Submitted by agautam on Wed, 11/02/2011 - 3:06pm

 First a disclaimer, I am not an economist but a lowly engineer. I have been following the US economy closely since the recession first began in early 2008 when Bear Stearns and Lehman Brothers declared bankruptcy and the credit markets froze. There are many reasons why the US economy is at a stall speed and cannot seem to take off and housing market is a big reason for it. I want to present some of my views regarding the housing market and what I foresee happening. The new housing market was a bulk of the CEDIA channel revenues before the recession so it is important to know what is happening and how one can shield their business from some of its effects.

At present, there are 1.6 percent of mortgage loans that were current six months ago but are now seriously delinquent. Goldman Sachs economists have predicted that housing through construction and consumption of complementary goods can add 1.25 percent growth to the economy. So there are reasons to believe that Fed sees housing as an impediment to growth and a Fed governor recently said that Fed should consider buying housing debt to lower mortgages and increase growth.  In fact, 69 percent of economists in a Bloomberg survey see the Fed embarking on a third round of quantitative easing or QE 3 in early 2012. The way I see it is that the Fed is trying to take advantage of the low inflationary environment and boost up the housing market by pumping money into it. Whether this will work or not, I cannot predict but QE 2 had minimal effect on the economy and “operation twist” just lowered long-term interest rates and the benefits were not passed down to the households. In my opinion, this will just raise the long-term borrowing costs for the US government.

This is the Case-Shiller index which measures the price of residential housing in US. The index attained an all time high of 189.3 in the 2^nd of quarter of 2006 and recorded the largest year over year drop in 2008. Since then, the decline has slowed but not yet reversed.  In fact the home values are set to fall even further in the coming months by 3.6 percent according to Fiserv, a financial analytics firm. Home values will reach an all-time low of 35 percent below the peak reached in early 2006. The combination of unemployment, foreclosures and fear of the unknown such as the European sovereign debt crisis are keeping home prices depressed. But all is not gloom and doom, in the luxury market of multi-million dollar mansions, the prices have held remarkably well and the low dollar value is attracting international buyers. Buyers from Brazil, China, India and Russia are snapping up residences with prices above $20 million dollars in California, Florida and New York. In my opinion, it is important to cater to these new buyers who are not afraid to splurge and to have someone who is bilingual on your team who can understand their requirements and needs for home theater and automation systems.

Currently there are 2.5 million excess inventory of homes in US and it will take an average of 1.3 million new households to clear them over a five year period, according to a prominent macroeconomist. That is NOT happening anytime soon. So what does an ESC do in this situation? Like they say when you are handed lemons, you make lemonade. In my opinion, there is a great need to upgrade client’s current infrastructure of wires and equipment in the existing home. With the “Analog Sunset” dawning upon us, component and S-Video have to go out and replaced with HDMI, wireless and other retrofit solutions, such as MoCA and HomePNA. And with the consumer of today ever eager to embrace Apple and Google’s Android products in their lives, it is high time as ESCs that we embrace it too.  How many of you know about Apple TV or Google Tungsten? These products will make existing distributed audio and video obsolete. Now granted these are low margin products but rather than taking away the profits, they should be viewed as an opportunity to upsell other parts of the home system and bring whole-home control to a new segment of the population.  Now, I want to know what are some of your thoughts on the tough economy and how to stay profitable?