April 02 2007
VALUE PAWN & JEWLERY: HOME-FOCUSED RETAILERS SHRUG OFF SUBPRIME FEARS FOR NOW
 

NEW YORK (Dow Jones)--Alice Mercado fears defaulting on her mortgage, but she still wants a new couch.

The 39-year-old's family of six bought a house last February in a historic section of Providence, R.I. But the mortgage's 8% interest rate became painful, especially when she lost her job last spring. Meanwhile, the $360,000 house has lost 8% of its value.

"I've got to get this mortgage refinanced," Mercado says.

But if Mercado landed a secretarial job tomorrow to supplement her husband's income, would she soon replace that old futon in the living room?

"Totally," Mercado says - whether she refinances the mortgage or not.

Mercado shows how consumers still want to spend on their homes despite subprime mortgage troubles, which have exacerbated an already weak U.S. housing market. To most shoppers, the lack of sizable pay raises and the rising cost of gas are the two biggest worries. That's most evident in hard-hit economies like Detroit and the Gulf Coast. And while defaults have soared in overheated real-estate markets like Rhode Island, Florida, Texas and California, their local economies have generally remained strong.

"We really have not seen much evidence of a slowdown in consumer spending due to the subprime issue," says Mark Vitner, senior economist at Wachovia. "I know there are a lot of folks out there grasping at straws, trying to find it."

Still, if there's any niche of retailing that stands to suffer as subprime lenders pull back even more on working-class Americans, it's stores that sell big-ticket items for the home.

Indeed, home-improvement retailers Home Depot Inc. (HD) and Lowe's Cos. (LOW) already have seen results hit by the broad slowdown in the U.S. housing market. In January, new-home sales plunged 16.6%, according to the Commerce Department. Economists say that further deterioration in housing is the biggest threat to economic growth this year.

Home Depot officials declined to comment for this story. But Lowe's executives told investors at a conference hosted last month by Merrill Lynch & Co. that it sees difficulties in subprime as part of the broader pressures on housing rather than a new issue, according to the investment firm.

Recent headlines on subprime mortgage defaults have inflamed concerns about the furniture industry. On Monday, Goldman Sachs & Co. cut its rating on shares of furniture retailer Ethan Allen Interiors Inc. (ETH) to sell, citing potential profit warnings this year "as a choppy macro backdrop persists."

Tightened credit terms for home buyers amid the subprime crisis could potentially crimp purchases, adding risk to the industry's recovery, Goldman says.

Meanwhile, "efforts among finance companies to manage delinquency rates could increase the costs of interest rate promotions for consumer electronics retailers" like Best Buy Co. (BBY) and Circuit City Stores Inc. (CC), Raymond James analyst Dan Wewer wrote in a research note last week.

To date, there is scant evidence of that happening, says Phil Zahn, an analyst at Fitch Ratings in Chicago. He notes that subprime auto loans are still flowing freely, keeping sales intact. "Subprime borrowers have been squeezed for a while," he says. "Mortgage payment gets priority over a credit-card payment, so any negative impact on the retail industry would already be occurring."

Zahn adds that, while perverse in terms of financial planning, "to the extent (subprime borrowers) do lose their homes, they're relieved of having to make that mortgage payment." For strapped consumers, "that frees up a little cash to buy that big-screen TV."

Indeed, Swedish furniture chain Ikea International A/S says it's well-positioned for a downturn. "Whether (consumers are) forced to go into smaller homes or smaller spaces, Ikea is known for having home furnishings solutions for all spaces," spokesman Joseph Roth says.

Atlanta-based Haverty Furniture Cos. (HVT), which operates 121 stores across the South and Midwest, counts as important markets the subprime hot spots of Florida and Texas. The average Haverty's customer, however, probably doesn't have a subprime mortgage, says Dennis Fink, the company's financial chief.

"I can't say that we've seen something specifically related to subprime," Fink says. "Business has been slow, as you've seen, in the industry, but it seems more related just to housing and to the equity value of homes coming down."

 
   A Bounce In Detroit? 
   

Few areas of the country have been harder-hit by the subprime crisis than Detroit's Wayne County, where more than half of home buyers used subprime loans for their initial purchases last year, according to a study by the Association of Community Organizations for Reform Now, a watchdog group. Economists have fretted over the likelihood of a massive wave of defaults this year.

"I know people who have taken on those kinds of mortgages who really shouldn't have," says Scott Jordan, general manager of White Furniture Co., which operates its store in the suburb of Wyandotte.

But in Jordan's experience, the mortgage isn't what makes Detroit furniture shoppers tick. Since 2002, he estimates that upheaval in the auto industry has fueled the close of numerous competing furniture outlets in the Detroit area. But while business was off by as much as a third last year, Jordan expects a round of union contract buyouts at Ford Motor Co. (F) this year will fuel a bounce in business.

"It's the uncertainty over whether they'll have jobs tomorrow that bothers people more," Jordan says.

Some retailers take pains to point out distinctions between various customer niches that get slapped with the "subprime" label. Maitland, Fla.-based Value Financial Services Inc., which operates 56 pawn shops in Florida, says it's "tough as ever to find good people in the labor market" and "spending is as strong as it ever has been."

Darren Brock, president of Rent Max, a four-store chain in Tampa, notes that most of the clients that rent his furniture, appliances and electronics are flying under the radar of the subprime mortgage crisis, simply because they don't own homes.

"They're worried about gasoline more than anything else," Brock says.

If there is a weak spot in Florida's furniture market, it's in the business of selling directly to home builders, says Bill Webber, director of retail operations at Famous Tates Appliance & Bedding Center, which operates eight stores in the Tampa Bay region.

"One of the builders we sell to was putting up 150 homes this time last year, and this year he's got contracts on 15," Webber says. "That's a problem."

Still, brisk demand from retail customers is offsetting that decline, Webber says.

"The high-end segment of the business is still strong," Webber says. "Sub-Zero fridges, Viking grills - people can't get enough of them."

- By James Covert, Dow Jones Newswires; 201-938-5360; james.covert@dowjones.com

- By Mary Ellen Lloyd, Dow Jones Newswires; 704-371-4033; maryellen.lloyd@dowjones.com