Auto, Housing Fundamentals Looking Up
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If someone told me three years ago that real estate and auto sales would be the sectors leading the U.S. economy out of the doldrums, I would be hard pressed to believe it. Only three years ago, the residential and commercial real estate markets were still in free-fall and in 2009 required the U.S Government to pour billions into automakers.
What a difference three years makes. Indeed, according to a recent article in The Wall Street Journal, it is in fact home sales and auto sales that are driving economic growth. Granted, these companies are interest rate sensitive and stand to benefit when monetary policy continues to favor their respective businesses. But they'll take what they can get.
Lets begin with autos. Car sales are on track to revisit pre-financial crisis levels of 2007. Sales of new cars and light trucks are pegged at some 14.2 million, which exceeds earlier industry expectations. I noticed how Vice President Biden touted the auto industry throughout the DNC in Charlotte, NC last week and now I see more evidence of why he did that. Auto workers are - well - working. According to the WSJ article, car companies were even taken aback by the strength and instead of taking a summer hiatus for maintenance the automakers were working around the clock.
Incidentally, one of the key uncertainties that are weighing on the US economy in addition to our own struggles is Europe. The European debt crisis is not contained to the continent's regional economies and continues to weigh on corporate America. Nonetheless, Europe is where automakers like Ford Motor (NYSE: F) have set their sights.
The automaker - the only one of course that didn't take advantage of a government bailout - wants to appeal to European drivers. Indeed, Ford is looking globally and why not given that European car makers certainly have their footprints lodged here.
But Ford is betting that its iconic, American brand will resonate with European drivers. Despite an environmental push that is more mature across the pond than stateside, Ford will market its large cars, sport utility vehicles and commercial vehicles in Europe to capitalize on what the company identifies as growth opportunities there. Even Ford's signature Mustang sports car is on its way to the streets of Berlin. Stephen Odell, who leads Ford Europe, said in a statement:
“The European market holds potential for profitable growth that’s clouded at the moment by the economic crisis. The total European car and CV market, including Russia, is expected to grow 20 percent in the next five years to 23 million vehicles. While others are backing off or cutting product investments, we at Ford are accelerating the introduction of new products, leveraging our One Ford global strengths.”
Indeed, Ford has outlined a five-year plan to populate Europe with its vehicles although the Mustang is on the short-term, fast track. The change in business plan comes at a time when the company will soon face a changing of the guard. The automaker is said to be close to naming a successor for the retiring Alan Mulally, the company's current CEO, and at the board's urging may reveal that plan sooner than later. According to an article in the WSJ, the most likely successor is Mark Fields, who is 51 years of age and president of the company's North and South American operations.
Ford shares are off about 20% from March levels but may see a boost from a reported surge in new auto-loan originations, which revisited 2007 levels in this past 2Q, according to the WSJ.
The housing market is also taking a turn. For instance, Fannie Mae has lifted its sales forecast to 4.96 million for all of 2012 compared with previous estimates of 4.74 million. If there was a greater pipeline of homes for sale, the picture might be rosier. Home buyers are lining up but have been disappointed with inventory while sellers take to the fence until home values strengthen. Many are going the rental route until they can sell without taking a loss. According to Fannie Mae's most recent housing survey, participants are optimistic that home prices will rise 1.6% in the next year.
Housing stocks are rebounding including Lennar (NYSE: LEN), which reports its third quarter earnings later this month and whose stock is trading at 52-week high levels today on September 12th. The stock has come a long way from say its 2008 lows of below $4 per share and if its earnings results are anything like rival Hovnanian Enterprises (NYSE: HOV), which swung to a 3Q profit earlier this month amid a backlog of home contracts in what it dubs a 'gradual recovery' in the housing market, there could be more upside potential ahead.
Despite the upturn, institutional investors are still seeking out distressed real estate for their portfolios. These investors are taking a page out of the small investor's book and are scooping up residential houses in foreclosure for their private equity tombstones. Buyout firm Blackstone Group in addition to hedge fund Och-Ziff Capital and alternative investment firm Oaktree Capital have combined attracted some $8 billion for the purpose of purchasing distressed homes, according to The Wall Street Journal.
The interesting thing about the green shoots of economic recovery stemming from the auto and housing sectors is that America could be well on its way to reattaining the American Dream, which would recapture the nostalgia of home ownership and a new car parked in the driveway.
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