September 3, 2007 – A delicate balancing act

By Steve Bauer
Managing Editor
After years of signals, warnings and fears, the slumping housing market is finally taking its toll on formerly untouchable sectors of the U.S. economy.
Big box retailers such as Home Depot and WalMart, and many companies in between, are all blaming recent disappointing earnings reports on the recent mortgage/foreclosure crisis. Meanwhile, the Commerce Department reported that the construction of new homes nationwide fell in July to its lowest level in more than a decade.
So what effect, if any, has the housing market’s freefall had on powersports manufacturers and dealers, and just how closely are the two tied to one another?

an unraveling market
After bearing the brunt of the U.S. economy in the years since the 9/11 attacks, the housing market finally started showing signs of a slowdown in mid-2006, and since then not only have home prices leveled out in a majority of major markets, but a rise in interest rates have made once-affordable adjustable-rate mortgages suddenly the centerpoint of a foreclosure crisis in the past six months.
According to Federal Reserve Chairman Ben Bernanke, losses in the subprime lending market — which refers to a large segment of the mortgage market that caters to borrowers with shaky credit — could top $100 billion.
“The credit losses associated with subprime (lending) have come to light and they are fairly significant and disturbing,” he said.
During recent testimony to the Senate Banking Committee, Bernanke said if the housing situation continues to worsen, consumers might trim spending by as much as nine cents or more for each dollar of wealth lost. The effects that drop would have on retailers is a loss of anywhere from 10-20 percent of consumers’ discretionary or “disposable” income.
And with banks now raising the bar significantly in order for consumers to qualify for a home purchase or even a refinance, many experts say this might turn out to be historically one of the most difficult and expensive periods in the U.S. to purchase or refinance a home.
“It’s a total mess,” said Britt Beemer, founder of America’s Research Group, an independent research firm that follows consumer spending habits.
“Not only do you have a group of homeowners bailing on their mortgages, but couple that with the added financial pressure on consumers who are struggling with high gas prices, higher property taxes and insurance rates. “
Debate Over disposable income
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.
Mark Kiesel, the executive vice president and money manager at Pacific Investment Management Co., which oversees $80 billion of corporate bonds, says that in the past year, consumers have taken about $400 billion less equity out of their homes than in 2006. He adds that when consumer spending shrinks, no one in the retail industry is immune to its effects, including the powersports industry.
‘‘Because the house is no longer an ATM machine, the profits of these companies are going to be affected,’’ Kiesel said. “When consumers have to cut back on essential purchases such as groceries, it’s naive to think that it’s not going to have an effect on an industry that is based off recreation.”
Giant Motorsports, a large powersports retailer that owns dealerships such as Chicago Cycle, recently admitted in a press release that the reduction in consumer spending power could have an impact on sales in the near future.
“Since motorcycle purchases in the U.S. and, to a greater extent, purchases of ATVs, are normally bought for entertainment and sport, and not necessarily for transportation, any significant reduction in discretionary spending power could have an adverse effect on sales of our motorcycles and other powersports products,” the company stated.

not a major concern
Despite the gloomy outlook from analysts, some manufacturers and dealers say they haven’t seen any impact on sales due to the housing decline, and that if people don’t have the means to get money through their homes or other equity, then they will finance, whether it’s through an independent financial institution or an in-house dealer program.
“We haven’t seen any research on that which would prove whether it’s affecting us one way or the other,” said Marlys Knutson, head of public relations for Polaris. “There’s probably a lot of things that have an effect on any company’s sales, and the housing market is just one of them. You can make the argument in our industry that the crazy weather we’ve had this summer has had a greater impact on sales than anything else.”
Knutson says it’s difficult to put a hard number on what percentage of their customers pay with disposable income, but it’s not an issue that has Polaris executives concerned about in terms of current or future sales.
“I don’t sense that consumers are using escrow out of their homes to pay for their toys,” she said. “Now maybe that’s the case if you get into the the real high-end recreational vehicles, like motorhomes, for example, but I wouldn’t sense that for an ATV. I think they’re either paying cash in some cases, or going through indendent financing or things like our consumer credit line program. To this point, the impact that the home market has on Polaris’ sales has not been a topic of discussion.”
Paul Jacobs, owner of Star City Powersports in Austin, Texas, says his dealership has seen a spike in financing in 2007, and that consumers don’t seem to be deterred by the fact that they can’t pay for a vehicle with cash.
“I’ve seen that our customers haven’t changed their spending habits just because they can’t pay cash for a $10,000 vehicle,” he said. “We offer some great financing packages through various lenders, both through manufacturers and independent lenders, and people are pleasantly surprised when they find out all the options they have instead of paying cash for it.”
Jacobs does admit, however, that it’s become tougher to attract more customers to his dealership because people tend to put ATVs and motorcycles on the back burner when they’re squeezed for money.
“We’ve implemented several innovative ad campaigns aimed at attracting potential customers who maybe five or six months ago wouldn’t have thought twice about coming in to purchase a new bike,” he said. “Our main goal is to get them in the door so we can show them that they can still finance a vehicle, and do it a way that it fits into their budget.”