The Ripple Effect Of Housing On Motorcycle Sales.

The biggest topic of conversation, in & out of the industry, is the slow down of motorcycle sales. We all know that the housing boom from 2000 to 2005 has created a wealth effect with the mortgage equity withdrawals (MEW) being a cash cow providing home owners 100’s of billions of dollars going into consumer spending. On an annualized basis MEW soared from about $100 billion in 2000 to $780 billion at the peak in the 3rd quarter of 2005.  From that point it has already dropped by about 55% to $350 billion. Harley Davidson and its clone companies (Big Dog Motorcycles, American Iron Horse, etc…) were some of the benefactors.  Harley stock price (HOG) outperformed the S&P 500 by 130% from 2000-2006. This so-called “wealth effect” has been an extremely important factor to fuel consumer spending as real consumption growth has far outpaced real income growth in recent years. With MEW no longer providing households with a substantial amount of extra cash, and jobs not rising as fast, consumer spending growth has slowed down significantly. Add to this vanishing wealth effect the fact that Harley-Davidson was financing about 50% of its sales with 15% of these loans being subprime loans, and you begin to understand why motorcycle loans & sales are hitting a pothole. Wall Street analysts state that Harley-Davidson books show a pattern of deterioration of loans, growing credit losses and over 30-day delinquencies. These loans can be sold to another company, but because of risk, at a big discount. Dealers inventories are also balooning. Based on a survey conducted: Harley Davidson dealers are now carrying between 2.5x – 3.5x more inventory then they were in Q1 2004.The lesson? Excessively easy credit is always costly in the long run.. Economists are debating to which point the end of the housing boom will ripple through the rest of the economy. Will we have a soft or hard landing, or quite possibly a recession? . Yesterday a poll of 1,373 adults conducted for the Los Angeles Times and financial news wire Bloomberg found that 60 percent of those surveyed said recession was somewhat or very likely within the next year, Of course nobody knows for sure. For those who can, it’s a very good time to buy a house with one or two motorcycles in the garage.


15 Responses to “The Ripple Effect Of Housing On Motorcycle Sales.”

  1. 1 James Bromfield Apr 12th, 2007 at 9:29 am

    Cyril. It’s excellent information and analysis. All this makes sense. But what goes down will go up again. Right?

  2. 2 Brandon Apr 12th, 2007 at 11:50 am

    Good post. But let’s forget about real estate. True bikers will continue to ride.

  3. 3 Nicker Apr 12th, 2007 at 1:40 pm

    Great background info (as usual).
    You’ve got the supply side coverd.
    How about the demand side…….?
    How much of the soft market is due to shift in demand?

  4. 4 Cyril Huze Apr 12th, 2007 at 5:42 pm

    Nicker. Good question. Maybe I will write a post devoted exclusively to the "demand side". But I give you a short summary of what I think. Media exposure attracted a lot of new people to our industry, both for the good and bad reasons. New vendors/manufacturers trying to make a quick buck. New dealers/builders thinking that the well known builders make millions building bikes and that it’s easy to do it (did you say 10 days?!?!?). New bikers who order a chopper (!), build one in their garage (!!), when they never have ridden a motorcycle before (!!!). A very few percentage of these people vendors/dealers/builders/bikers) fell in love with our sport and want to stay with us. The vast majority has been disappointed by the little money/the difficulty/the bad build bikes, and consequently abandonned our sport. They are gone forever. Add to this new EPA/ARB constraints, the scare of not being able to pay the mortgage, and you get all the reasons why the market is what it is today. The good thing about all this is that the ones who will still be there in 1 year are the true manufacturers/dealers/builders/bikers. The ones who are in this business by choice because they really love it (not by opportunism or because it’s cool). They are the ones who are going to build the future of motorcycling. And they should be the only ones entitled to do so.

  5. 5 Michael Long Apr 12th, 2007 at 8:04 pm

    Mr.Huze.I read your blog since its launch. I must say that it is as good as your bikes. It means excellent. I am glad that a reputable builder like you is able to write so well and so correctly about the v twin industry. You seem to be the only one able to do this. This post gives us a clear view of what’s happening and why it’s happening. Thank you for your contribution to motorcycling.

  6. 6 John Apr 13th, 2007 at 2:09 am

    Wow- I’ve been an investment advisor for 19 yrs, and your analysis shames anything I’ve seen in the industry lately- you have a career choice, Mr Huze!

    The only thing as difficult as calling the top before it happens is calling the bottom before it happens (i.e.- “catch a falling knife”);

    It will take more time to clean out the effects of too-easy mortgage money. We’ll need to see real contraction- deflation, panic liquidation of assets, and true insolvency- before we can call it the bottom.

    For anyone who ever drove thru Dallas in the mid 80’s, when 7 out of every 10 houses on a given block had a “for sale” sign on them, you know what things look like at a bottom; We’re not even close to being there yet- people are just now putting their houses on the market, and typically believe they can “ride out” slow sales for at least six more months- borrow from the IRA, 401k, whatever;

    I think this results in s double-hit for the motorcycle industry, because no one can deny that there had been a glut of product and resources within the industry, regardless of macroeconomic issues; To see medium-size shops order 5-axis CNC rigs just because their neighbors or Paul Sr are doing so, for example- madness!

    The excess has to be rung out of the system before things can turn up. It’s never easy. HD didn’t intend to nearly go out of business in the early 80’s- money contracted, belts tightened, and no one NEEDED a harley to survive.

    Deflation is the nastiest pill to swallow. When house prices fall 30-50% from current levels, and still no one wants to step up, then you’ll see a true cleansing of the system.

    Absolutely right- regardless of economic conditions, the artisans of the motorycle industry will survive, because they do what they love, not what necessarily makes them wealthy.

    How do we fix it? Seems simple to me- crank up GDP. Quit worrying about inflation- it’s been a simple-minded fear of the Fed far too long- it ain’t happening. You shouldn’t be “fearful of inflation” when 17,000 jobs disappear at Citibank this week, and get reassigned to India.

    There used to be a saying- “As Goes General Motors, So Goes The Country”; Well, GM is taking a standing 8-count- notice that their RWD platform just got cut back this week? They are in full-panic mode.

    Exporting jobs while letting people borrow their own money from their houses is a profoundly stupid way to manage an economy; Real wealth is created by producing more goods and services, NOT by inflating assets.

    I love the motorcycle industry, but when I see Big Dog cutting back workforce by only 5%, for example, I know that people aren’t getting it yet; When you see Big Dog selling assets at the auction, then you’ll know we’re closer to the bottom- sad, but true.

    LOL! Sorry for the speech- gonna go ride……

  7. 7 Nicker Apr 13th, 2007 at 4:37 am

    I’m with Michael Long… what a great discussion!
    It’s like rediscovering the 1960s scooter scene, BTMs (thats Before The Morons) moved in.

    This blog is a virtual old time camp fire chat….:)
    Intelligent people who love scooters. Trust me, life doesn’t get much better than that.

    “…the ones who will still be there in 1 year are the true manufacturers/dealers/builders/bikers…”

    Your spot-on. And they’re keepers.

    “…the ones who are in this business by choice because they really love it (not by opportunism or because it’s cool). They are the ones who are going to build the future of motorcycling. And they should be the only ones entitled to do so…”

    Again… spot-on!

    As John says:
    “… We’ll need to see real contraction- deflation, panic liquidation of assets, and true insolvency- before we can call it the bottom…”

    Right, that’s when the dead-wood gets cut out. The question is, how far off is that?

    “…the artisans of the motorycle industry will survive, because they do what they love, not what necessarily makes them wealthy…”

    Sure, and it’s great to see a guy like Bob Monroe (who was like Alan’s first “manufacturing process”) get some TV recognition. He’s been building hotrods and scooters in the Walnut Creek area for years, a true craftsman and certainly an inspiration for me. I suspect he’ll keep doing it, not because there’s any foortune to be made, but because he has a pasion to create stuff.

    As you-all say, the real motorcyclists, who love the sport will stay, regardless. The rest is dead wood. A while back we had three shops open and close in our small town, before i knew they were even there!

    It’s interesting to see younger guys building Triumph bobbers again. I don’t know why they’re doing it (“contrarians”?), but i see-em as “new shoots” on a bush thats been cut back to it’s stalks.

    Perhaps -because of budgets, gas prices, or nostaliga- the future is going back to small displacement machines?

    “… medium-size shops order 5-axis CNC rigs…”
    There are shops in silicon valley that run several machines, but are one man operations. It realy depends on the business case.

    “…just because their neighbors or Paul Sr are doing so…”

    I agree, that’s a piss-poor business case.

    Thans for the info guys. Good chasting with you.

  8. 8 Dennis Apr 13th, 2007 at 8:09 am

    And to the misery, add very soon a severe Wall Street correction. Big trouble ahead. How long? I say a minimum of 5 years.

  9. 9 Rod Apr 13th, 2007 at 8:23 am

    Very intelligent post by Cyril and comments by some very smart and educated bikers.

  10. 10 Scott Apr 13th, 2007 at 11:52 am

    After over a decade of this false economy, people are in for a rude awakening. I agree with what has been said so far. It has been obvious here in the Mid-west that the bike market is soft. It has been soft for the last year and is not looking better today. We have a long way to go to the bottom. The bright side is only the true lovers will be around when it reaches bottom and turns around.

  11. 11 DRAGON Apr 16th, 2007 at 10:30 pm

    ok mr.huze you once said you would rather build a thirty thousand dollar bike that a person will ride than build a hundred thousand dollar bike that is going to be used as a show peace and we the true biker’s of america are still going to be riding and selling when all is said and done so to me all this is going to do is weed out the weak links in the chain

  12. 12 Fatboy02 Apr 22nd, 2007 at 12:06 pm

    Sunday’s Press Journal. Vero Beach, Florida’s local newspaper has 29 Harley Davidson’s and 32 other motorcycles for sale. As in Dallas in the mid 80’s on every block in Indian River County there are many homes for sale. People are selling for less than they paid. Construction has pretty much stopped and many are without jobs. Foreclosures are at a all time high in Indian River County. Most people are concerned with trying to keep their homes out of foreclosure and selling bikes they can no longer afford to keep making the monthly payments on. Times are hard and it looks like it is just going to get worse. In Florida’s history more people are moving out of Florida than moving into the state. True bikers may want to keep their bikes…….but they also want a roof over their head as well. Foreclosures are at a all time record breaking high in the states of Florida, Georgia, Texas, California, Ohio, West Virginia, Michigan, Indiana and Virginia. The majority of Americans do not walk into a dealership, Harley or other and pay cash for their bike. I guess the rich people who have custom bikes built do pay cash. They are not people with mortgages and have no job.

  13. 13 Nicker Apr 23rd, 2007 at 2:27 pm

    Hmmmmm…… interesting comments, these:

    “… rather build a that a person will ride than build …a show peace…”

    “…weed out the weak links in the chain …”

    “…True bikers may want to keep their bikes…….but they also want a roof over their head…”

    “…The majority of Americans do not walk into a dealership, Harley or other and pay cash for their bike…”

    “… rich people who have custom bikes built do pay cash… They are not people with mortgages and have no job…”

    To me, it looks as though there are some conflicting issues being expressed:

    1. – A business selling a product does better if it expands its potential customer base. So, targeting a smaller market (only those who ride their bikes) sounds like a business limmiting strategy.

    2. – Building and riding “choppers” by definition is an activity engaged in by 1% of the population that is interested in riding a creation bourn of their individual imagination, initiative, and ability. Those people will move to somthing else when “everyone” gets in on the act.

    3. – “…Walking into a dealership to buy a motorcycle…” is a toy-buying exercise. Unlike Europeans, most Americans consider motorcycles as toys, not transportation. When times get tough the toy market gets hit first.

    Now, if the socio-political landscape (global warming, oil shortages….whatever…) drives the cost of transportation up, then perhpas motorcycles in America will take on a more utilitarian role, as they have in Europe….?

    However, those who are into Motorcycles as a mechanical artform and who apply that medium to fulfill “a need to tinker,” they aren’t going to be stopped by the state of the economy, geo-politics, or the green movement. I’m think-n thats about 1% of the market – for part.

  14. 14 Billy Bartels Apr 24th, 2007 at 10:59 am

    Okay a little sunnier insight from me. If you hold to the theory that California lead the way (and in the last few Harley/Custom booms, it has), the landing will be a lot softer than you think. From what I’ve heard, dealers out in this end of the country have been having record months recently. Maybe that’s due to a number of local factors that I’m certainly not aware of, but taht’s just what I’m seeing.

    Also, on the demand side, it seems like the market is swinging to low-buck, rideable bikes, customizing harleys that you already own (remember when people did that?), and custom baggers. Show bike style choppers are taking a break.

    It seems like there aren’t any “middle class” custom builders any more. They either made it into Cyril’s stratosphere, or went out of business. The $50k custom is dead. It’s either $100k, or $20k.

  15. 15 Sandie Apr 30th, 2007 at 9:50 pm

    Billy Bartels: You are so right. Yea, I know what you mean about customizing the Harley you already have. Harley stock is up. There is plenty to buy for the bike you own in the dealership. There are hard times in Florida and Texas. Seems like the bottom has fell out of new construction and there are people without jobs. Nicker is right, Americans consider a bike a toy. I have a bike and not a yacht. One needs to buy what they can afford. The days of paying cash for toys are long gone. I did my thing with the old payment book and never again. I am into customizing and it is “FUN”!!!!!

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Cyril Huze