Strategic Exchange - February 2012

By Kemp Harr

According to Zillow’s chief economist, Stan Humphries, 22 million American households are still doubling up with one another waiting for home values to stop falling so they can jump back into the housing market and ride the wave as home values start to appreciate again. Once home values start to turn north and consumers feel that the economy has stabilized, this pent up demand could cause a rapid spike in home sales. This is just the type of catalyst the economy needs to put itself back on track. It’s a classic chicken-and-egg situation. The economy is waiting on the housing market turn but the housing market is watching the economy.

So where are we on home values? The median sale price for an existing home in December was down 2.5% from December 2010, so the decline has certainly moderated. A big part of the equation on values is the inventory or number of unsold homes on the market. And the good news with inventory is that there are now 2.38 million unsold homes on the market, which is the fewest since March of 2005. That is a 6.2 month supply based on the sales pace we experienced in December.

Back in 2008, the median price for a single family home was $197,000 and mortgage rates were tracking at just over 6%. Today the median price is $163,000 and interest rates are hovering around 4%. When you look at the relationship between mortgage interest rates, median home prices and median family income, housing is more affordable today than it has been in 40 years.

My advice to those 22 million households is to jump in now while affordability is at record levels. We are within a couple of points of being at the bottom now and it won’t be long before interest rates and housing prices start rising again.

Prison Labor in Canada
Because most prisons are called correctional facilities, one could assume that their role has as much to do with convict rehabilitation as it does with isolation from society. While convicted criminals are serving their debts to society, what prisoners do while behind bars should have some bearing on how well they do once they’ve served their time. Some states put them to work cleaning up highway trash and others give them access to a machine shop where they manufacture license plates.

Many years ago, Anderson Hardwood, which is well known in the hardwood industry as in innovator—such as being the first to introduce aluminum oxide finishes—recognized consumers’ interest in handscraped, distressed finishes. Anderson experimented with several techniques and eventually locked into a program that used “voluntary” prison labor to create new flooring that came out of the box with a time-worn look. Not only is this process cost effective, but the correctional facilities like it because it gives the prisoners something to do and also produces revenue—not to mention giving them a source of pride by producing beautiful looking flooring.

From the very beginning, Anderson, which at that time was a family owned business, has promoted its prison distressing process because the look is unique, and allowing the prisoners to work with their hands is good for their rehabilitation. In fact, the prisoners enjoy doing the work so much, there is a waiting list to get into the program. Funds generated from the program are divided between the state, the family of the prisoner doing the work and in some cases the victims of the crimes.

Four years ago, when Shaw bought Anderson, it recognized the upward trend for hand-distressed products and expanded the program into products sold under the Shaw brand name. Mannington Mills also saw the advantages of this program, and it, too, started selling products that were enhanced with handmade character marks that used prison labor.

But unbeknownst to Shaw or Anderson until sometime late last year, Canada has an international commerce law that prohibits the import of products that are produced using prison labor—regardless if the labor is forced or voluntary.

As soon as Shaw discovered the law, it notified Canadian customs officials and stopped selling the products in Canada. Since Shaw turned itself in, there was no penalty but it created a gap in Shaw and Anderson’s products in Canada. The hardwood look in Canada is very popular and for many years Canadians preferred a pristine finish in contrast to the pre-stressed look. This trend, however, has changed and in recent years the demand for distressed hardwood has been ramping up. According to Scott Sandlin, Shaw’s vice president for the hard surface business, Shaw and Anderson are rapidly developing a solution for the Canadian market that complies with its undifferentiating prison labor law.

Mannington is also making the necessary changes to comply with this law now that it has come to light..

The Evolution of Media Must Not Leave a Void
We’ve all been watching the evolution of mass media as it’s moved from the three broadcast channels to hundreds of cable channels today and as iconic newspapers and weekly magazines have disappeared on the print side.

Innovations like cable and direct satellite TV, and more recently the Internet, have completely changed the landscape for how consumers and business people get their daily fix of information or how they get access to leisure time entertainment.

Newspapers have had to reinvent themselves as they lost the revenue from classified advertising for used products that moved to eBay and Craig’s List, and job postings that moved to websites like Monster.com.

There has also been consolidation as Time beat out Newsweek and the Chicago Tribune beat out the Sun-Times.

Relatively new to the media mix are websites and bloggers, many of which don’t actually create content but aggregate it and serve up other people’s information as their own.

With all this rapid change, I feel compelled to remind our readers about the role of traditional, objective media. These are the guys that create the content. They conduct interviews, do indepth research, develop relationships with the industry’s progressive thinkers and newsmakers, and travel the world to see new trends in products and projects. They work to understand all perspectives on any topic of controversy. And to be able to effectively and empathetically communicate to the audience, they have to be a chronic student of the subject matter. While their core discipline is journalism, they must also have advanced knowledge of the subject they write about.

The goal of a journalist is not only to inform and entertain. It is also to vet out the truth, reveal an injustice, give recognition to the worthy, and help the reader sort out the facts. There will always be a place for publications that create their content versus those that research the topic on Google, or rely on their advertisers or moonlighting consultants to fill the void between their ad pages.

Rapid Growth of Internet Rug Sales
I traveled to Domotex again this year and next month we’ll run a story on the news and trends from that show, but I did want to mention one trend that is rapidly changing the global landscape for how area rugs are sold to the end-user. Those of you who have gone to Domotex in Hannover, Germany know that three separate and very large buildings are devoted to companies that exhibit area rugs. Just to put it into perspective, it’s highly likely that the area devoted to area rug sales at Domotex is larger than the upper floor of the Surfaces show in Las Vegas.

The emerging trend, revealed to me by a veteran importer who has been coming to Domotex since its inception in 1989, is the rapid growth of the Internet as one of the leading channels of commerce for area rug sales. Despite the fact that rugs are a fashion item and a picture never truly conveys the true color or styling of the product, web sales of area rugs have doubled in the past year—flattening the distribution channel and taking at least one, if not two, of the distribution layers out of the equation. Internet sales of value priced rugs has been a factor for many years but from what we heard at Domotex, it’s becoming a bigger factor in the more expensive hand-knotted and upper-end machine made rugs.

Some manufacturers have fought this phenomenon by instituting a miminum advertised retail price but others are embracing it as a method of increasing volumes and margins

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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