September 24, 2007 – Housing’s hazy future

By Steve Bauer
Managing Editor
It’s nearly impossible to watch TV or read a newspaper without hearing more troubling news on the housing market. Whether it’s a new monthly record in foreclosures, the federal government stepping in to help troubled borrowers or another sour report on home sales, it’s hard to find a silver lining in this dark cloud, leaving many to wonder when — or if — things will begin to turn around.
So what does the future hold for the housing market, and what is the powersports industry doing to adapt to an undeniably influential yet uncertain sector of the financial market?

Many housing market experts agree that although the market looks troubling now, what’s happening is the reaction to years of rapid home building, easy-access home loans and rock-bottom interest rates.
“The housing market, much like the powersports industry, has been enjoying some historic highs in the past four years, and what I see happening isn’t so much a market in crisis, but more so a much needed market correction,” said Janice Kneece, spokeswoman for the National Association of Realtors. “Interest rates hit historic lows, in some markets home values increased by triple digits percentage-wise and lenders lowered the bar on who could qualify for a home loan, offering adjustable rate mortgages and other financing packages that were affordable until interest rates started to creep up, as they are now. If you look at this historically, there was a time in the 1980s when mortgage rates were 12-15 percent, and back then those rates were considered pretty reasonable.”
Joseph Redding, a housing analyst with Chase who has been in the industry for more than three decades, says although he doesn’t foresee the housing market returning to the “circus” it was four or five years ago, things will improve quickly once the glut of foreclosures, bankruptcies and predatory lenders run their course.
“It’s really hard to predict what any market is going to do in the future, but the housing market held the economy on its shoulders for so long after 9/11 that it was a matter of the market naturally clearing itself out, both by foreclosures, people taking their homes off the market and more qualified homebuyers in traditional fixed mortgages,” he said. “Once that happens, the huge number of available homes will shrink, and demand from homebuyers will rise. ”

Higher credit standards
Two things dealers are already seeing is buyers who do have disposable income being much more wary to spend it on recreation, whereas those who don’t have cash in-hand are looking for generous financing offers from dealerships.
“I think what we’re starting to see, and this will be more prominent in the future, is that people who are able to buy will be more cautious about spending the money,” said Joseph Yakey, owner of Antigo Yamaha in Antigo, Wis. “On the opposite end, those who really shouldn’t be purchasing will come into the store looking for us to offer them some sort of financing package. In many cases, these customers would finance every item in the store if we let them.”
Yakey says one problem he sees are low buy-in programs offered by manufacturers, where a consumer will finance a vehicle with a low entry level payment, but after a few years, will see that payment balloon well beyond their financial means.
“We get a lot of people who qualify for the low buy-in programs, where a payment starts out at $79 or $89 a month, but after two years, based on their credit score those payments can really soar,” he said. “Then those people are the ones who come in looking to trade their vehicle, but they’re upside down on their loan, so they’re just digging themselves deeper into a hole. No one ever seems to pay attention or care about the fact that their payments go up after a period of time, all they’re thinking about is ‘wow, I got this great ATV or bike for only $80 a month.’ In my experience, that $80 barely covers the interest each month on the loan, and then after the honeymoon period cold reality sets in for them.”
One benefit of the market downturn has been the reaction from lenders, who are now making it harder for consumers to be approved for financing, raising the bar on credit scores to reduce the amount of defaults on not only home loans, but cars and powersports vehicles, as well. Mike Stafford of Gulf Coast Cycle in Shreveport, La., says he’s had to turn away many customers who would have been approved only a year ago, but says the new standards are a benefit for everyone in the long run.
“Yeah, I’ve had to turn away potential sales because they couldn’t qualify for financing, but it hasn’t been so dramatic that it’s affected my dealership’s profits,” Stafford said. “The folks who can’t qualify should probably be spending that extra money for other purposes, which is the whole point of making it harder to obtain financing because those people typically aren’t responsible with how they spend their money.”
Robert Watson, owner of Watson Motorsports outside of Grand Rapids, Mich., says more rural dealerships like his cater to a more farm/utility customer base, which he says has allowed him to avoid the home market crunch on his business.
“Where you’re going to see more of an impact for powersports dealers in the future will be in the urban market, where people are purchasing their vehicles for recreation, not work, and might be more willing to cash out their home equity or get into a financing package in order to get their toy,” he said. “We have a very rural customer base here, and the people who come in to buy a Yamaha Rhino or Kawasaki Mule aren’t paying for it with home equity. And an overwhelming number of our customers don’t finance, either. So we haven’t seen an impact on our business from that perspective, and don’t foresee it in the near future.”

Manufacturers moving ahead
Although acknowledging the housing market has impacted sales to a degree, major powersports manufacturers believe other factors play into sales numbers as well, and have no plans to alter their production or marketing strategies based solely on the troubling housing market.
“There are many aspects to the economy, and although the housing market certainly plays a big role, we certainly don’t see its downturn as a reason to change how we conduct business,” said Vince Iorio, product manager for Kawasaki Motors Corp. U.S.A. “There are some segments of the market that are down, and one reason for it is the decline in disposable income, but that’s because people are paying higher percentage rates on a lot of items. We’ll continue to produce world-class products, and with the help of our outstanding network of dealers, we’re confident sales will continue to be strong.”