Screw This Housing Market! Black & Decker Sucked into the Housing Abyss.

I was talking earlier in the week with a colleague in the construction business in Orange County. He currently has work but tells me that “he has no pending projects lined up after this one is done.” There is a decorum that we have and I don’t go telling everyone about the housing decline or yelling at him, “get thee to another industry!” In fact, I rarely comment on the housing market to those unless they ask (that is, aside from the blog world of course). He’s a good guy and a very hard worker and I’m sure he will land on his feet. You’ll be amazed how many people at various Christmas parties last year were telling me about their personal journey to housing Mecca and how they made $100,000 in equity by simply adding a diamond studded doggy door. It’ll be an interesting Christmas party this year. Yet this guy isn’t your paper equity real estate mogul wannabe flaunter but a very hardworking individual with a family to take care of. Unfortunately he took on more debt than he knew what to do with and now is starring a reset straight in the face. How often has this story been told this year? As we talked, I’m pretty sure he has no idea what the mortgage backed security market has to do with slowing construction or how inflation is creeping into every corner of the economy and as he aptly stated, “this housing market sucks.” As he opened up a bit, he told me what kind of mortgage he had and was wondering what his options were. Sadly there isn’t many. With his current income he would squeeze by on the reset but as he and many now know, there will be a large contraction in many industries next year especially those tied to the hip to housing. As someone once told me, “what the hell do I care if it costs $1 million or $1 if I don’t have a damn cent!”

Black & Decker got hit today by a double whammy (BusinessWeek):

“Black & Decker isn’t expecting a very jolly holiday season this year. The manufacturer of power tools and other household accessories announced a product recall on Dec. 14 and also slashed its fourth-quarter profit forecast, citing worse than expected market conditions in North America.

The Towson (Md.) company said it will recall certain DeWALT XRP cordless drills produced during the past 18 months, which will result in a pretax charge of $25 million in the fourth quarter of this year. The charge includes estimated costs to repair products returned by customers, as well as the hit from sales returns from distribution channels, but doesn’t account for anything potential recouped from a component supplier. No injuries related to these products have been reported, it said.”

Obviously any recall is going to hurt your bottom line but we are now seeing staples of the housing and construction industry being severely impacted by the housing decline. This has been going on for the large part of the year. Take a look at year to date performance for a few players in the housing industry:

Company Year to Date Performance
Home Depot -33 percent
Lowes -27 percent
Black and Decker -8.3 percent

The trend for declining home retailers such as Home Depot and Lowes has been going on since the start of the year. Black & Decker, with a drop of 8.5 percent today wiped out an entire year’s gain in one trading day. What we are now noticing is the velocity of drops are occurring at a much quicker pace and I expect with the resets next year, stagnant inventory, and tighter credit that this will only accelerate. Yes, Black & Decker had a specific issue that drove their stock down at a faster pace but how much of this drop was due to the recall and how much was due to the revised slow down in housing? We are now into a debate between which came first, the chicken or the egg.

Since we are approaching the end of the year, we can get a clear idea of what has happened to other large players in the housing market:

Company Year to Date Performance
Fannie Mae -41 percent
Freddie Mac -53 percent
Countrywide -76 percent
Washington Mutual -66 percent
Citigroup -44 percent

It would be one thing if these companies were your fly by night mortgage operations but many of those are no longer trading since they have imploded. These companies are the most heavily involved in the housing credit game. Their one year stock performance is astounding considering the Dow Jones Industrial Average is up 7 percent for the year.

Now going back to my colleague in construction, during the boom times I remember all the new tools he would be adding to his truck. Whenever we saw each other, he would have a new gadget that fixed faux granite counter-tops or tools that would make installing jet powered tubs (a hot seller) more convenient. Now that the demand for remodeling is declining by the clear drop in mortgage equity withdrawals, larger projects are taking a back seat. Instead of expanding a regular bedroom into a master bedroom people are deciding to add a touch of decorations or repainting their room. This cuts into the bottom lines of Home Depot and also the companies of high end housing products. Projects are on a tighter budget. Taste change when your budget can’t afford caviar. Your psychology is also different when you are adding items to a home that increase its flipping potential; when it is your own home you typically won’t spend unless you have the disposable income to do it. It is becoming more apparent in everyday life how this credit bubble will impact a large portion of our society, especially in bubble areas like here in Southern California. As BusinessWeek put it, Black & Decker isn’t the only one getting drilled this year.

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8 Responses to “Screw This Housing Market! Black & Decker Sucked into the Housing Abyss.”

  • I’m really not the social butterfly type, but during this holiday season I usually attend a few business associate’s office parties. These are professional, degreed people…doctors and lawyers, not real estate sales/ industry types. Last year they reminded me of 1999…as the dot-com bubble was nearing its end, but people were still making money, albeit quite nervously and with increased volatility. This year’s mood has so far reminded me of 2000, after the trap-door had sprung open on the tech bubble but people were still in denial that it was over. Lotta nervous chatter going around and the alcohol intake has been noticeably about double or more this year. And next week, the financial companies that financed this credit orgy are scheduled to report how bad their hits are. Everyone has been wanting to know why LA has been so “sticky” on the way down. I really don’t know. What I do know is that in the entertainment capital of the world there is a writer’s strike going on and a lotta beamer, benz and mortgage payments not being met just as they are being re-cast upwards. Although I don’t live in LA proper, I hear there are loads of for sale and for rent signs up in nice parts of Pasadena. After what has happened and is happening in San Diego and Orange County, can the westside be far behind?

  • I discovered your blog a couple of weeks ago, and I must say that I am addicted. I find your “real homes of genius” very insightful and enlighting, and to my knowledge, one of the first to put numbers to the question of affordability.

    I agree this is due to all the cheap money – amazing how fast we went from one bubble to the next. Next stop – stagflation.
    Thank you for posting your thoughts and knowledge on this topic.

  • Wow,

    I also know some people who this is happening to. I do think the true value of labor over the course of the next year will make a large impact in peoples incomes.

  • I’m pretty sure even high end areas will feel the impact of this housing bear market. I think the general market sentiment has a feel of “let us wait and see if this is the real deal.” Also, you have folks in zombie mode shopping so the reality won’t hit until Q1 of 2008. For fun, you can browse the following zipcodes in Los Angeles County:

    You’ll notice that numbers are all over the map.

  • Son of Brock Landers

    One does have to admit that the export centric companies, materials companies, and raw materials/checmicals companies have done well. It just how quickly can they offset the huge losses the housing industry is having on the entire economy. Quarter 1 of 2008 should be full of bad numbers for banks, retailers, housing, etc. They cannot hide bad numbers forever. While I think that MEW activity slowing to a crawl will hit the consumer spending, I focus more on the jobless claims made week to week and the 4 week moving average. When those numbers get closer to 400K a week, I will worry big time.

  • @covered – can the westside be far behind? I sure hope not, but denial can be very powerful. I see more and more “open house” signs every Sunday, but as far as I can tell, prices haven’t dropped appreciably. (I’m talking Santa Monica specifically right now).

    I remember seeing lots of twenty-somethings in VW Jettas driving up to look at $1.2M homes on the market a year and a half ago and thinking “WTF?!?!?!” … I wonder how many of them chomped down the hook & worm and are now struggling to free themselves.

  • Do any of you listen to the real estate shows on Saturday FM talk stations? Today, a group that was pumping prices throughout the bubble was suddenly telling listeners, “offer 10, 15, or even 20 percent below recent comps. If they don’t accept, let them know should the seller reconsider they can call you back.”

    The tides be changing folks and this is here in SoCal.

  • OMG, Cupertino (an upper middle class neighborhood) in Bay Area has higher medium home prices than Bevelley Hills already.

    What this world has become. Just found out today that a friend’s 1.4m house actually only bought for 550k in 99.

    And people are asking “How low can it fall anyway?”. I thought wages haven’t really gone up much in Bay Area since the Internet bubble burst.

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