Fourth-quarter 2007 has opened with consumer technology dealers competing for business amid a decidedly mixed macro-economy. The rich were still rich and still spending, but the lower- and middle-income customers were pulling back, if not hit hard.
The impact of the housing downturn, the August credit crunch and current and impending mortgage foreclosures varied greatly on a market-by-market basis. Adding to the mix are high gas prices, pre-election jitters and, to a lesser extent, the ongoing war in Iraq.
Consumer Electronics Association Economist Shawn DuBravac is watching both the industry and U.S. macroeconomics. “The broader macroeconomic story is increased uncertainty, which is breeding more uncertainty,” he said. “Risk is back in vogue. Markets are re-pricing risk. The real risk is that that kind of bleeds over into everything else.”
The perception of risk could possibly make housing worse and place a bigger drag on the economy, he said. “We’re not looking at a recession, but there’s a lot of indications that the economy is slowing.”
The CE industry story, as of late September, was that “the consumer is still pretty resilient,” DuBravac said, later adding that “Consumers are allocating the money they will spend away from things related to the home (such as major appliances, furniture and home furnishings),” he said, adding that some of that reallocated spending is being directed into the electronics sector.
“Flat panel TV, digital cameras and photo frames are all holding up very well” in terms of both unit and dollar sales. Consumers are taking advantage of CE’s rapid price deflation to buy more for their money—more, larger LCD TVs or 10 mega pixel cameras, digital camcorders, he said for example.
In Fort Worth, Texas, Stuart Schuster, president of Marvin Electronics Company, in early October counted his family’s 60-year-old, single-store, audio/video retail business as being “very fortunate.” “This year and last year have been the highest amount of repossessions and foreclosures in Tarrant County, yet we don’t really see a lot of that,” Schuster said
Marvin Electronics stopped selling appliances 30 years ago, and now concentrates on the mid-to-high end a/v customer. While it does some work for builders, early all of its custom installation business is performed directly for the homeowner. “We see people being cautious, but I don’t have customers that have had foreclosures on their homes at all,” he said.
Positive CE trends, however, can’t whitewash how a tanking housing market has hurt appliances and furniture sales. The industry rule of thumb is that one new home generates the sale of five major appliances. Turmoil in the mortgage finance system in August led to an 8.3 percent drop in sales of new single-family homes for the month, according the U.S. Commerce Department. Sales of new homes dropped nationally to an annual rate of 795,000 units, 21.2 percent below a year earlier. Housing starts in August were down 19.1 percent from a year earlier, the lowest level in 12 years.
Earlier this month, roughly a month after concerns about the subprime mortgage lending industry wrecked havoc in global stock markets, the U.S. credit crisis was starting to relax, in no small part as a response to the Federal Reserve’s reducing its benchmark interest rate to 4.75 percent, from 5.25 percent.
Both stock market indexes and mortgage rates “have stabilized since that disruption in August,” said Kevin Thorpe, manager of housing statistics at the National Association of Realtors (NAR. “There are definitely some early indications that we are moving away from this subprime mess, at least in terms of liquidity.
“That doesn’t mean that there’s not going to be an increase in foreclosures—that’s still a reality, and we do expect that to continue,” he added, saying that he doesn’t anticipate “a significantly huge number of foreclosures.”
The non-profit Center for Responsible Lending in December 2006 estimated that one out of five (19.4%) subprime loans issued during 2005 to 2006 will fail. Spokeswoman Sharon Reuss said the non-profit group estimates that 2.2 million subprime homeowner loans have already failed or will end in foreclosure. “The wave is just really starting,” as adjustable rate mortgages continue to reset, she said.
But Thorpe estimates that subprime mortgages comprise only 9 percent of the overall housing market, and that only one to two percent of those subprime loans “are really running into trouble as the mortgage rates reset.”
“It’s not going to have a major, major impact,” he said. “It’s just going to result in a slightly higher inventory level.”
Another segment of the lending market also saw turmoil. As lenders recalculated their risk exposures, the uncertainty in the subprime mortgage market did trickle up into higher cost markets in the form of higher rates for Jumbo loans (any loan above the conforming loan limit of $417,000). This resulted in some constrictions within the prime lending industry, especially in higher-priced markets that would require jumbo loans.
“Usually, the jumbo rate is about 25 basis points higher than the 30 year fixed rates,” Thorpe said. “During August, it was a whole percentage point higher. They’ve since come down.”