Wednesday, September 26, 2007

Why Housing Is So Important

From the WSJ:

Lennar Corp., the nation's second-largest home builder by market value, reported a net loss of $514 million for the quarter ended Aug. 31. That was nearly six times the loss Wall Street analysts on average had expected, and compared with net income of $207 million a year earlier. The company was forced to write down the value of land and write off deposits for land it no longer wants to build on. The writedowns totaled $847.5 million in the quarter. Lennar said it has cut its work force by 35% since last year.

Lennar shares fell 4% and have lost more than half their value this year.

Chief Executive Stuart Miller said the problems are broad-based and stem from an oversupply of homes, turmoil in the mortgage market and weak consumer confidence. "We have not only not seen evidence of any of these items resolving, but instead we have seen further deterioration," Mr. Miller told investors and analysts during a conference call.


Remember the CEOs are media savvy people -- they are paid to be and sound bullish. When they start to talk like the last paragraph you know there's a problem -- a big problem that isn't going away soon.

In addition, note the interrelationships going on.

1.) We have an oversupply of homes. The absolute level of existing homes on the market is at an all-time high. Frankly, it's gotten to the point where we all probably know someone who is trying to sell their house and been unsuccessful or seen for sale signs in neighborhood yards for what seems like forever. In my immediate area I have seen 5 auctions that I know about. When I go running I keep tabs on for sale signs and it's not a pretty picture and hasn't been for awhile.

2.) Mortgage market problems. I can't speak for the average consumer, but I would think the Fed's rate cut was bug news and was widely disseminated. In addition, the mid-summer stock market sell-off was big news which most people probably at least knew about.

3.) All of this is impacting consumer confidence. First, consumer confidence dropped more than expected yesterday. This increasing pessimism is negatively impacting retail sales:

Consumer gloom also continues to deepen. The Consumer Confidence Index fell a more-than-expected 5.8 points to 99.8 in September, the lowest in nearly two years. The Conference Board blamed declining home values and a weaker job market.

There are signs that shoppers are holding tight to their wallets.

Same-store sales fell 1% in the week ended Sept. 22, the International Council of Shopping Centers and UBS Securities said. So ICSC cut its September growth target to 2%-2.5% from 2.5%.


Also remember yesterday Target cut its same store sales predictions in half and Lowe's lowered guidance.

While it's taken awhile, housing market problems appear to be rippling through the markets and impacting consumer sentiment. This set of relationships is why housing is so important.

The next question is how will this impact holiday shopping? Early reports of holiday shopping are always concerned about the season. In other words, there probably won't be much difference between last year's early reports and this years. But pay particular attention to foot traffic and retailers use of discounts going forward.