Slower R.E. Market Could Curb Retail Growth

A slowdown in the sizzling South Florida housing market, combined with rising energy prices, is likely to curb retail spending in 2006.

The normally optimistic National Retail Federation is cautious in its forecast this year, calling for a 4.7 percent growth in 2006 sales, a drop from the 6.1 percent gain retail sales showed in 2005. Overall consumer spending, which rose 3.7 percent in 2005, will increase only by an estimated 2.8 percent this year, writes Elaine Walker of the Miami Herald.

”While we don’t expect the housing bubble to burst, we are beginning to see some leaks,” said Tracy Mullin, the organization’s president.

As home prices have escalated in South Florida and across other areas of the country, a great number of consumers have been cashing out in recent years. They have turned to Florida home equity loans, capital gains from home sales and refinancing in order to generate cash for home improvements or other expenditures. But this trend will likely slow. As mortgage rates creep up, as they are expected to do this year, consumers will be less anxious to tap that equity.

Freddie Mac estimates that about $205 billion was extracted from home values in 2005, up sharply from $142 billion in 2004. A study by the Federal Reserve concluded that money from home values added around $700 billion to the United States’ economic activity last year, a sum that translates into as much as 8 percent of what consumer’s spent overall.

That’s been a windfall for retailers — particularly warehouse merchants, building material stores, and electronics retailers — many of which reported double-digit increases in 2005.

But as the housing market slows, expect building material and furniture stores to be the first to see an adverse impact on sales. The areas of clothing, electronics, food/beverage, and health/personal care are projected to remain relatively strong. Retail analysis believe sales will be more modest, but still outperform the average. Like many housing market forecasts, the insiders are looking at a softening, not a crash.

Despite the cautious projections, retailers are coming off a better-than-expected 2005 holiday season. Overall sales increased 6.4 percent in November/December over 2004, as consumers spendt a total of $438.6 billion. Nothing grim is on the horizon for this coming year, but those who make gains will have to get more creative. Retail industry analysts say that, in 2006, the key to success be simply who can best understand their consumer base.

”It used to be all about the product. Now, it’s changed to being all about understanding the customer and what do they want to buy? It’s about really getting inside the consumer’s mind,” said Janet Hoffman, managing partner of North American retail for Accenture.

The lesson? The going rate of Florida home loans impacts a whole lot. As mortgages go, so goes the housing market, and with that a major portion of the U.S. economy. Stay tuned.