The Real-Estate Blame Game

The unlikeliest victims of the housing slump.

Even before the housing market began to decline in earnest, companies started complaining, not always convincingly, that they were suffering collateral damage from the bursting bubble. Ford, for example, tried to blame its poor results on declining sales of pickup trucks to contractors. As the housing slump has deepened, the damage has become real. Companies whose fortunes are directly tied to housing and to housing credit have been hit hard. Homebuilders like Lennar and D.R. Horton have reported sharply lower results; subprime lenders like New Century have gone bankrupt. In today’s Wall Street Journal, Justin Lahart notes that the stocks of credit-rating agencies like Moody’s have suffered in recent months because their operations have become too reliant on rating bonds backed by mortgages.

The carnage in the housing sector is likely to worsen. Today, the National Association of Realtors reported that existing homes sales in March were down 11.3 percent from March 2006. The effects of the housing decline are now spreading to less obvious victims, such as:

Railroads. Railroads are generally thriving, thanks in part to rising shipments of coal and corn. But freight trains in recent years have also been full of building materials—cement, lumber, drywall. And that component of the business is clearly suffering. CSX reported its earnings last week. The overall volume of shipments was down 4 percent from the prior year’s quarter, with the weak residential-construction market leading to declines in shipments of lumber and aggregates (i.e., cement and stone). Union Pacific reported that carloads in the first quarter fell 2 percent from the year before, due to “winter storms, a softer housing market and decreased domestic intermodal volume.” Revenues from shipments of industrial products, which includes the materials used in housing, were down 3 percent.

Boat retailers and manufacturers. Last July, Moneybox noted that the powerboat industry was doing poorly because of the high price of gasoline. It’s not doing much better now. Boat retailer West Marine’s most recent quarterly results showed sales were down 4.9 percent from the year before. Marine Max last week chopped earnings estimates for 2007 by nearly two-thirds. The industry may have weathered higher gas prices, but a weaker housing market is a bigger challenge, for two reasons, as a Barron’s article noted last week. First, entry-level boat buyers are being hit by the resetting of adjustable-rate mortgages. Second, boating industry sales are concentrated in coastal areas, such as Florida and California, where the deflation of the housing bubble is leaving prospective buyers at all price points with less equity in their homes to tap for boat buying.

All of Latin America. An excellent article  (subscription required) by Joel Millman in yesterday’s Wall Street Journal suggests that retailers and service companies throughout Latin America are starting to feel the pain of weak housing in el norte. Why? In recent years, hundreds of thousands of Hispanics have found work in construction-related trades. Many of them are migrants who send their earnings home. Walter Molano of BCP Securities crunched the numbers between 1997 and 2005 and found that there was a high level of correlation between housing starts and remittances to Latin American countries. Molano notes that remittances to Mexico peaked in May 2006, about when housing starts peaked, and are down 26 percent since then. The Journal observed that remittances to Brazil and Guatemala are off by roughly the same amount in the past year.

Even more industries will suffer as declining home prices, rising interest costs, and decreased levels of new construction eat away at incomes and buying power throughout the Western Hemisphere. But which ones?

Readers, send your nominations for other unobvious casualties of the weak housing market to