Detroit Needs New Home Sales To Pickup
DETROIT – At Kevin Haner’s construction company in Las Vegas, three of the four Dodge Ram pickup trucks are starting to get a little old. He may replace one if he gets a great deal, but he’ll keep running the others until he’s convinced that the housing slump has ended.
Haner’s reluctance to spend is typical of contractors nationwide. This presents a huge problem for the Detroit automakers because truck sales are directly tied to new home construction. Pickup sales are on pace for their worst performance in 17 years, and GM, Chrysler and Ford still sell 91 percent of all full-size pickups in the U.S.
Even as Detroit tries to gain traction with new small cars and electric vehicles in a government-mandated shift toward greater fuel economy, it needs to sell more Rams, Chevrolet Silverados and Ford F-150s. Pickups often sell for $30,000 or more and typically command higher prices and generate more profits than small and midsize cars. They account for 22 percent of sales for the Detroit Three. Until pickup sales rebound, steady profits and solid financial footing will likely prove hard to come by.
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Haner and others have reason to be cautious. While October new home sales were up 6.2 percent over September, construction of homes and apartments fell a larger-than-expected 10.6 percent, and building permits, a key indicator of future construction, slid 4 percent.
“I’m not inclined to take on any more exposure until I see that the building-housing market is thoroughly back out of recession,” Haner said Wednesday after the Commerce Department released the latest reading on new home sales.
“Right now, construction companies are going out of business,” said Erich Merkle, president of the auto industry consulting firm autoconomy.com in Grand Rapids, Mich. “And those companies that are surviving are making do with the existing fleet.”
The housing slump has pushed U.S. pickup sales downward for the past three years. Sales routinely topped 200,000 per month as recently as 2007, but in February they fell to less than 89,000, the low point for the year. They’re off 32 percent from the first 10 months of 2008, according to Ward’s AutoInfoBank. Ford, Chrysler and GM combined to sell 843,000 pickups through October.
In Las Vegas, once among the hottest housing markets in the nation, building declined rapidly in the recession and is just starting to show signs of recovery, Haner said.
His work force surged to 25 during the boom years earlier this decade, but now its down to six. He paid off three of his trucks in 2007 while business was still good, and he’s maintained them so they’ll last.
With the casual truck buyer all but out of the market, automakers have been offering big incentives such as zero percent financing to entice contractors out of their bunkers. But like Haner, most are not budging because of uncertainty about a housing recovery.
The big drop in October home construction numbers brought fears of a double-dip recession in the industry and warnings that 2010 may still be sluggish for the sector. Yet inventory in October dropped to the lowest level in nearly four decades, leading at least one housing industry analyst to predict that builders will be swinging their hammers soon.
Mike DiGiovanni, General Motors’ top sales analyst, said the automaker still projects an upward trend in new housing into the fourth quarter of next year.
Pickup sales are particularly critical to GM. The Chevy Silverado is by far the company’s top-selling vehicle. Even in the recession, GM sold 261,142 Silverados through October, but that’s 35 percent fewer than in 2008.
DiGiovanni believes a recent stabilization in home prices, after months of declines, indicate the industry is starting a comeback.
Markets like Las Vegas have seen prices drop for 12 straight months. But prices have risen for at least six consecutive months in Denver, Washington D.C. and Chicago, according to the Standard & Poor’s/Case-Shiller index of 20 major cities.
Nationally, the median price of a new home was $212,200 in October, almost even with $213,200 a year earlier, but up almost 1 percent from September’s level of $210,700.
“We do think that as we move into next year, residential investment is going to become a small positive for the economy,” DiGiovanni said.
Merkle predicts that housing, and pickup sales, will lag behind the rest of the economy in recovering but still show small improvements next year. But it may take until late next year before contractors like Haner feel safe enough to buy new pickups.
Haner may replace his own Ram pickup because his dealer is offering zero-percent financing. But he plans to run the three company pickups, one of which is nearly six years old, for 250,000 miles or more. A 2004 model has only about 60,000 miles on it, he said.
Haner, who builds custom homes and does renovations and other work, has lived in the west for 35 years. He’s seen many boom-and-bust cycles in the real estate business, and he’s sure the Las Vegas market will rebound.
But when asked what it would take for him to replace his trucks sooner, Haner said: “A hell of a lot more work than we’ve got right now.”