Do Appliance Sales Signal the Start of Housing Uptick?
Its funny how two people can look at the same data point and draw opposite conclusions. That’s what makes a horse race.
Sometimes, an inherent bias or wishful thinking comes into play; other times, its partisan ideology getting in the way. And in some instances, a little bit of common sense goes a long way.
Take as an example some recent data on appliance sales. In Q3, Best Buy reported a 10% jump in sales of major appliances (refrigerators, stoves, washers, dryers) at stores open at least a year, versus a 21% drop for the year-ago period.
Some analysts are suggesting this provides “a glimmer of hope in housing.”
“It’s the first real indication that the housing market is turning,” says Craig Johnson, president of Customer Growth Partners, a retail consultant in Connecticut. Johnson says he’s hearing from department managers and shoppers in the stores he surveys that the big appliance sales are “non-duress.” That means the purchases are being made voluntarily, not because an appliance has failed and left the consumer no choice . . .
I disagree.
Why are consumers making “non-duress” purchases? Well, if its because they are buying existing homes and replacing the older appliances, that would in fact be a positive sign for the housing market.
But we should not put the cart before the horse. Housing is falling more slowly year over year, and on a monthly basis has stabilized, thanks to 5% mortgage rates and government subsidies. That hardly accounts for the surge in sales (especially versus last year’s collapse).
My explanation involves two factors: Underwater homeowners unable to move, and Deflation.
The typical underwater homeowners are betwixt and between worlds; The average home buyer of the past decade is likely not so underwater as to be willing to walk away; yet they don’t qualify for a mortgage mod. For most of these folks, their best option is to hunker down where they are, and ride the housing collapse out.
If you know you are stuck somewhere for five years (or longer), then you probably want to make that stay as comfortable as possible. Given the big drops in prices of major appliances — aka Deflation — an upgrade or replacement becomes a simple way for any family to raise their standard of living.
Higher end appliances have seen prices plummet 30-40%; We looked at a large French door refrigerator 6 months ago (2 doors up to, a bottom freezer drawer, integrated ice/water) for $2500; Its now $1899. The big washers and dryers (on pedastal drawers) have also seen hefty discounts. I imagine the price drops across stoves, microwaves, dishwashers are also substantial.
And America is still a nation of consumers, albeit somehwat chastened. More than a year into after the credit collapse, there must be some pent up demand out there.
Hence, a family that is underwater, but are in the 90% of the labor pool with an active breadwinner, can still spend some money on these home upgrades. And if my anecdotal experience at Best Buy, PC Richard, and Sears is anything to go by, in store credit for people with decent credit ratings are plentiful.
Consider this bit of weak analysis:
Some experts see clear stirrings in the long-morbund housing market. If efforts to ease foreclosures succeed, “there could be significant recovery in housing values in 2010,” says Michael Feder, president and CEO of Radar Logic, a real-estate data and analytics company. The firm’s composite index of 25 metropolitan areas found prices fell just 0.7% in the month ended Oct. 15, the smallest decline for that month since 2005. “Current trends are making us optimistic about demand,” says Quinn Eddins, director of research.
There is so much wrong about that, I don’t know where to begin. 1) Where foreclosures have picked up, real estate activity has risen; 2) Foreclosure abatements only delay the inevitable repricing; 3) Less bad i s not the same as optimistic; 4) By conventional metrics, housing prices still remain over-priced relative to their historical means.
Perhaps wishful thinking analysts are confusing correlation with causation. When appliance sales tick up, its usually follows a big move upwards in housing sales. That does not really seem to be the case presently.
If anything, its likely the opposite . . .
>
Sources:
White (Goods) Christmas?
Home for the Holidays
ROBIN GOLDWYN BLUMENTHAL
Barron’s, DECEMBER 22, 2009
http://online.barrons.com/article/SB126118060195297837.html
Housing Is Shaky With U.S. Aid. Without It?
MARK GONGLOFF
WSJ, DECEMBER 22, 2009
http://online.wsj.com/article/SB20001424052748703344704574610510675459626.html
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December 22nd, 2009 at 8:19 am
Cars & appliances wear out faster than homes, sales of those segments should recover sooner than new homes. Although all get distorted by stimuli.
Not surprising that appliance prices plummet when bulk purchases by new home builders vaporize, supply demand suddenly shifts in favor of individuals.
December 22nd, 2009 at 8:24 am
Here’s my anecdotal evidence of housing recovery. This part of the Jersey shore (Spring Lake/Sea Girt) has very few empty lots and based on my observation the pace of teardowns has accelerated the past few months. The market peaked early here – mid 2005 was the high water mark. Most of the new homes are big & expensive ($2M) and I think the record bank bonuses are rippling through to Jersey shore second homes.
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BR: It better be cash, cause Jumbo mortgages are not moving . . .
December 22nd, 2009 at 8:26 am
“If anything, its likely the opposite . . .”–BR
x2
IOW, Housing “Bulls” are, nicely, clueless, or, differently, FOS.
they, too, would be better off by snorting less Toner, and more Exhaust fumes..
(yes, read, ‘they need to get out of the Office, and into the field..)
Houses are, hardly, ‘flying off the shelves’..
December 22nd, 2009 at 8:40 am
GDP revision was brutal: 2.8% down to 2.2%
December 22nd, 2009 at 8:57 am
John Burns has a nice housing info site. It has a barometer index 0 to 10, 10 being least affordable.
http://www.realestateconsulting.com/Home.aspx
December 22nd, 2009 at 9:11 am
Wait on buying the refrigerator, BR until the “cash for appliances” starts
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/26/AR2009112602420.html
~~~
BR: I mentioned the NYS version of that last week:
http://www.ritholtz.com/blog/2009/12/morning-bank-reads/#comment-242402
December 22nd, 2009 at 9:20 am
from wapo article:
‘Now the home appliance manufacturers who celebrated the passage of the program worry that the delay in its implementation might actually depress sales at first, with consumers putting off purchases until the rebates begin.’
anecdotally i can say that have been postponing the purchase of a new dishwasher waiting for ohio to roll this out. i am tired of waiting. may see what goes on sale next week.
December 22nd, 2009 at 9:20 am
My take is that home sales are elevated because of foreclosure and short-sale “deals”. Once these play out there will be a decline in home sale activity, appliances, etc. They are likely pulling forward future demand, as also are the federal tax credits. Existing home sales at 6 million annual is a pretty blistering pace in a broken economy.
December 22nd, 2009 at 9:31 am
OK, so Best Buy same-store sales improved in Q3 2009 versus Q3 2008. Two words: Circuit City.
On the housing side, this morning the Globe is trumpeting: Local home sales soar
more than 59 percent http://www.boston.com/business/ticker/2009/12/local_home_sale_1.html
But if you read the article, the take-away is actually not buried (for once):
November 2009 benefitted from some easy comparisons to November 2008, said the Warren Group, which added that a home buyer tax credit also helped last month’s sales.
Q3 and Q4 2008 posted numbers that are not exactly tough to beat. So, rather than use that single data point to argue a trend, the more rigorous thing to do is smooth out the trend and account for the fact that the end of 2008 posted some real outlier numbers across industries.
December 22nd, 2009 at 10:05 am
BR- agree w your assessment. Appliances are a bit cheaper and more affordable now, no matter your housing situation. I myself just bought a new LG steamwasher fr Sears, and I’m not anywhere near underwater.
December 22nd, 2009 at 10:23 am
We’ve bought new central heater, water heater for increased energy efficiency (nearly 1/3 gain). We are not underwater, house long paid for (Albuquerque).
I do wonder…
I’ve heard/read a lot of these “consultant” and “expert” firms across wide swath of sectors/activities during this
slide down the cliffrecovery… and the preponderance of their conclusions is reliably poop. There also, I have observed, seems to be a correlation w/these guys between diminished, published comprehensive research and feel good speculative expert advice.December 22nd, 2009 at 10:37 am
I think people must be buying appliances and storing them in their garages for the day – very soon – when they buy that big new house. What else could it be, right?
December 22nd, 2009 at 10:46 am
People buying foreclosures like myself often walk into a house that has no appliances.
No one knows who walked off with the appliances, as all the fannie homes in the area have the same key, which everyone seems to have.
I bought my appliances off of craigslist, but I’m sure there are other folks out there who went up to Best Buy.
December 22nd, 2009 at 10:51 am
Transor Z nailed it on the head. You can’t really draw conclusions from Best Buy due to Circuit City’s failure in March 2009. If Burger King went under, McDonalds would have better numbers just due to survivorship.
Best Buy’s numbers actually look bad when you factor in Circuit City because BBY probably picked up a large percentage of those customers. To get a better gauge on appliances, we should look at the underlying producers.
But, I think BR is right in that prices have dropped on major appliances, and many people have decided they are stuck in the home so might as well make it livable.
December 22nd, 2009 at 10:54 am
I’ve replaced major appliances in the past year (washer, dryer, and a range) in the lower-midrange price points.
There were two main drivers behind my purchase decision: 1. one-year no interest financing and 2. Retailer is in ‘urban-enterprize zone’ so only 1/2 NJ sales tax due on purchase.
I could have paid cash if wanted to, but I guess that’s why they were willing to let me use credit for ‘free’. I may even go as far as to say for items over $300, I’m not buying unless I get no-interest credit for at least 6 months. I bought a macbook for 12 mo. no interest, all my music/recording gear 6 month no interest terms. I am fortunate that I do still have credit available to me, otherwise I guarantee I would spend considerably less per year. Also fortunate I never broke the cash rule, that is I could just pay cash. But perhaps, most important, steady employment throughout.
It should be interesting to see the impact when interest rates are capped though, most of my no-interest deals would increase well above 20% if not paid within the promotional period. In my case, the risk of the higher rate limited my total spending. I’m one of those ‘deadbeat’ credit users that payoff their balances.
I bought a house in 2001, thankfully I’m not underwater and resisted selling & ‘upgrading’ in 2005. In my view, there’s a big gap in homes in NJ. There is need for homes in $200k range, but most of the construction it seems was in the upper range >$400k. Talk about misallocation. I would joke that houses are being built only for doctors and lawyers and business executives (cue “Little Boxes”) or people obsessed with large slabs of igneous or metamorphic rocks.
“Look at my counter, it used to be a mountain!”, exclaims the gleeful homeowner. I guess if the homeowner can’t go to the mountain, bring the mountain to the homeowner.
Everyone else gets a ‘fixer-upper’ or an apartment. It’s funny too, the ‘duh’ answer is just be a top earner, but that is just as silly a solution as rapidly expanding credit. Truly, at this time, they only way to increase my standard of living is though upgrades and sweat equity.
Sorry for going off on a tangent…
December 22nd, 2009 at 11:09 am
It is a one-off based on the rush to get the initial $8k credit that boosted home sales in Oct & Nov. Dishwashers under the tree for Christmas.
December 22nd, 2009 at 11:25 am
BR, I resemble your remarks 100%. Went from 50% equity to now slightly underwater (slightly for CA being 30-50k). I refied in 2008 before I lost all my equity (I saw it coming) and after realizing we are not moving, we finished all our projects. I too went to Sears and bought all new energystar appliances on 0% interest, then paid them off over the year. This week we just finally finished putting in new sliding doors in the bedrooms replacing the old single panes, taking advantage of the tax credit, and keeping us warmer while saving energy.
This isn’t exactly where we would chose to stay forever, the house does not suit all our needs. But we’ve been here a long time, we’re close to our jobs and new jobs if needed (15+ minutes outside SF), so we might as well make this home as comfortable and energy efficient as possible. We’ve all together spent less than 10k to completely modernize our 1950 bungalow.
We know many others doing the same….
Although on the other hand, we also know several people walking away.
December 22nd, 2009 at 11:43 am
We should not confuse an incentive “to replace” with an increase in housing turnarounds – I can hear thousands of folks – “it’s almost year end – Our______________(fill in the blank) needs to be replaced
We can get a bigger tax refund or lower tax payment for something we were going to replace anyway.
The American Recovery and Reinvestment Act of 2009 extended many consumer tax incentives introduced in the 2005 Energy Policy Act. These acts bring good news to consumers, who can get tax credits in exchange for buying specific energy-efficient appliances for their homes. Manufacturers who produce these appliances stamp them with an “Energy Star” logo to make them easier to identify. In addition to federal tax incentives, some consumers will also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient homes, vehicles and equipment. Each state’s energy office website may have more information on specific state tax information.
The IRS offers tax credits on three different types of water heaters. Tankless gas, oil or propane water heaters with a thermal efficiency of at least 90 percent, electric heat pump water heaters with an energy factor of at least 2.0 and SRCC-certified (Solar Rating and Certification Corp) solar water heaters where at least half of the energy generated comes from the sun. These water heaters qualify for a tax credit that is up to $1,500, or 30 percent of the cost to purchase and install it.
Lets not look at a “fart” for the relief of constipation
December 22nd, 2009 at 3:00 pm
[...] people think a recent uptick in appliance sales signals a turnaround in the housing market. Not Barry Ritholtz. [The Big [...]
December 22nd, 2009 at 3:21 pm
Hi Barry–I don’t know whether is a full-fledged organic housing recovery–that’s above my pay grade. I would say that the recent signposts are consistent with such a recovery, if not definitive final proof.
My expertise is really in consumer behavior and consumer discretionary/retail, rather than housing per se. I do know the folks at HD/LOW quite well (and LOW is a past client, not in LY), and see what’s happening in the stores, and know what builders and home improvement contractors tell us. But based on 35 years of working in market research, my sense is that people wouldn’t be investing in new homes or home fix-up or new Maj app unless they thought that the investment would pay off in the near to medium term.
Best,
December 22nd, 2009 at 3:50 pm
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How about if they a) were underwater on their mortgage; b) thought they might be stuck were they were for 3-7 years; c) believed real estate waas not going to snap back anytime soon?
Might that send them to buy new appliances ?
December 22nd, 2009 at 4:19 pm
[...] Appliance sales may not be best read on housing [...]
December 22nd, 2009 at 4:43 pm
Michael Feder is a perma-bull. I talked with him right before the crisis and tried to warn him, but he would hear nothing of it.
The radar logic product is great though – it is essentially real time housing prices.
I’ve been tracking the spending of the top spenders through the gallup poll, and it fell 15% last month. If rich people are not spending, we will not have a strong economy.
Thats (one) the problem(s) with trickle down economics in general, you put marginal demand into the hands of a very concentrated group of people. When they stop spending, the economy goes into a tail spin very quickly.
December 23rd, 2009 at 8:13 am
This from yesterday’s NYT:
Nice Home. Where’s the rest of it?
http://www.nytimes.com/2009/12/23/business/economy/23stripped.html?emc=eta1
In Nevada and other states hit hard by the housing crisis, stripping fixtures and appliances from homes in foreclosure has become commonplace. Craigslist, the Web site for classified ads, functions as a bazaar where stripped items are sold openly. Often, the stripping is not done by strangers. It is done by the owner, just before the bank forecloses on the mortgage and takes the property back.