Housing bubble victims: Is retail next?
- Article by: David Phelps
- Star Tribune
- August 18, 2007 - 5:20 PM
After more than a year of signals, warnings and fears, the slumping housing market is finally taking a bite out of a wide swath of the economy.
Home builders, clothing retailers, paint manufacturers and many companies in between are all blaming recent woes on housing.
For already hurting retailers, the timing couldn't be worse as they gear up for the crucial -- and ever-longer -- back-to-school season, the second-most important annual shopping event for merchants after Christmas.
While the season has only just begun -- last year it stretched to the holidays, notes one analyst -- there is anecdotal evidence that some parents and their kids are spending less, while others are holding out for bargains for clothes, electronics and basic classroom supplies.
"All in all it will be a good year for back-to-school, not a stellar one," said Marshal Cohen, chief industry analyst at the NPD Group, a market research firm.
Last week, Twin Cities Realtor groups reported that July sales were down 7.2 percent from a year ago, the 16th consecutive month of declines. That report followed one that showed closed sales were down 16 percent in the first six months of 2007 compared with 2006.
Meanwhile, the Commerce Department reported that the construction of new homes nationwide fell in July to its lowest level in more than a decade.
The housing woes and subprime mortgage loans gone bad have led banks to crack down on lending, making loans more difficult to find and more expensive for many borrowers.
Besides the depressed housing market, Americans also are coping with persistently expensive gasoline, higher food costs, high debt levels and a volatile stock market that does little for their confidence.
"It's a malaise," said Britt Beemer of America's Research Group. "People are paying $20 a week more for groceries than a year ago. Gas prices are still high. And there's more financial pressure on consumers who are paying higher property taxes and insurance rates."
Wal-Mart Stores Inc. said last week that earnings would be lower because of the nation's economic woes. Minneapolis-based paint manufacturer Valspar Corp. said the weakness in the housing segment would "modestly reduce" fourth-quarter results. Building suppliers Lowe's and Home Depot reported weaker sales. Target Corp., which had shown some weakness during the year, most recently said store traffic has been normal for the season.
"The mortgage issue and the unavailability of credit are going to bite consumers more than the run-up in oil," said George John, marketing chairman at the University of Minnesota's Carlson School of Management. "Housing is such a big chunk of what people have. It makes them feel wealthy or not wealthy. But we haven't seen the [full effects of] the crunch yet."
Predictions for the back-to-school shopping season are across the board.
The International Council of Shopping Centers reported that growth in chain-store sales was a sluggish 2.6 percent in July. The organization's chief economist, Michael Niemira, said the July figures reflected a "soft patch" in consumer activity that began last winter.
"The housing market drag continues to dampen consumer demand, and with it the overall economy," Niemira said.
Reading tea leaves
Nonetheless, he's predicting a 5 percent increase in the 2007 back-to-school shopping season, to $27 billion. Niemira said that consumers are more value-conscious this year and that they started their shopping earlier than usual in search of good deals.
Eight out of 10 households said they intend to shop at discount stores, according to a survey by Niemira's organization and Citi Global Wealth Management. Half said their main motivator for selecting a retail store was price rather than convenience or selection.
A survey by America's Research Group -- dubbed Consumer Mind Reader -- said nearly half of U.S. consumers would keep back-to-school spending to a minimum. Half the time, new clothes would be purchased only to replace items that students have outgrown, the survey found.
Beemer believes that consumers are holding off on back-to-school purchases until Labor Day weekend and beyond in anticipation of inventory markdowns to allow retailers to clear floor space for the not-too-distant Christmas season.
"Consumers want more deals," Beemer said. "The back-to-school season is now extending to Christmas." That trend he noticed for the first time last year.
NPD's consumer survey found three-fourths of respondents said they intend to spend $500 or less on back-to-school goods. "Consumers have a budget in mind and go shopping with the intention of spending those dollars," Cohen said.
But John contends that the "cultural, institutional and social" pressures of back-to-school spending may mitigate the gloom-and-doom fears of consumers.
"Students have to have some new clothes, new backpacks," John said. "It's socially acceptable."
David Phelps 612-673-7269
David Phelps email@example.com
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