The housing slump may be having a bigger impact on the economy--and corporate profits--than many people realize.
Not only are big home-improvement retailers like Home Depot and Lowe's feeling the pinch, but banks and other mortgage lenders are seeing their stocks drop on concerns that more homeowners may be unable to make their monthly payments. Then there are smaller outfits like furniture and appliance makers which are seeing their sales weaken.
“People don’t realize the impact housing has,” Richard Manoogian, chairman and chief executive officer of home improvement product giant Masco, said on CNBC Friday “There is a much larger ripple effect than people realize.”
Manoogian, whose company is a big supplier to Lowe’s, said he expects consumers to spend $150 billion less on home improvement over the next 12 to 18 months because of the decline in home-equity loans. And companies that serve the housing market, from insulation suppliers to kitchen cabinet makers, may not see a pickup in profits until later this year and into 2008, he said.
Lowe’s , the nation’s second-largest home improvement chain, on Friday became the latest company to report a drop in fourth-quarter profit tied to a slower housing market. The retailer said earnings fell nearly 12%, though they still beat analysts’ forecasts.
That followed Tuesday's report by Home Depot , the largest do-it-yourself retailer, that fourth-quarter profit dropped 28%.
While Lowe’s top executive said he expects earnings to improve later this year, it may take a while for the companies to fully bounce back because a downturn in housing has a lag effect on these companies. Beyond the home builders and big retailers, the struggle extends to several other peripheral industries as well, from furniture companies to appliance manufacturers and other related suppliers.
“When home equity loans are down, then high ticket items tend to slow like kitchen cabinets and remodeling work," Manoogian said. "So our Wal-Mart business is increasing nicely, whereas at Home Depot and Lowe’s, those outlets are struggling more.”
Manoogian expects weaker sales at companies tied to housing for up to six months before things turnaround.
"The housing industry will be down deeper in the short term than is generally expected. That will result in the economy being slower than expected and greater unemployment than expected," he added. "The good news is I think that will slow inflation and lead to lower interest rates and a stronger 2008. By (next year), we’ll start seeing a nice improvement in the housing industry."