Homes Dried Up Retail Landscape

While I was sitting at my local laundromat waiting for the spin cycle to end, I picked up a past issue of the New Yorker, the March 2008 edition, and started flipping through the pages for distraction.

Although I have forgotten the title of it, I read a very interesting article about the downturn of the housing market and made a correlation between the mass foreclosures in North America with the spending habits of fellow consumers.

During the real estate boom between 1996 and 2004, borrowing credit had never been easier. Lending restrictions were lax and putting a down payment on a home was virtually non-existant. The average down payment for a home would only reach as little as 2%, leaving consumers less likely to save up for the future and spending more. This extra spending habit conveniently coupled with the rise of accessible luxury was a recipe for extravagance.

As consumers borrowed more on the easy credit available, they never thought of saving that money up for their mortgage. Fast forward 4 years later, the market crashed. With job losses, new homeowners are now at the mercy of a loan they can no longer repay. Consequentially, the extra spending on luxury and clothing eventually dried up to a trickle, leading to the current retail meltdown. Store openings have been pushed back or scrapped altogether, executives have quit, brands have been sold, and prices have fallen off a cliff.

It’s therefore safe to say that the housing market has deeply affected the retail landscape. We shouldn’t simply blame credits and loans for financial woes, we should also blame -well, ourselves…and the media.

First, consumers are held responsible for carelessness, investing in homes with no thought of consequences were they to lose their jobs or could no longer afford to pay back their mortgages. I personally find it staggering that down payments on homes can be as little as 1%, would you really want to trust people who can fork up so little money with a $200K mortgage? Also, if anyone ever paid attention to the TLC channel and the mass home makeover shows such as “Flip That House,” real estate prices have been inflated at nearly double their original value.

Second, the media has had a dramatic effect on retail sales. Advertisement had been at an all-time high, as fashion brands spruced up in and around the medias like fungi on billboards, magazines, reality series, and iPhones. Savvy marketing tactics enticed consumers with entry level luxury items, making them purchase items they normally could not afford were it not for the cheap mortgage on their brand new homes.

Further more, disposable income have shrunk from 34.5% down to 32.5% according to the UK Telegraph in 2007. In the UK, costs of essential bills have risen over the last 10 years, making spending freely less of an option.

Bottoms Down for Baby Boomers

Regaining consumer spending will not be an easy task as paying back a mortgage loan is not a quick thing to accomplish. Most home owners are baby boomers, the largest spending demographic 79 million strong in the US, pumping $2 trillion into the spending economy every year. According to the Associated Press, baby boomers will keep spending less until 2020 when retirement is on the horizon. That gives fashion retailers a little more than 10 years to work their magic to cater to Generation X and Y, and in an ever changing landscape of technology and new products, the road will be more than challenging.

For the baby boomers who were smart enough to save their spendings, there is still a chance for them to contribute significantly to the economy despite reaching past the age of retirement. But the amount will be significantly less than what they had spend in the mid 90’s and 2000’s. Retailers will have to scale back and refocus their branding if they are to swoon the ever fickle younger generations.