What’s the Difference between the Bay Area and Procter & Gamble?
Simple. The income divide between haves and have-nots have been obvious for years in the Bay Area. Haves live in Atherton, Have-nots live in West Atherton. But Procter & Gamble, makers of some of America’s most known household products, are just beginning to notice.
As Middle Class Shrinks, P&G Aims High and Low
By ELLEN BYRON, The Wall Street Journal, September 12, 2011
For generations, Procter & Gamble Co.’s growth strategy was focused on developing household staples for the vast American middle class.
A shrinking middle class has forced Procter and Gamble to adjust the way it markets its household products — to higher and lower income levels than the traditional middle-class levels, WSJ’s Ellen Byron reports on the AM Hub. AP Photo/Steve Helber
Now, P&G executives say many of its former middle-market shoppers are trading down to lower-priced goods—widening the pools of have and have-not consumers at the expense of the middle.
That’s forced P&G, which estimates it has at least one product in 98% of American households, to fundamentally change the way it develops and sells its goods. For the first time in 38 years, for example, the company launched a new dish soap in the U.S. at a bargain price.
P&G’s roll out of Gain dish soap says a lot about the health of the American middle class: The world’s largest maker of consumer products is now betting that the squeeze on middle America will be long lasting.
"It’s required us to think differently about our product portfolio and how to please the high-end and lower-end markets," says Melanie Healey, group president of P&G’s North America business. "That’s frankly where a lot of the growth is happening."
In the wake of the worst recession in 50 years, there’s little doubt that the American middle class—the 40% of households with annual incomes between $50,000 and $140,000 a year—is in distress. Even before the recession, incomes of American middle-class families weren’t keeping up with inflation, especially with the rising costs of what are considered the essential ingredients of middle-class life—college education, health care and housing. In 2009, the income of the median family, the one smack in the middle of the middle, was lower, adjusted for inflation, than in 1998, the Census Bureau says.
Proctor & Gamble sells to 98 percent of the households in the United States. If you use Tide Detergent, or their budget brand Gain, you’re a P&G customer. P&G owns Gillette razors. They have both Pampers and Luvs disposable diapers. The first is the premium brand, the other, the bargain. Now they’re going all in on Consumer Hourglass Theory because the numbers show the middle class just doesn’t have much around the middle anymore.
Consumer Hourglass Theory, a term invented by Citibank, says since the middle is getting pinched, market to the high-income spenders and the budget-brand penny pinchers. This 
approach says luxury brands will be profitable, as will low-end brands, but stores that aim to the middle will find more difficulty.
Look what’s happening right here in our real estate market. Old Palo Alto? Pending, pending, pending, gone! East San Jose? Bargains are snapped up too. But that in-between $600-900K tier? Not so good. Federal loan guarantees being reduced doesn’t help, either.
This is an Open Thread. Which tier of houses are you looking at this weekend?
September 18th, 2011 at 10:27 am
I’m looking in RBA special zip codes at homes in that exact price range you mentioned above. And there aren’t many of them out there that are correctly priced, if they are they do get snapped up. That’s the key – we can’t afford to overpay or get bid up beyond our limit.
I do believe that many people in that price range are sitting on their homes because they don’t have to sell and if they wait a while (like 10 years) their homes will slowly creep back up, so why not wait? It’s unfortunate that many of these people have been in their homes for a long time and don’t need the 3-4 bedrooms or the school district. But like my Mother (who still lives in the coveted CUSD), they don’t feel motivated to sell.
September 18th, 2011 at 10:32 am
I guess I fit the description of middle-class a few years ago, I now live on 1/20th, or call it 5%, of what I used to make.
I’m not looking at any houses this weekend; they stopped serving free sandwiches at Open Houses years ago.
September 18th, 2011 at 11:00 am
“I do believe that many people in that price range are sitting on their homes because they don’t have to sell and if they wait a while (like 10 years) their homes will slowly creep back up, so why not wait?” You suggest your mother might like to sell, but she is not motivated by low prices.
I have not spoken with my friend who owns so much Vegas property, but even if Vegas is going up in value, it is my estimation that Vegas will never return to its past values, on a discounted basis. Put in different terms, for every million he had in resale value (i.e. current market value at that time), I estimate he has no more than 25% of that now (1/2 of 1/2), so two price doubles.
In the RBA the price doubles every 10 years, or sooner, and that is considered to be the best real estate investment. So let’s assume Vegas doubles every 20 years on average, or 40 years for this guy’s property to recover to former resale values, without any added return on investment. He might as well wait more like 60 years to double again. Forty to sixty years?
Then there is the other side: The buyer.
Let’s consider for a moment that, like other sellers, your mother is not motivated to sell at low prices. At the same time I note, “we can’t afford to overpay or get bid up beyond our limit.” When the buyers cannot afford to pay more, then prices are not going up.
So on the one side we have buyers who suggest that they cannot afford to sell at low prices, and on the other side we have buyers who suggest that they cannot afford to pay current high prices.
Which direction will selling prices move in the future?
September 18th, 2011 at 11:14 am
So on the one side we have SELLERS who suggest that they cannot afford to sell at low prices, and on the other side we have buyers who suggest that they cannot afford to pay current high prices.
Which direction will selling prices move in the future?
September 18th, 2011 at 11:32 am
Alex – other than the one wine and cheese open house I blogged about, that’s true. No free food to be had, although the Realtards sure do seem hungry.
SEA – Of course, if you ask the Realtards, they say prices are going up because of the low inventory. But they always have a reason prices are going up. I think they’re going down a bit currently because summer is over, but not a lot in these zip codes overall – maybe 5% or a bit more?
But we’re not on the Redfin forums so I’m not going to whip out tons of stats to dazzle and confuse everyone into agreeing with my point of view on which way the markets are trending.
September 18th, 2011 at 11:33 am
Not everyone is like Divasm’s mother, holding onto a house she doesn’t need (too big, no kids for the premium schools) because the prices are “too low” (compared to bubblicious pricing a few years ago).
There’s also the FBs who can’t afford to sell at prices buyers are willing to pay. Eventually, the banks will take those homes back.
Then prices will go down some more.
The premium properties will hold their value or even rise, according to Consumer Hourglass Theory. The question for Burbed readers is at what price point is a neighborhood no longer premium? Is Cupertino still there? How about South Sunnyvale with Cupertino schools? How about without them? What about Mountain View with crappy schools but close to Google?
Is there still a demand for mid-priced homes here, and where would you draw the price line for them? Is $600-900K too high, then?
September 18th, 2011 at 11:35 am
They’ll move down, they have to.
People are getting very cautious. Those people in the RBA all paid off with their extra bedrooms, children grown and gone, are hanging on because it’s Home. They raised their kids there, they’ve lived there for decades, they don’t have to sell so why sell? And they’ve all heard horror stories about how someone knows someone who was screwed over royally by the banksters when they sold or refinanced their house.
I was listening to some financial program on the radio yesterday and everyone wants to pay off their mortgage ASAP. The show’s host was showing how asinine that actually is, interest rates are at historic lows, pay the minimum and use the $ you keep in your hands in other investments, you can always pay the mortgage off in a lump later but meanwhile you come out far ahead. I was shocked, it makes sense. Still, if I had a mortgage I’d still want to pay that sucker off ASAP. People are SPOOKED.
The land I’m the “junkyard dog” on, has gone from $400k to $1.2 mil, to about $400k again. Does the owner care? Nope! It’s paid off! He’s never leaving! It produces corn and beans and veggies and chicken and eggs and lamb, that’s what matters. We’re prepping for the money economy to slow way the hell down. Someone who has their house all paid off, as opposed to a mortgage “nut” to feed, will be in much better shape than the average homedebtor.
And this is why everyone was calling into the radio show about paying off their mortgage early. Even if it doesn’t really make sense, working the numbers, at the gut level, they can’t help themselves, Neither a Borrower nor a Lender Be, In Yon Coming Times.
September 18th, 2011 at 11:40 am
I bet Divasm’s mother is a great ol’ gal.
I once rented a room from an old gal who’d gotten her nursing license pre-WWII. She was great. And had a far bigger house than she needed, husband deceased, something like 4 sons, all engineers, grown and married off. She had a big room downstairs with folding beds, for big family visits, plus rented out 4 smaller rooms. I was in one. To give an idea of what kind of tenants we were, once while she was off on a trip, we got together and conspired to pay more rent! She’d been charging $125/mo for something like a decade, and she often only had 2-3 of it, it wasn’t paying the bills. And besides, it was below market rate. We voted to pay $200.
The thing is, Mrs. S. got to stay in the house she’d lived in for decades, had some company, had people looking out for her in case something happened, etc. And we had a nice place to live, it all worked out great.
September 18th, 2011 at 11:42 am
Often only had 2-3 of US renting there.
September 18th, 2011 at 11:45 am
“But we’re not on the Redfin forums so I’m not going to whip out tons of stats to dazzle and confuse everyone into agreeing with my point of view on which way the markets are trending.”
What is the velocity of ‘buyable’ inventory?
September 18th, 2011 at 11:50 am
For those who don’t understand the velocity of ‘buyable’ inventory:
“I don’t see what’s with all the clamor around inventory. At the current rate of sales, inventory does not pose an issue whatsoever. Inventory by itself is useless aggregate data. You need to look at the velocity of “buyable” inventory, rather than just absolute inventory. With all that inventory, are you finding any great deals in Palo Alto that you can buy?”
September 18th, 2011 at 12:01 pm
> Is Cupertino still there?
Suitcases full of cash say yes.
> How about South Sunnyvale with Cupertino schools?
Foreign investors say no.
> How about without them?
Don’t be ridiculous.
> What about Mountain View with crappy schools but close to Google?
Of course not. But Los Altos High is now at 875 and Mountain View High is at 861. If it ever hits 900 then suitcases will start pouring in!
September 18th, 2011 at 12:15 pm
Homestead is at 866. I’m stuck in the top of the middle, rather than the bottom of the premium! No wonder my shack’s not worth a million anymore.
The only positive thing about Homestead properties is the sheer number of parents who will do anything to get their kids AWAY from Fremont HS and move here.
(Fremont HS: 767 2011 API Growth, 732 2010 Base)
Homestead High School Motto: OK we’ll never crack 900 but we’re better than Fremont!
September 18th, 2011 at 12:20 pm
“I was listening to some financial program on the radio yesterday and everyone wants to pay off their mortgage ASAP. The show’s host was showing how asinine that actually is, interest rates are at historic lows, pay the minimum and use the $ you keep in your hands in other investments, you can always pay the mortgage off in a lump later but meanwhile you come out far ahead. I was shocked, it makes sense. Still, if I had a mortgage I’d still want to pay that sucker off ASAP. People are SPOOKED.”
This totally avoids the rent versus buy discussion. It’s like, “If I didn’t have a mortgage, then I’d be fine…” That might be true on a cash flow basis, but does it maximize total wealth? No matter if interest rates are at historic lows, and no matter if you can get FREE money (0%), if you would have purchased that $1M home a few years ago in the Vegas area, you might be lucky to get $250k today.
September 18th, 2011 at 1:29 pm
> 1. SELLERS who suggest that they cannot afford to sell at low prices,
> 2. buyers who suggest that they cannot afford to pay current high prices.
> 3. Which direction will selling prices move in the future?
1. sellers can sell at lower prices. they just don’t want to (so they say, insincerely, they can’t, but they can). it’s called a short sale. they can also default.
2. buyers can -not- afford to pay higher prices since lenders are now only lending what makes sense.
3. when there is a standstill where buyers can’t buy high, and sellers don’t want to sell low sales will drop as there is no agreement on price.
ultimately:
a) prices come down to meet buyers affordability levels
b) buyer income increases to afford high prices
c) buyer increases down payment to lower monthly payments.
d) lender loosens underwriting so strawberry picker can afford $1M dollar houses again
a) is the most likely scenario.
September 18th, 2011 at 2:00 pm
> I was listening to some financial program on the radio yesterday and everyone wants to pay off their mortgage ASAP. The show’s host was showing how asinine that actually is
it’s never asinine to pay off debt.
the show’s host is a dumbass. i hear this all the time by people that think they are great investors but usually far from wealthy. lol.
it’s the bleating of a sheep repeating conventional wisdom.
what these idiotic expert “investors” fail to realize is
1) it’s 100% guaranteed you will need to amortize your debt. the only way to avoid this is default and loss of your property.
2) investment returns are not 100% guaranteed. in fact there is a fairly good chance of losing money on investments even over 10 year periods.
when the idiotic host says look: mortgage rate are 5% but stocks return 10%/year, so only an idiot would pay down their mortgage.
he is of course too clueless to realize, that the 10%/year return is an average over 100 years and if the person invested at the wrong time, he would have been much better paying off his mortgage (s&p 500 return from jan 2000 to today is -14%).
there is of course the emotional benefit of no longer being in debt and peace of mind which is priceless.
September 18th, 2011 at 2:17 pm
“(s&p 500 return from jan 2000 to today is -14%).”
I wonder how much Vegas housing is down from January 2000 to today.
September 18th, 2011 at 2:39 pm
Looks like Vegas is down even over a ten year period.
http://www.zillow.com/local-info/NV-Las-Vegas-home-value/r_18959/#metric=mt%3D19%26dt%3D1%26tp%3D6%26rt%3D8%26r%3D18959%252C192689%252C192820%252C192796%26el%3D0
Oct 1, 2001: Las Vegas $146K (median selling price)
Jul 1, 2011: Las Vegas $120K (median selling price)
It’s also down by square foot ($91 to $71). 65% of homes sold in LV this summer were at a loss. 10 years ago, this happened to less than 5%.
The foreclosure rate went up 9x, from .0625% to .594% (this is a monthly, not an annual number, as are all the ones I’m grabbing).
Over 60% of the sales in Las Vegas this July were foreclosure resales.
I could download all the numbers behind the chart I’m eyeballing, but I’m too lazy to do so for a comment. I’m probably even too lazy to do so for an article.
September 18th, 2011 at 3:12 pm
$146k down to $120k, also keep in mind inflation, what little there’s been, opportunity cost, costs for utilities and taxes and light bulbs and Drano, plus the cost of being stuck owning in an area while your job goes elsewhere.
All the right stuff is now the wrong stuff. We really are flying inverted.
September 18th, 2011 at 3:26 pm
That’s $120k less sales expenses…
It would be very interesting to compute the total cost of ownership over that 10 year period VERSUS the total cost of rent.
September 18th, 2011 at 3:33 pm
Haha, I wouldn’t classify my mom as a “Great ol’ gal”, necessarily, but it’s true that her house is paid off and she usually has a friend renting from her in return for housework/very low rent.
She also probably fits more into the category of not wanting to sell because she’s lived there for so long, plus the trouble/effort/cost it would take to find a new place and then disentangle herself and stuff from the current place make it unattractive.
September 18th, 2011 at 3:35 pm
madhuas@18,
i think it has been firmly established by the burbed readership that numbers are -not- acceptable here, that should be left to the eggheads on redfin. please instead replace your numbers will easy to view pictures of elmo and the cookie monster.
September 18th, 2011 at 3:54 pm
Hey * at message 22: Ha, the “eggheads” on redfin aren’t any more number-y than over here (unless there’s a data forum for numbers geeks that I missed; I only play in the Bay Area forum.)
Someone (MS) asked on another thread why we don’t have forums here. burbed (the website owner, not the website itself which is capitalized) was looking into it but got busy with some other stuff. I’ll see if there’s anything I can do, but I don’t have full access to the whole site so it’s probably going to be up to burbed to enable it. It’s more likely to happen if I can present several solutions rather than make demands on burbed’s time.
However, if anyone has a forum plug-in to recommend that works well on a WordPress site, feel free to email me with details.
September 18th, 2011 at 4:03 pm
September 18th, 2011 at 4:33 pm
I think Spock is definitely more appropriate than cookie monster.
Aren’t forums also harder because you have to moderate more content? As soon as you establish actual forums, instead of mildly witty observations about today’s post turn into trolls and attention-seekers as the majority, right?
September 18th, 2011 at 5:21 pm
Did you notice the level of non-RBA on Redfin? Of course those on Redfin are far more concerned about numbers. People of the RBA know: Numbers are not important, and math does not matter; the automatic housing price appreciation takes care of everything.
September 18th, 2011 at 7:40 pm
#21 (Divasm), you’ve neatly summarized why my mother will be leaving her house for the final time “feet first.” She complains about the upkeep, but moving would be difficult, emotionally and logistically, so she’ll stay put.
#26 (SEA), you’ve learned from RE well…
September 18th, 2011 at 11:07 pm
Sure I understand the RBA, but I’m still trying to *find* it. I know it must be there, somewhere–right between useless aggregate data and useless individual data.
September 18th, 2011 at 11:55 pm
Rate this post “Like” if you think Divasm’s mom is a Great ol’ gal, “Dislike” if you don’t.
September 19th, 2011 at 12:07 am
SEA, the proper terms are “meaningless aggregate data” and “useless anecdotal data.” Each term can expand or contract as necessary to ensure whatever dataset you provide is not applicable to the RBA.
HTH
September 19th, 2011 at 12:27 am
It’s funny how the “automatic price double every 10 years or sooner” seems to be neither “meaningless aggregate data” nor “useless anecdotal data.”
September 21st, 2011 at 5:47 pm
“This is an Open Thread. Which tier of houses are you looking at this weekend?”
None. Cuz’ the houses in the Bay Area are overpriced.
September 27th, 2011 at 12:01 am
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