Regional News: Florida's ?Real Estate Effect'

RISMEDIA, April 6, 2007-(MCT)-Many South Floridians are eating out less and springing for fewer big purchases like a new car or expensive vacation. It's not just because of the increasing cost of living. Economists talk about a new cost-consciousness among consumers who had relied heavily upon their houses for their net worth and are now watching the housing market slow way down.

And as the housing market slides, that new consumer psychology is rippling through South Florida's economy-and is already hurting South Florida's biggest companies.

Companies are saying they're starting to see less business because of the housing slowdown. And it's not just the obvious businesses within the housing industry, like real estate or construction companies, which have already seen clear hits. Miami-based home builder Lennar, for example, reported last week that its first-quarter profit tumbled 73% on continued softness in the housing market made worse by problems with subprime lenders. Lennar also warned it doesn't expect to meet its 2007 earnings guidance.

But South Florida companies you wouldn't automatically associate with housing are also pointing to the real estate slowdown as a big culprit for less robust earnings, in industries as varied as car dealerships, cruise lines and shipping companies.

"We've been expecting effects like this for some time," said Per Berglund, an economist who tracks Florida for Moody's Economy.com. "In a sense, that is Florida's Achilles Heel-a lot of industries are very closely tied to the state of the U.S. economy."

In February, although prices remained relatively flat, sales of existing single-family homes were down 31% in Miami-Dade and 20% in Broward compared to a year ago, according to the Florida Association of Realtors. The condo numbers were worse, and inventory has nearly doubled.

All those for-sale signs play havoc with consumer psychology as the housing market slows. The boom saw many homeowners taking out sizable adjustable rate mortgages or simply tapping equity out of their homes. Now, with possible rate increases and the house-equity well drying up, people are more worried and therefore more cost-conscious.

Consumer confidence among Floridians dropped last month, according to data released by the University of Florida last week. The index, last month at 92, declined to 86. Sentiment about big-ticket items took a sharp negative turn, from 109 to 98 over the month.

"Housing is an increasing problem," said Survey Director Chris McCarty, who also attributed the drop to the recent stock market downturn and higher gas prices. But McCarty, who has directed the monthly survey since 1992, said he's been expecting the housing slowdown to spill into other sectors of the economy.

"It's very clear that people were using their home equity to fuel spending, so I don't think this should be that much of a surprise," said McCarty, who also cited the rampant speculative buying and use of exotic loans.

City Furniture President Keith Koenig has never seen a decrease in business year-over-year since he and his brother founded the chain in 1994 — until now.

"This is the best market in the country, but it's down a little this year, and that is the first time I have ever said that," said Koenig, who added that the South Florida-based furniture retailer with 19 stores in Miami-Dade and Broward is seeing sales about 10% slower in January and February compared to last year. "The consumer is being careful with the dollar."

Other big businesses are citing the slowdown, too.

Miami-based Ryder System, which manages and moves freight all over the country for its business clients, is still forecasting overall growth for the year, but that has been dampened by weakness in one area of its short-term business.

The company's short-term commercial rental contracts-Chief Executive Greg Swienton describes those as the kind of 'cushion in customers' fleets that customers can add or subtract"-will probably be down about 6% to 7% this year.

"Wherever there are reductions in new housing starts, then we would probably have an impact in that commercial rental activity," Swienton said, adding that Ryder moves a lot of the goods — appliances, wood products, flooring and vinyl — for many companies that support housing.

Berglund sees the housing slowdown working its way through the broader economy like this: First, home prices slow down, then the number of people extracting equity from their homes also starts to taper off. That winnowing pool of money leads to fewer purchases of big-ticket items, like cars.

Last year, 16% of the new car purchases in Florida were made with home equity loans, said Art Spinella, president of Oregon-based market research firm CNW Research. That compares to 9% in 2000.

Florida and California have been hurt the most in terms of auto sales, said Spinella, stating that the No. 1 reason for the decline in auto sales in California is its housing market, and that in Florida, it's "in large part" due to housing.

Florida, for instance, has seen an 11% decrease in retail deliveries and a nearly 19% decrease in customer floor traffic industrywide in the first 10 weeks of this year compared to the same period last year. The state trailed only California in both categories, according to CNW's research.

For a company such as Fort Lauderdale-based AutoNation, that's a direct hit. Half its revenues come from Florida and California. AutoNation, the largest automotive retailer in the country, saw flat earnings in the most recent quarter.

"Tapping into home equity, either psychologically or in actuality, was a big factor in driving automobile sales" over the past few years, said its Chairman and Chief Executive, Mike Jackson.

Add to that slowing sales of pickup trucks, which construction workers, contractors and builders have put off purchasing as the real estate market declines.

"It's going to be a difficult environment for big-ticket items for some period of time where we work through this adjustment," Jackson said, adding there's no chance for improvement during the first half of this year.
Cruise lines including Carnival, Royal Caribbean and Norwegian Cruise Line, which offer trips through the Caribbean that are popular with middle-class Americans, are also saying their customers seem to be cutting back.

The Caribbean has been a weak market for some time for cruise lines, but Miami-based Carnival said recently when it released earnings that it believed the current softness was an "economic issue" related to high fuel costs and the real estate market.

BACKED INTO CORNER

"There is no way of really knowing, but . . . I do believe that some of those people who have stretched to buy homes and got very aggressive mortgage financing are people in the income levels we are dealing with," Gerry Cahill, Carnival's chief financial officer, told analysts during a recent conference call.

"It's not just the subprime issue. There's a lot of other issues going on in the housing market," he added.

Carnival, which declined to comment for this article, said during that conference call that it expected 2007 net revenues to be flat to slightly positive, compared to last year.

Royal Caribbean has similarly pointed to the economy and the housing downturn as potential factors in the weak pricing in the Caribbean.

At the recent Seatrade Convention on Miami Beach, Colin Veitch, chief executive of Norwegian, said the decline in the housing market, rising interest rates and high gas prices have conspired to make consumers tighten purse strings. "The consumer at the low end of the market is being pinched," he said.

CHANGING MIND-SET

Many executives, such as Darden Restaurants Chief Executive Clarence Otis, talk about the psychological rather than actual effect the slowdown has had on consumers, made worse by recent gas-price increases.

"People are more attuned to interest rate volatility and the possibility of higher interest rates, and resetting mortgages at higher levels," he said. "And they're cutting back on their spending."
Otis said that customers dining out, at casual restaurants and for quick meals, had declined.

Orlando-based Darden Restaurants, which owns chains like Red Lobster and Olive Garden and has 22 restaurants in South Florida, has slowly decreased its forecast since last fall. In September, it said it expected annual sales to increase between 6% and 7%. This month, the company said 2007 sales would be 5% over the year.

MORE THAN A HOME
Others point out that many Americans during the past boom identified their houses as a key part of their net worth. Now that home prices are stabilizing, those people are also feeling that they are worth less and that they can't keep tapping equity out of their homes.

About 16% of income in Miami-Dade County came from home equity extraction during the second and third quarters last year, according to Creditforecast.com. In Broward County, it was just below 16%. That's almost double compared to the rest of the country.

By the fourth quarter, that had slowed to 14.5% in Miami-Dade and 13.8%in Broward.

Miami in particular is running a bit behind the slowdown throughout the state and the rest of the country, and it will get worse before it gets better, Berglund thinks.

"South Florida is kind of running behind in this whole housing cycle, thanks to all the development in Miami," he said. "Clearly, we're going to see a moderation in Miami going forward."