Auto sales in the U.S. appear to be stabilizing
Tighter Credit, Rising Payments Add Pressure On Auto Sales
August 20, 2007: 01:26 PM EST
DETROIT -(Dow Jones)- Auto sales in the U.S. appear to be stabilizing in August after declining the previous two months, but the pace of sales remains historically weak as tighter credit fuels an already-tense atmosphere created by a soft housing market and high fuel prices.
Analysts expect light-vehicle sales to be flat to slightly higher in August compared to a year ago, but that forecast could change if incentives spark a late-month rally in demand or the slumping stock market cripples consumers, J.D. Power and Associates Chief Economist Bob Schnorbus said.
Even a flat performance wouldn't necessarily be welcome, as August 2006's sales pace was near a decade low for the month. The pace of sales in June and July hit a nine-year low, forcing Detroit auto makers to cut sales forecasts for the year.
In past months, industry analysts cited a pullback in sales incentives as a culprit for the sliding demand. However, auto makers are now offering relatively generous rebates, discounts and financing offers, leading analysts to increasingly blame the overall willingness and ability of people to buy cars as the reason for continued sluggishness.
"We view the continued supply of credit as critical to supporting auto sales," Lehman Brothers auto analyst Brian Johnson said, noting that he cut his 2007 and 2008 industry sales forecast "as a result of trends to tighten credit." He said macroeconomic indicators - mainly income growth and unemployment - would suggest auto sales should be higher. With that in mind, he blames tighter credit standards for a 400,000-vehicle, or a 2.5%, decline in light-vehicle demand from where it should be.
For new-car buyers, the majority of whom are considered prime by lending companies, access to loans isn't necessarily the problem. Instead, loans are becoming less affordable as people aren't tapping into home equity to pay for loans.
In the past, people would pull money out of their home equity in order to make up for the disparity between what their car was worth and what they still owed on the vehicle. If a buyer's vehicle is worth less than what was owed, the buyer is said to be "upside down" - and much of the vehicle demand in recent years has been inspired by the upside-down segment.
Also, lenders are shortening loan maturities, which drives up monthly payments. Auto makers are typically no longer offering 0% financing deals to buyers, which were a factor in stretching out loan maturities and dramatically reducing monthly payments in recent years.
The latest data from the Federal Reserve suggest the average monthly payment is up more than 5% from a year ago. Based on Fed data, the average monthly payment was nearly $520 in June.
Morgan Stanley auto analyst Jonathan Steinmetz said in a recent note to investors that rising monthly payments are a cause for concern because they decrease affordability. "We do not believe it is a coincidence that higher monthly payments are occurring simultaneously with weaker vehicle sales," he said.
The shock of higher payments is being felt at dealerships as buyers are walking away without buying because car payments are higher.
"A lot of people strictly buy on monthly payment," said Bob Thibodeau, owner of Bob Thibodeau Ford in Centerline, Mich. "People are looking for stability in their payments and they can't get it."
As a result, closely watched closing rates on new-car sales are slipping, even as showroom traffic is stable.
Thibodeau said he is seeing increasing rates of people coming into the dealership wanting to trade in an SUV or pickup truck - which get relatively low fuel economy - in hopes of buying a more fuel-efficient model. "Unfortunately, the deals of two years ago just aren't available today," he said.
Lehman's Johnson said that even though most new-car buyers are still able to find financing, they may be finding more attractive offers in the used-car market, which tends to cater to subprime buyers. The latest data suggest that consumer prices are down 4.5% in the used-car market, partially because sellers of such vehicles have to reduce price in order to lure subprime buyers.
-By John D. Stoll, Dow Jones Newswires; 313-226-1249; john.stoll@dowjones.com
(END) Dow Jones Newswires
08-20-07 1326ET
Copyright (c) 2007 Dow Jones & Company, Inc.
---------------------------------------------------------------------------------------------------------
This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com.
Print | posted on Tuesday, August 21, 2007 5:38 PM