IS THE HOUSING MARKET DECLINE PULLING MOTORCYCLE SALES DOWN?

HOG OR HOME? HOUSE OR HAYABUSA?

Many retailers have reported that as housing values decline, their revenues similarly shrink. Large ticket retailers such as power sports dealers are wondering if their recent sales declines are caused by the home market malaise.

Powersports Business Magazine asks just that question in its lead article in its August 30th edition, “A Delicate Balancing Act”.

A topic of heated debate in the powersports industry of late has been how big of a source an individual’s home equity has been when purchasing a new or used vehicle. Depending on who you ask, the answer varies widely.

“In the past, people knew they could always refinance or ‘flip’ their houses, so they were willing to spend more,” said Matt Ross, sales manager at Coleman Powersports in Falls Church, Md. Ross estimates his dealership has lost at least 20 percent of its sales of motorcycles, motorboats and PWCs from consumers who planned to pay for their purchase using home equity.

“A motorcycle or an ATV is a toy for most people, and we’ve seen that they’re more hesitant to finance them like they would a car or truck,” he said. “When you have that disposable income that’s considered by a lot of homeowners to be ‘free’ money, it’s a lot easier to spend it on recreation.”

Ross’ sentiments are echoed by analysts, as well. A recent statement by Banc of America Securities analyst Michael Savner noted he was cutting his price targets on Polaris and Harley-Davidson based on poor July sales, which Savner partly attributes to the housing market.

“Our view is that powersports companies are the hardest hit by macroeconomic headwinds and are currently negatively impacted by housing market decline, higher gas prices and low consumer sentiment,” he stated.

It should be noted, however, that two of the individuals cited in the Powersports Business Magazine do not believe that housing prices arr the cause of sales decline and note that traditional finance mechanisms are available for purchasers. Borrow more. Buy more.

“WEALTH EFFECT” UNWINDS, HONEY POT EMPTIES.

The “wealth effect” is a well-documented phenomenon. It refers to a “to an increase in spending that accompanies an increase in wealth (in absolute terms), or merely a perceived increase in wealth (in relative terms).” Mr. Ross of Coleman Powersports describes the wealth effect in layman’s terms in the extended quote, above. Basically, if you get more money, or even think you are getting more money, you will spend more money.

Conversely, if your income or wealth declines, or if you perceive that your income or wealth will decline, you will probably spend less.

NEED CASH? WANT MORE TOYS? A HOUSE IS JUST A GIANT PLAYTHING.

The Author, as well as many real economists and analysts, have long noted that consumer spending, as well as Gross National Product, have been propped up by home equity withdrawals. That was the explicit topic of the Author’s post from late 2005, “The Economy Wants Your House”.

Wrote the Author on December 19, 2005:

Many economists and business analysts have advised that consumer spending since 2001 has been propped up by massive mortgage equity withdrawals[i]. They argue that growth in GDP is more a result of spending occasioned by cashing out equity than money earned and recirculated from growing productive activity. Low interest rates, combined with fast-rising home prices, have created a pool of cash that homeowners have tapped to keep the spending splurge going.

Above is a chart that estimates the amount of US Gross Domestic Product with home equity withdrawals and without such withdrawals. Note that without such withdrawals, the economy actually contracted in 2001. Growth was less than one percent in 2003, 2004 and 2005.

KEEP YOUR HEAD DOWN AND YOUR POWDER DRY IN THE DESERT OF THE REAL!