The Industry Might Be Facing Disaster, But at Least Used Car Prices Are Down
The auto industry has really turned a corner over the last decade, but this year has been underlined by an unsettling lack of interest in new vehicles — potentially hinting at the return of a industry-wide crisis. The good news is that abnormally high used car prices are sinking like a stone. The flip-side of that coin, however, means that we could be approaching darker days as more consumers shy away from the new vehicle market.
Most carmakers spent last year enjoying record sales but seemed keenly aware that the market was about to plateau. However, 2017 sales have stagnated more than predicted, with rising interest rates and deflated prices seen on second-hand automobiles. It all looks very pre-recessionish and some analysts are beginning to make fearful noises.
March’s industry-wide deliveries slowed to a seasonally adjusted pace of 16.6 million annual units, far below the expectation that the market would accelerate to 17.2 million after the normal late-winter lull. At the current sales rate, deliveries are expected to fall over one-million units shy of last year’s high — but there are signs that even those numbers could be wildly ambitious, as lackluster demand isn’t the only problem.
“Somewhat ominously, today’s market increasingly resembles one we described in ‘A Triple Threat’ (Feb. 20, 2004),” Deutsche Bank analysts Rod Lache, Mike Levine and Robert Salmon wrote in a note on Tuesday. “In that report we highlighted the risks to the industry from rising rates, rising negative equity in vehicle loans and used vehicle-price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability and deteriorating mix/pricing.”
We’ve written extensively on the abysmal state of the subprime loan situation, as well as the bizarre lengths companies are willing to go to reclaim the vehicles fewer and fewer lessees are able to pay for.
“Credit performance for both prime and subprime auto loan ABS is expected to continue to deteriorate, although at a moderate pace,” analysts at Bank of America Merrill Lynch said in a report from last week.
There is nothing moderate about the deterioration of used car prices, though. According Deutsche Bank, used vehicle prices declined at an accelerated rate of 7.7 percent in February after an average fall of 3.5 percent during the first nine months of 2016. Meanwhile, automakers were also offering discounts on new product. Incentive spending went up another $450 per vehicle last month as many manufacturers faced an inventory surplus.
Some of this is due to off-lease supply, though demand remains below average as people are simply less willing to let go of their current vehicle. The number of recycled cars has declined to about 11 million per year from nearly 14 million a decade ago. While there has been an influx of new drivers in recent years, it hasn’t been enough to account for the overall decline and they seem less eager to buy a replacement vehicle than anyone else.
Regardless of whether or not this spells doom for the auto industry, there are a few things that we can expect in the short term.
Swelling incentives aside, average new car transaction sums are likely to increase overall as trade-in values plummet and longer-term loans become the norm. Trade-in cycles might change too, as it would take longer for consumers to build positive equity in their current vehicles. Also, anticipate credit to get a little wonky as lenders become more cautious over collateral risk — especially for long-term leases.
While the annual forecast doesn’t look great, at least we have those temporarily low used vehicle prices as a silver lining to this dark and inauspicious cloud.
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