BUNGALOWS IN A BOX 

Our motto at Calnan Flack is “Ethical, Innovative & Strategic” although I’m sure many of you might think its “Same Same, but Different”.

We continually try to press the point that each cycle will be the same, but different. Often when people come upon this concept, they think it’s a cop out. I’d really like you to think about todays’ parallels with the story I’m about to tell, as we genuinely believe, as old mate Gann did, that there is nothing new under the sun.

Is Amazon really as unique as we think it is.

Is the Allen key really the “key” to the revolutionary impact brought about by IKEA flat pack furniture?

Or is it all just the Same Same…

The development of the shopping mall was the brain child of Austrian born architect Victor Gruen and was really just an ingenious extension of the strip shopping concept developed to overcome the weather conditions of Detroit.

It was in these very malls that the retailing heavyweights like Kmart, Target and Walmart finally pushed the retail giant Sears into bankruptcy after 125 years of trade.

But let’s wind back the clock, or should I say watch, to understand where it started and just how the Sears juggernaut grew!

The necessity of a fob watch

In 1886 railroad station agent Richard Sears started selling gold watches at 14 bucks a pop.

It was perfect timing to be selling watches as in November 1883 the USA sanctioned the introduction of four different standard times zones throughout America. Basically, this was in response to the massive growth in the railways that brought about for the first time the necessity for the accurate keeping of time.

As the punctual arrival and departure times of trains was based upon strict published timetables, passengers needed to know the time, based on their time zones, in order to catch their desired train.

Sears had no trouble selling these gold watches, a true display of urban sophistication for the wearer which also helped passengers arrive on time.

By 1893 Richard Sears business had matured from selling watches to railway passengers into Sears, Roebuck & Company a “General Mail Order” business selling a mindboggling array of consumer goods.

By 1894 the Sears catalogue was some 322 pages boasting sale items from bicycles to baby buggies, fireplaces to firearms, musical instruments to medical and veterinary supplies. You name it, Sears sold it!

A Sears catalogue was so extensive it literally sold everything including not just the kitchen sink, but whole houses as well…

Bungalows in a Box

In 1908, Sears issued a specialty catalogue called the “Book of Modern Homes and Building Plans”. Within this catalogue were 44 pre-cut kits that ranged in price from $360–$2,890. Amazingly Sears went on to offer some 447 different designs!

Each home purchase included approximately 30,000 individual parts weighing about 24 tons, swiftly shipped to your vacant block in a railroad boxcar ready for the DYI installation.

10,000 pieces of framing timber, 20,000 roofing shingles, screws, nails, paint, windows, doors, the doorknobs, hinges and everything else you would need to construct your beautiful new Sears mail-order home; including 75 pages of instructions!

Tens of thousands of these homes were put together IKEA style as the housing boom gathered momentum.

Sears promised that, even without a carpenter and with only rudimentary construction knowledge, the new home owner could complete their beautiful new Sears mail-order home in less than 90 days, a task most purchasers achieved.

But it didn’t take Sears long to work out that they could further profit by not just milling their own timber and manufacturing their own door knobs and hinges, but they could finance the purchase of the Great American Dream!

So, around 1912 Sears started offering 5-15 year mortgages at rates around 6-7%. At first it was only for the material, but it quickly included financing the dirt as well.

Easy credit for the Sears customer

So confident in their product were they that Sears took a radical approach from the norm of the day and asked nothing about the applicants’ race, ethnicity, gender or even their finances. Needless to say, this paved the way for home ownership for thousands of buyers who were not welcome at their local banks.

Who would have guessed – business boomed. Sell the mortgages and deliver a house in a box. What could go wrong?

Anyone want to have a guess as to when the sale of Sears homes and mortgages peaked?

CORRECT! 1929….

And I’m sure you could all skip the next few paragraphs as what I’m going to say I am sure you could all guess.

That the Great Depression brought about rising defaults placing continuing financial pressure on Sears Modern Home program until its financing arm was terminated in 1934. Sears was forced to liquidate in excess of $11 million of housing that was in default. This in turn caused a public relations disaster for the company!

Sears did continue to sell its Dream Homes until 1940, when the last Sears Modern Homes catalogue was issued.

Its estimated that some 75,000 well-designed, well-constructed and economical Sears houses were sold to American families.

The evolution of the motor car helped bring about the decline in the popularity of mail-order shopping as society became more mobile. Sears reacted proactively by aggressively opening retail stores across America and had over 700 stores by the 1950’s to complement its mail-order business.

The mail-order division continued to survive for a total of 100 years, that is until 1993, when the final page was turned and the catalogue business was finally laid to rest.

It’s interesting to note that Sears Tower, completed in 1974 (bottom of the real-estate cycle) was considered the tallest building in the world for nearly 25 years and was considered the tallest building in the Western hemisphere for 41 years.

However, it was also half-vacant for a decade after its construction. Now who could have ever guessed that?!

Sears lost its crown as being the Number 1 retailer in America in 1991 and sold Sears Tower in 1994 (bottom of the next real-estate cycle). Incidentally, this was a year prior to Amazon shipping its first book…

In 2018 Sears finally filed for bankruptcy, sadly bringing an end to the retailer, some 125 years after the mail-order firm Sears, Roebuck & Company first sprang to life.

The Five Drivers!

When we think of this story in terms of our cycle drivers, they are all there. The development of the railway Infrastructure allowing for the delivery of a Sears house in a box. The Technological advancements of the personal watch driven by the need to know when the trains would arrive. The Population boom (US population doubled in the 35 years from 1890) and urbanisation of society driving the need for new housing. The Credit Creation opportunity that Sears identified and fulfilled with the original NINJA (No Income No Job No Assets) loans that were of course all centred around the Government Granted License of housing and credit. Remember Sears sold EVERYTHING a household could desire.

Maybe its not so different this time?

So, when we say the cycle, the economy and investment markets are just the Same Same, but Different, remember the story of Sears and their foray into the housing market.

We will have to wait and see if Amazon follows suits…

LET’S GET STARTED 

If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we could help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

IMPORTANT NOTICE

Disclaimer: Any opinions or recommendations expressed here do not purport to Financial Advice but rather should be considered General Advice and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. Should Financial Advice be sought, we suggest you seek such advice from an appropriately qualified advisor. Any yields, rental income, tax rates, interest rates, depreciation rates, inflation rates Dividends per Share (DPS) and Earning Per Share (EPS) etc shown are estimates only and should not be used as a guide to future performance. Past performance is not necessarily a guide to future performance and should not be relied upon for this purpose. Authorised Representative of PGW Financial Services Pty Ltd – AFSL 384713 ABN 15 123 835 441.