposable income which is fueled by a vibrant growth oriented economy, which in turn is dependent upon consistent growth in consumption.
It is a closed loop system. When some of the parts are at sub-performance, the engine can keep running, but its performance suffers. The greater the number of parts which are impacted, the greater the impact to the overall performance.
Combine the softening of the economy with the general declining level of consumer confidence and the consumer generally finds a way to tighten their belts and spends less of their disposable income.
It will all turn around when the positive economic data reports exceed the negative; we’ve been here before.
I don’t think the housing market is making any dramatic changes. Sure there are markets that are oversold, overbuilt or overpriced. As long as interest rates stay reasonable, the above will shake out. Oversold will experience more building, overbuilt will experience some deflation and over priced will not turn until equilibrium occurs. Housing is always an up and down proposition but when I see older homes being bulldozed to make way for new construction and construction cranes littering the skyline of so many cities I cannot see a housing recession. Lowe’s has experienced a boom market for over five years and a boom market should not be considered “normal.” Lowe’s does a magnificent job of managing their business and I personally will be looking for any dip in their stock price as a buying opportunity.
Over the past 4-6 months, the media has been saturated with doom and gloom about the housing market bubble bursting. Therefore consumers have a heightened awareness of the housing situation – whether they are directly impacted or not. (Certainly those home owners who are highly leveraged with adjustable rate mortgages have every reason to be concerned). I think this concern and unease translates into consumers giving second thoughts to purchases generally and may lead to postponing purchases – especially big ticket purchases that they were planning to fund with home equity. This will have a ripple effect across many segments like the D-I-Y industry, car dealers, furniture and appliance retailers as well as folks more directed connected such as home loans & mortgage lenders and new home builders. While homeowners may delay the big re-model or not put in that beautiful swimming pool, I don’t see much of an impact on day-to-day household purchases.
Employment is the strongest driver of retail sales. Construction is one of the largest industries (10 million workers), and although housing is not the only source of construction employment, it’s a major source. See http://www.bls.gov/oco/cg/cgs003.htm
The housing slowdown leads to construction employment declines, which lead to declines in service and manufacturing employment in many sectors. Construction can’t be imported, and it’s very labor-intensive, so when people buy less of it, the impact is completely domestic. When unemployment rises, retail sales suffer. And the graying of America also depresses retail sales since older people generally spend more on medical care and less on nonfood retail.
When home values are rising, people don’t just waste their money. They “invest” by improving their homes. Sometimes, when prices fall, they invest in order to gain competitive advantage. But with no more money available to borrow, it’s belt tightening time. Cut back as well on energy use, cable TV, new appliances, furniture, car, etc. It’s the feeling as much as the amount.