Housing, A Building Block to Economic Recovery?

Sunday, November 08, 2009 1:36 AM

Business

Michelle Hirst

Wednesday, June 17, 2009

Kingston today and Kingston just one year ago surprisingly look very different. Just last year, you couldn't turn a corner without bumping into a new set of townhouses or an apartment complex under construction.

Back then, if you happened to see an empty plot of land, it was almost a guarantee that if you went back to the same spot just one month later, you'd find bulldozers and workmen galore. The real estate industry, particularly the housing market was booming, and supply struggled to keep pace with demand.

But now the picture has been turned upside down. Deserted construction sites and half- finished complexes are common. Some realtors say that the projects have been postponed but one can't help but wonder - postponed until when? The global economic crisis, with which we are all too familiar, has severely eaten away at credit, the single most important driver of a thriving housing market. And until there is a correction in the credit market, we can continue to wave goodbye to a thriving real estate industry.

Some argue that revitalising the construction industry should not be a top priority as currently there are "bigger fish to fry." But in fact, a healthy housing market goes hand in hand with a strong economy. Construction signifies economic growth - if there is little or no construction, it is almost a given that the economy is stagnant or contracting. With all the recent talks of a recovery, one has to ask the question - can a true recovery happen without an improvement in the housing market? It was recently reported that US retail sales increased by the largest amount in four months in May, and US consumer confidence rose for the fourth straight month and analysts were quick to say that "we have passed the bottom".

However, it wasn't until yesterday that the housing market was brought into the "recovery equation." It was announced that new US housing starts and permits jumped more than forecast in May. The US Commerce Department released data showing that housing starts climbed 17.2 per cent to a seasonally adjusted annual rate of 532,000 units from April's 454,000 units, exceeding forecasts of 490,000 units. New building permits, which give a sense of future home construction, rose four per cent to 518,000, the biggest advance since June of last year.

Though this news marks an improvement concurring that yes, the US could be working its way from the bottom, the numbers don't represent a full turnaround. Home starts have still plunged 45 per cent from a year earlier. Rising unemployment continues to deter Americans from making big purchases and foreclosures continue to mount. Potential home buyers are wary about losing their jobs and therefore are afraid to take on mortgages, and builders continue to face competition from existing properties.

After months of investors steering clear of anything to do with the housing market, things are actually starting to brighten for companies in the industry - at least in the US. Home Depot Inc (NYSE: HD) recently raised its earnings estimate for the year. Instead of projecting a 7 per cent decline in Earnings per Share (EPS), the company said profits could be flat or down as much as 7 per cent. Similarly, Lowes Companies Inc (NYSE: LOW) reported encouraging earnings in its most recent quarter. EPS of US$0.32 trumped estimates of US$0.25 per share and the company increased its full year outlook to between US$1.13 and US$1.15 per share.

On the other hand, our local housing market has yet to receive uplifting news. The going has been tough for companies in the construction business, such as Caribbean Cement Company Ltd (CCC), Hardware & Lumber Ltd (HL), and Berger Paints Jamaica Ltd (BRG). As the economic crisis worsened in the latter half of last year, CCC was faced with softening demand for cement (in its most recent quarter, cement sales in terms of cement tonnes fell 3.9 per cent to 190.86mm, after falling 7.96 per cent last year) and high inventory levels. The company recognises these challenges and is addressing them by increasing its competitiveness in the export market, implementing stringent cost controls and improving internal efficiencies (kiln 5 and new cement mill).

BRG and HL were hit harder as both have reported consecutive losses. In BRG's most recent quarter ended March 31, 2009 (Q01 2009) the company reported a decline in sales of 9.76 per cent to $303.47mm and despite a 28 per cent reduction in operating expenses, BRG widened its operating loss significantly. At its Annual General Meeting (AGM) held on April 17, 2009, BRG's CEO Warren McDonald outlined that the company recently launched three new products, Royale Silk, Weather Proof Ultra and Surface Compound. BRG felt compelled to offer what it considers to be the most cutting edge products even at a time when consumers have less money to spend on discretionary items.

Likewise, HL reported its third consecutive loss for its first quarter ended March 31, 2009 (Q01 2009) with its AgroGrace segment the only one of its three divisions to report profits. At the company's AGM which was held on Monday (June 15, 2009), HL's CEO Joseph Taffe stated that HL will focus on several key areas in order to improve its performance this year, including reducing inventory, improving customer service, reducing borrowing, and improving efficiency through the use of technology.
Time will tell whether these initiatives are enough to combat plunging demand. Either way, investors should not expect a turnaround over- night, whether locally or globally. A housing market recovery will take time, so investors need to position themselves cautiously.

Michelle Hirst is the Manager, Research at Stocks & Securities Ltd (SSL). You can contact her at mhirst@sslinvest.com

If you were to grade Derick Latibeaudiere's performance over his 13 years as Bank of Jamaica governor, what grade would he get?
	A
	B
	C
	D
	E
	F

View Results
Results published weekly in Sunday Finance

Username:
Password: