Car Sales Will Rise Eventually

Let me start with car manufacturers. Though I think this economy - due to excessive debt levels - will be in a funk for years to come, at some point people need to buy a new car. There is just so long keeping the old one where maintenance is not too expensive before you have to move up and there are just so many late model used cars out there. A local dealership is advertising for late model used autos, even if you are not buying a new car from them, so I have to assume folks with older vehicles that are too expensive to maintain are looking for more recent vintage used vehicles because they cannot afford new ones. This will push buyers up the list eventually to buying new vehicles. There are an increasingly small number of used cars to go around.

Think about it, as Calculated Risk points out, we have twice the drivers we did in 1967 but sales of new autos are the same or less than then. Obviously this cannot continue for long.

Now I have to add that Chrysler and GM (GMGMQ.PK) filing bankruptcy is complicating the picture a bit in terms of investment. One might think the survivors are better off but Chrysler and GM shedding some obligations in bankruptcy might make them much more competitive. Either way, a lot of their suppliers - which supply (for the most part) multiple manufacturers - will make this quite complicated to figure out.

Nonetheless, an area to watch. Certainly there will be some winners here so it may be wise to spread the investment across the board. I have no investments here at the moment but am giving it serious thought.

CRE is Next

Commercial real estate (CRE) values - and mortgage defaults - tend to lag the residential market by up to a year. I mentioned the other day that the U.S. has twice the retail space of the closest competing country, well it appears on hotel space we are even worse. Go figure!

The CRE defaults, which are very significant, will likely not peak until next year. And as the linked post above notes, CRE has a long way to bottom. Not a good picture.

Disclosures: None

Comments

[leapingcat:]

I don't see any evidence to support this assumption, for that is all it is. Demand will in the first place be determined by the availability of finance, whether cash or credit. It will also be affected by changes in the marketplace, for example whether or not greener cars are seen as desirable. In the meantime there are plenty of autos around with a good few years life in them.
A better strategy might be be to look to invest in component suppliers who are also strong in the aftermarket. Not necessarily win-win, but perhaps a lower risk approach.

Jul 02 07:36 AM

[Old Trader:]

I'm not sure I'd be banking on a turnaround in auto sales anytime soon. The author is correct in saying that people will be moving up the value chain to late model used cars, which I suspect will be true, but then they'll hang onto THOSE longer than has been the case in the past. Any meaningful turnaround in new cars sales is at least several years off, imho. Of course, we might get a "Cash for Clunkers, Part 2", which might goose sales a tad.

Jul 02 09:18 AM

[optionsgirl:]

We got a bad unemployment # this morning. So long as economics don't improve substantially, people will postpone every big ticket item they can.
Additionally, some companies have disbanded their leasing arms. Leasing is what put so many people into new vehicles previously, because they weren't paying for the residual value upfront. There are plenty of late model autos availlable.

Jul 02 09:30 AM

[User 283977:]

I think we need to factor several things into the equation. For example, oil prices. There are a lot of large SUVs out there that people can't afford to run at $4 per gallon. Yes, we have more people, but there are now a lot more people that can not afford to even own a car anymore and they are going to be dependent on mass transit. As optionsgirl said, In difficult economic times, people avoid purchasing big ticket items. New vehicle sales are going to be in the tank until the 'jobs' problem is solved, and the way things are working out, I don't see much promise on that front. I am afraid pain in the automotive business is going to continue for quite some time.

Jul 02 11:30 AM

[zagrebzagreb:]

I am not surprised to read that current vehicle sales are equivalent to 1967... But is the author suggesting that with twice the drivers on the road today we should see a comparable two-fold increase in sales?

While a typical 1967 car has about five times the style of a modern car, the long-term durability situation is reversed. Take a look at a Road & Track from the period... long-term owner's reports are plentiful and emphasize the issues of the day: valve jobs at 40,000; body rust (even in salt-free California); carburetion problems; regularly failing secondary components such as instrumentation, window seals, etc. Without modern galvanized bodies, many of these cars simply rusted away in harsh environments. Most of these cars can easily last 250,000 miles with proper care (I have a 1972 MGB approaching 300,000 miles) but there is simply no comparison with a modern car in terms of build quality, engineering, rust issues and maintenance requirements.

My point? 'Old age' for a car has radically changed in 42 years. We have every right to expect our cars to last twice as long as they did in 1967, and by my math, would make current sales levels market appropriate.

Jul 02 12:50 PM

[Tdot:]

Remember - there are still millions and millions of automobiles out there on 2 to 4 year leases that are expiring in the coming months. It is inevitable - either those customers will extend those leases, or buy them off, or turn them in for something else. Some may turn them in for another used car - someone else's former lease to ride out the storm. But the used car market must dry up eventually - and soon a new car will be cheaper than a used (recent model) one.

Every month that goes by without an annualized rate of at least 12 million means a future month of make-up sales. The average age of vehicles on the road is already 8 years, and getting older every day that they are not replaced. The pressure to replace cars increases every day. At some point the dam has to increase the flow, or it springs a leak and breaks up, or it overflows. Either way, vehicle sales have to start increasing - and dramatically.

Cash for Clunkers by itself is only worth maybe 250,000 vehicles in "Round 1" - up to $1B total. Beyond that, some Dealers may see relatively good-condition used cars being brought in as worth (from Kelly Blue Book) more than the $4500 CfC maximum in trade - and will offer more than the Feds in order to resell them or send them to wholesale for a profit. The actual Clunkers only have to be destroyed if the Feds officially "buy" the car under CfC.

In any case there is a huge market for new AND used cars in the coming months, and the pressure builds every day. It is like a tsunami effect. First it pulls away, and everyone wonders where the ocean went; then comes back with a roar.

Jul 02 05:56 PM

[alaskaeagle:]

How old does a two year old "new" car have to be before it becomes and old car? The new cars are not selling and they will be in inventory when the new cars come out. Can anyone afford the new cars if they can not get loans? Will the prices of the previous year drop to affordable prices? The last years "new" cars will have to become used cars even if they were not sold. The dealers should just face reality and discount the new cars to move the inventory.


On Jul 02 09:18 AM Old Trader wrote:

> I'm not sure I'd be banking on a turnaround in auto sales anytime
> soon. The author is correct in saying that people will be moving
> up the value chain to late model used cars, which I suspect will
> be true, but then they'll hang onto THOSE longer than has been the
> case in the past. Any meaningful turnaround in new cars sales is
> at least several years off, imho. Of course, we might get a "Cash
> for Clunkers, Part 2", which might goose sales a tad.

Jul 03 01:14 AM

[Pstoneki:]

It will be interesting to see if most people go back to buying cars the old fashioned way - by saving up and paying with cash. The days of middle class people buying new luxury cars on credit may be over.

On Jul 03 01:14 AM alaskaeagle wrote:

> How old does a two year old "new" car have to be before it becomes
> and old car? The new cars are not selling and they will be in inventory
> when the new cars come out. Can anyone afford the new cars if they
> can not get loans? Will the prices of the previous year drop to affordable
> prices? The last years "new" cars will have to become used cars even
> if they were not sold. The dealers should just face reality and discount
> the new cars to move the inventory.

Jul 06 04:41 PM