Why You Should Care About the Mortgage Crisis
In my Wholesale Distribution Economic Outlook 2008 webcast last Thursday, I described how the current state of housing and residential construction markets will ripple throughout the wholesale distribution industry. (Click here to order the audio CD, handouts, and transcript of this event from Modern Distribution Management.)
Historically, the housing market was a symptom rather than a cause of economic conditions. Something different is happening today, which why you hear so much in the news about the sub-prime mortgage situation. Right now, the residential housing market is a leading indicator of economic activity.
Wholesale distribution executives who don’t spend time in construction markets may not fully appreciate the degree of interconnectedness or how housing will affect their markets.
I suggest you read yesterday’s excellent front page article from The Wall Street Journal entitled U.S. Mortgage Crisis Rivals S&L Meltdown. The article implies that the ultimate extent of the crisis will depend largely on how steeply the price of the average American home falls. So, here’s some data that I presented on the webcast showing the national index of home prices.
Yikes!
As I described on the webcast, I expect residential housing conditions – both home sales and construction activity – will worsen and are unlikely to rebound in 2008. Residential remodeling activity will also trend down in 2008.
Unfortunately, it will take years to blow off the excesses from the speculative bubble in housing. The wholesale distribution industry will face some major changes during this adjustment period.
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Next week, I’ll cover another hot topic from the webcast: how the U.S. dollar's devaluation will affect prospects for private label products from wholesaler-distributors.
1 comments:
The wonderful "supply and demand formula" is alive and well in the housing market--and new construction excesses have an impact on resale housing too--causing further declines. New home construction is the only real "new supply" in the housing market (no--they're not making many "new" 30-year old ranch style homes these days).
However, once builders reach a point where continuing to build and sell homes ceases to recoup their costs from the margin--more and more will stop building--and sit it out until prices inch back up.
As this happens--there will be the beginning of a chain reaction--probably sometime around late 2008/early 2009. The supply will begin to curtail--which will slowly begin to increase the demand. It won't happen overnight--but in 2009--we're going to see a supply decrease begin to improve things--and some blood will begin to flow through the ailing economic body again.
We'll avoid a recession and the building economy will return.
So keep tightening the belt, focus on profitable business with customers, and keep your best people in place. 2009 isn't that fare off. Jeff Wedge.
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