The Real Estate Excuse

CEOs’ latest lame explanation for poor performance.

Companies tend to blame their disappointing results on phenomena that have little to do with their actual operations. Starbucks, for example, recently blamed its poor results on the heat and the ensuing demand it created for time-consuming Frappuccinos. Lame excuses do tend to contain a kernel of truth. The demand for coffee might well decline when the mercury tops 100. So, it’s no surprise that companies are now starting to attribute their adverse results to the cooling real estate market.

Whether it is yesterday’s disappointing results of McMansion manufacturer Toll Brothers or this morning’s National Association of Realtors’ release on plunging existing-home sales, signs of real estate cooling are more abundant than botox injections in the Hamptons. Inventories are up, sales are down, and prices are essentially holding still.

The punk housing market is obviously bad news for home builders and mortgage companies. But other companies are jumping on the bandwagon, some with more credibility than others.

When Lowe’s, the massive home-improvement chain, earlier this week reported disappointing earnings (click here and look at Aug. 2), analysts were quick to cite the slowing home market. Fair enough. Fewer home sales, fewer renovations. But Ford? Last week, the struggling automaker announced drastic production cuts. So, what does that have to do with the price of neo-Georgians in Georgia? Well, Ford’s most profitable line is the F-series pickup truck. In July, sales of the F-series were down a whopping 45 percent from the year before; year to date, they’re down 12 percent. And as this Marketwatch article notes, who buys F-series pickups? Contractors. This explanation loses its plausibility when you realize that sales for the large, expensive, gas-guzzling cars favored by soccer moms—like minivans and SUVs—have been falling at close to the same rate. It’s not the housing market that’s hurting Ford—it’s that it sells gas guzzlers that no one wants to buy.

Meanwhile, there seems to be an emerging consensus that slowing housing will hurt the overall stock market. “The housing market is in a funk,” Wall Street Journal market columnist Justin Lahart wrote today. “Can the stock market be far behind?” As if on cue, the market today fell out of bed after the release of the existing home-sales data. Lahart quotes Merrill Lynch economist David Rosenberg, who notes that the National Association of Home Builders’ builders confidence index tends to lead the stock market by 12 months. Last week, the index fell to a 15-year low. Gulp! But this is less plausible. If the S&P 500 starts to tank a year from now, will we really be able to chalk it up to declining confidence among home builders? And not to any of the dozen-odd huge factors—including, but not limited to, inflation, higher interest rates, global insecurity, the trade deficit, the high price of oil, the overall trend of corporate profits—that feed into stock valuation?

More convincing are concerns that the declining housing market will put a crimp in consumer spending and hence pinch the broad range of companies—everyone from Wal-Mart to Coca-Cola, Disney to Procter & Gamble—that peddle their goods and services to the American consumer. Goldman Sachs economist Jan Hatzius has noted that Americans spend about half of the money they extract from their homes via refinancings ($588 billion in 2005 alone). He told the Wall Street Journal in July that a flattening of home prices would stop such refinancing activity and slash about .75 percent from GDP growth next year. On a $13 trillion economy, that adds up to $100 billion in lost revenues. Meanwhile, Asha Bangalore of Northern Trust (go here and click on the Aug. 21 report) reports that home equity loans have been declining for the last few months, suggesting that consumer spending will flag this year.

Here, again, the pessimism, while justified, may be overblown. Americans spend everything they earn and then some. During the housing boom, people used home-equity loans to pay off or replace credit-card debts. The Federal Reserve’s most recent consumer credit survey shows that between 2002 and 2005, revolving credit—i.e., credit cards—grew at only 2.6 percent per year. But now that it makes less sense to borrow against their homes, Americans are funding their consumption the old-fashioned way: with revolving credit. In the second quarter of 2006, revolving credit rose at a robust 8.3 percent annual rate.