GM hurt by weak housing market
The nation’s housing market mess has spread to the driveway.
General Motors Corp., one of the first automakers to be hit hard by the downturn, said Thursday that a $115-million loss from its stake in a nationwide mortgage lending business weighed heavily on first-quarter net income, which plunged 90% from a year earlier.
And as automakers reported slumping April auto sales this week, in-house sales and market analysts at GM and Ford Motor Co. said they believed that one factor in the declines was weakening real estate prices that reduced the amount of cash that consumers were pulling out of home equity.
About 10% of real estate equity funds “end up in the car market,” said Bob Schnorbus, the Troy, Mich.-based chief economist for J.D. Power & Associates.
As the housing market peaked in 2005, homeowners pulled almost $1 trillion out of their residences through refinancing, gains on sales and home equity borrowing, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa.
The annual rate through the first quarter of this year, he said, “has fallen very sharply, to less than $500 billion, and that’s going to weaken further as home prices continue to fall.”
Zandi said he believed that home prices would continue to weaken “at least through this time next year” as the real estate market tries to shrink bloated inventories.
That could mean a big hit for automakers, whose own inventories are starting to swell as sales slip. About 14% of all sales of new passenger vehicles are cash deals, usually from home equity funds.
With less cash available from home equity, many shoppers who can still afford to buy will turn from the higher-priced models that deliver bigger profits to auto dealers and carmakers and opt instead for smaller, less expensive cars and trucks, Schnorbus said.
Sales losses aren’t the only hit the auto industry faces from home loan woes.
Automakers’ finance arms could be hurt as well, Zandi said.
“I think that some of the weakness in the home mortgage market will bleed out into the auto loan market as people start running late on car payments as they juggle funds to keep their home mortgage payments current,” he said.
Southern California dealership owner Fritz Hitchcock, whose franchises include Toyota lots in Northridge, Puente Hills and Santa Barbara, said shoppers were telling his managers “that they are looking at payments on their adjustable-rate mortgages going way up and knocking them right out of the market for a new car.”
The housing situation adds to the problems that GM, Ford and Detroit Three rival Chrysler Group already face: swollen inventories, excess manufacturing capacity, hefty healthcare and operating costs, and customer defections to import brands.
GM’s rough start for the year was marked by continued but narrowing losses from its crucial North American automotive operation as the company continued to reduce the scope of that business to match diminishing demand for its cars and trucks at home.
GM’s first-quarter net income of $62 million, or 11 cents a share, was down from $602 million, or $1.06, in the year-earlier period.
Although the company began the year with a profit after losing $2 billion last year and $10.4 billion in 2005, investors were not impressed, as many analysts had expected the automaker to do much better. Its stock declined $1.75, or 5.4%, to $30.69 on Thursday.
Excluding one-time items, the automaker said, it would have earned 17 cents a share, or $94 million. Thomson Financial said analysts it polled had expected earnings of 87 cents a share.
GM reported $32 million in one-time costs, largely from restructuring its Europe and Asia Pacific divisions. The comparison of quarterly results was skewed by a one-time after-tax gain of $395 million in the year-earlier period from the sale of much of GM’s equity ownership of Suzuki Motor Corp.
KeyBanc Capital Markets analyst Brett Hoselton wrote in a note to investors that he was concerned about the continuing effects of the deterioration in the residential mortgage operation of GM’s former finance arm, GMAC Financial Services. He dropped his recommendation on GM’s stock to “hold” from “buy.”
The automaker sold control of GMAC last year to a private investment group to raise cash for its restructuring, but it lost $115 million in the first quarter on its remaining 49% stake.
Hoselton had previously rated GM favorably because he had anticipated cost savings and better sales from the launch of new pickup trucks. But truck sales are being hurt by soaring fuel prices and the drying up of home equity funds.
“It’s only going to get tougher” for GM and other U.S. automakers, Banc of America Securities analyst Ronald Tadross cautioned investors.
He said he believed that GM would be forced to lower prices this year, cutting into profit as its introduction of new and redesigned models slows.
But GM Chief Executive Rick Wagoner told CNBC that he believed that the automaker’s first-quarter results showed that the company was running “at a break-even level” after two years of heavy losses.
Chief Financial Officer Fritz Henderson said analysts had failed to anticipate the full effect on GM of the nation’s mortgage industry meltdown.
GMAC on Wednesday reported a $305-million loss for the first quarter, contrasted with a gain of $495 million a year earlier, saying the loss came from its mortgage-lending operation.
GM’s first-quarter revenue of $43.9 billion was down 16% from a year earlier, reflecting the effects of the GMAC sale. Automotive sales of $42.9 billion were off 1.3% from the first quarter of 2006.
Although automotive revenue slipped, the number of cars and trucks GM sold globally rose 3% to a record 2.26 million in the quarter. Henderson said the average selling price rose by about $1,000 compared with the first quarter last year.
That wasn’t enough, however, to offset the drop in the U.S., where GM has cut back on low-profit sales to car rental fleets and chopped first-quarter production by 192,000 vehicles to further reduce inventory and postpone the need to pile on costly incentives to woo customers.
Nor was it enough to keep GM from relinquishing its accustomed spot as the world’s No. 1 automaker to Toyota Motor Corp.
“Clearly being down 192,000 units is a big headwind,” Henderson said.
In North America, GM is cutting production and reducing its share of employee healthcare costs and has slashed 35,000 hourly jobs from its payroll through a massive buyout and early retirement program.
The restructuring and cost cutting helped the company narrow its loss on North American auto operations to $46 million from $292 million a year earlier. Revenue for the region was down 7.7% to $28.5 billion.
“We continue to see progress on the automotive bottom line,” Wagoner said in a statement, “as we implement the strategies laid out two years ago.”