No slowing down the auto sales boom – Detroit Free Press
With July new vehicle sales expected to come in at an annual rate above 17 million for the third straight month on Monday, most economic signals show that the boom times have another year, possibly 18 months, to run, analysts and economists said.
The perfect potion of easy credit, falling gas prices and pentup demand keeps showroom traffic flowing steadily. Yet last week consulting firm IHS Automotive released a survey that even after six years of rising sales, the average car on U.S. roads is a record 11.5 years old.
“We are expecting 17.1 million for the full year, with quite possibly upside potential,” said Michelle Krebs, senior analyst with kbb.com, the online arm of Kelley Blue Book. “We expect 2016 to be another strong year in the same range.”
The last full year American bought more than 17 million new vehicles was 2006 and the industry’s peak was 2000 when sales reached 17.8 million.
The Federal Reserve indicated on Wednesday that it is close to raising the benchmark federal funds rate which it has kept near zero since December 2008. But most economists expect that increase to come in mid-September and be no more than 0.25%.
That rate initially applies to what banks pay to borrow short-term funds from one another, but that increase gets passed on to consumer and business loans.
“I don’t think 25 basis points is big enough to have much of an effect,” said Charles Ballard, economics professor at Michigan State University. “The real action will come down the road, when and if the Fed decides to raise rates further.”
Since July 23 General Motors, Ford and Fiat Chrysler reported a whopping $6.8 billion in profit from their North American operations. That bounty reflect the rare convergence of rising prices, lower incentives and a shift toward larger vehicles that generate the most robust profit margins.
Nationally gas prices have dropped about 10 cents a gallon in the last month, according to AAA, but in Michigan they plummeted 32 cents a gallon in that period.
For perspective, the year-over-year performance of certain automakers may not be that great because they posted very strong sales at this time last year.
Kurt McNeil, General Motors vice president of U.S. sales, said Thursday GM’s July sales could possibly fall from July 2014 because it pulled back on sales to rental companies and other fleet customers.
“We would be enjoying better headlines if we were doing more of that business,” McNeil said. “In the short term we are giving up market share.”
Tempering this optimism are three factors that could dilute the punchbowl that propels this party.
1) More people are financing their new vehicles over longer loans, sometimes as long as seven or eight years. That means that within a year or two they will owe more than their cars are worth. In turn, when they go to replace that vehicle five or six years from now they will have to borrow not just to buy another new vehicle but enough to cover the outstanding debt on the trade-in.
2) The second cautionary trend is that leasing accounted for 28.3% of new vehicle sales in June, according to Edmunds.com. That’s slightly below the all-time high of 29.7% in March of this year. Leasing allows people to get a more expensive car for a lower monthly payment than if they bought. But lessees must turn those vehicles in in three or four years. The resurgence of leasing means used car prices will fall as the quantity of vehicles going to auction in the next several years skyrockets.
Falling used car prices eventually ripple through the new car market because consumers find they have to finance more money to cover the gap between the trade-in value of the old and new vehicles.
“We are actually expecting 2017 to be the point where we start to level off,” said Eric Lyman, TrueCar vice president of industry insights.
That leaves the remainder of this year and all of 2016 for the party to continue.
3) One other cloud lurking on the horizon are investigations by the U.S. Justice Department and various state authorities into the securitization of auto loans, especially those made to risky borrowers. No one is suggesting the amounts involved could trigger a crisis as seismic as last decade’s mortgage-backed securities meltdown, but Edmunds.com reports that 8.3% of all new car loans in June carried interest rates of 10% or higher, indicating they were made to high-risk or subprime borrowers.
“When subprime appears in the same sentence with securitization, I start to worry,” said MSU economist Ballard. “It can work if proper safeguards are in place. But the economy has extremely bitter experience with what can happen when subprime loans are securitized and adequate safeguards are not in place.”
Contact Greg Gardner: (313) 222-8762 or firstname.lastname@example.org. Follow him on Twitter @GregGardner12