How the Housing Overhang Is Hurting Retail

How the Housing Overhang Is Hurting Retail

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First, the good news: Existing home sales rose 1.4 percent in October, hitting 4.97 million units, more than the 4.8 million that economists had expected. That’s going to help the supply overhang shrink a bit, even if Ian Shepherdson, chief U.S. economist at High Frequency Economics, argues that it will take until next spring and an increase in payroll earnings for the supply overhang in housing to diminish and for a real recovery in the housing market to take place. There’s also the risk, Shepherdson warned clients yesterday of “hidden supply” hitting an improving housing market and derailing it.

What happens to housing is as vital to the health of the American consumer and the economy in the long run as shopping on Black Friday this week is to retailers in the short run. For consumer spending to continue to grow over the long haul requires a combination of factors: real income has to go up (either wages have to climb or the tax burden must fall), asset prices must increase (think the value of stocks, bonds, and other investments in a portfolio), or the value of homes has to rise.

There are a few parts of the retail industry that are already showing the impact of a sluggish housing market. For instance, most people buy furniture when they need it to put in their newly purchased home; the same is often true of electronics. Not surprisingly, while real personal consumption expenditure grew at an annualized rate of 2.4% in the third quarter and retail sales climbed 0.5 percent in October, purchases of furniture slid 0.7 percent over September levels and were up only 3.4 percent over year-earlier levels, one of the smallest gains recorded.

As long as a whole-hearted housing market recovery remains elusive, it might be time to cast a wary eye on stocks like carpet manufacturer Mohawk Industries or Kirkland’s Inc. (KIRK), a home décor retailer that just reported a plunge in its profits and a decline in same-store sales in its fiscal third quarter. The absence of a robust housing market is far from the only constraint weighing on consumers and preventing them from spending gleefully, but it’s one of the biggest. While any sign of resilience in consumer spending later this week should be welcomed as another sign of economic health, don’t let it drive you to any impulse buys of your own in the stock market, especially when retail stocks are involved.