Financing will fuel the rebound in new car sales
Financing will fuel the rebound in new car sales
By IBISWorld Senior Analyst Casey Thormahlen
When US light-vehicle sales collapsed in 2008 and 2009, it was practically a given that 2010 would be a year of significant growth. Sustaining sales growth, however, will require significant improvements in several key economic drivers. From a sales perspective, the two most important economic drivers include unemployment and financing capacity.
Unemployment is trending upward at a snail's pace, which will limit the size of the US automotive market until employment quickens. Fortunately for vehicle sales, unemployment is far less important than financing capacity, which currently rests on a critical fulcrum. Financing capacity refers to a set of key financial indicators that will enable a sales boom beyond employment gains. Those indicators include consumers' debt loads, auto loan delinquencies and interest rates.
Consumers' debt load
Shockingly, the real reason to be optimistic about an automotive sales rebound is consumers' debt load, defined as the percentage of a consumer's disposable income that goes toward financial obligations like mortgages, rent, consumer loans and auto loans. In the third quarter of 2010 (the latest data available) about 16.8% of the average consumer's income went toward financial obligations. That is the lowest amount since the first quarter of 1995. While renters spend more than homeowners on these obligations, their debt-load spending hasn't been this low (23.9%) since the third quarter of 1984. The financial maelstrom of the last few years, as painful as it was, relieved a lot of people from some crushing financial burdens. For the first time in more than a decade, consumers are now more capable of taking on new auto loan debt.
Delinquency rates fall quickly
From late 2008 through 2009, dealersand consumers found themselves in the midst of the worst credit crisis in modern US history. Lending activity froze, thus limiting dealers' ability to finance their inventories and provide consumers access to auto loans. With unemployment rising and home foreclosures breaking records during this time, auto loan delinquencies peaked as well. Normally, seriously delinquent (90-plus days past due) auto loans represent between 4% and 7% of outstanding auto loans. In the fourth quarter of 2008, however, such loans totaled $8.5 billion and 13.9% of outstanding auto loans. In the first quarter of 2009 that share climbed to a historic high of 15.9%. Fortunately for the auto-sales industry, delinquencies, in value and percentage terms, rapidly declined during the second half of 2010.
As previously reported by Edmunds.com, a startlingly low share of auto loans in 2010 carried an APR higher than 10% (4% of auto loans, the lowest since 2004). While on its face this may suggest that the lending environment had already become friendly, the opposite is actually true. Lenders have been aggressively denying loan applications from the subprime credit-score consumers (who pay these high APRs). They had good reason to do so, with delinquencies so high. It's only a matter of time, however, until lenders reassess the lending risk subprime borrowers pose and unlock a demographic key to higher sales volumes, especially for budget brands.
Interest rates remain favorable
Interest rates are probably the most well-known indicator relating to automotive financing. Simply put, lower interest rates make it cheaper for consumers to pay for big purchases like cars. There are two main sources for loans when you buy a car: banks and auto finance companies. The interest rate that banks charge is almost always higher and less volatile than what auto finance companies charge. Despite these differences, interest rates from both sources follow the same overall trends, which are primarily influenced by the Federal Reserve's monetary policy. The Fed has been loosening monetary policy since mid-2007, causing bank-charged interest rates to fall from about 8% to below 6%. Since 1990, these interest rates have only been below 7% for two periods: from 2003 to 2005 and from 2009 to 2010. At some point in the next few years (if not in 2011), the Fed will have to begin tightening monetary policy or risk inflation and asset bubbles. Regardless, interest rates will remain well below pre-2000 levels, which will be sufficient to support automotive sales growth. With interest rates expected to rise, automakers that count on a captive finance arm will have an edge on those who rely on commercial banks.
Given the above conditions in the leading economic indicators, IBISWorld forecasts U.S. light-vehicle sales to increase at an average annualized rate of 4.2% to total about 15.7 million units between 2010 and 2016.
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