Auto sales for February were released last week, and sales on an annualized basis are expected to be at or higher than 14 million units for the second month in a row. Remember back to 2009 and cash for clunkers? The annualized rate for August 2009 was 14.1 million. It took more than two years, but auto sales are back to that level without government handouts. After the disastrous 2008-2009 plunge in sales and bankruptcies, auto sales have become the good news story in the economy.
This rebound in car sales is not an aberration. It has been a slow, steady build. The standard minimum replacement level was once considered to be 15 million units. Prior to 2008, annualized auto sales were consistently in the range of 16 to 17 million, with spikes to 18 million or more not uncommon. Then sales plunged to levels less than 10 million throughout 2008 and 2009. Sales jumped back to slightly more than nine million after cash-for-clunkers, and economists fretted that built-up demand had been met; however, there has been an upward trajectory in sales since then. Annualized volume was up to 11 million by December 2009, roughly 12.5 million by December 2010, and almost 14 million by year-end 2011. Along with higher new car sales, the used car industry has seen strong growth and profitability.
Auto Financing Future
No one really knows what the new normal will be for the replacement cycle, but it is likely to be far longer than historical norms. Cars are now made better and the styling doesn’t change drastically from year to year. I was raised in farming country, but I was from a car dealer family. I remember getting a peak at my dad’s new car models (always in late September for all models) before the annual grand unveiling celebration at his showroom. Some of you might be old enough to remember the excitement around this time. This was always a big event in our town, and the new models were always dramatically different than the old. No wonder sales were great. Those days are gone, but the desire to drive a modern-looking car with a few of the latest bells and whistles has not.
I see a pace of sales of 14 to 15 million as sustainable. There is still some catch-up to make for the ultra-lean years, but sales will likely level out around that level (unless there is an economic meltdown inspired by Europe). Remember, too, that sales haven’t been boosted by any boom in housing prices and have improved in what is just an okay economic environment. Even better is the performance of auto loans. After a few dark days in 2009, delinquency levels for auto loans have fallen back to normal prerecession levels. Even investors in securitized auto deals have recognized this, and auto securitizations have surged over the past twelve months.
Credit unions cannot compete with 0% financing on new cars, but those deals are becoming less common. Additionally, the 0% deals that are rolled out tend to be on limited models and with higher qualification hurdles. Credit unions have the reputation as the first stop for used car loans. Now, used car loans as well as used car values are performing well, as today’s late model cars are simply better than the old dogs that used to be traded in.
I was not a fan of cash for clunkers or the home tax credit. It was a waste of taxpayer money and produced nothing. I am a fan of a slow, steady trend based on affordability, need, and the ability to pay. We are solidly on that track in autos, now we need that same path for housing. Credit unions are already masters at auto loans, and the latest data demonstrates that credit unions are grabbing market share in mortgages. The credit union advantage is building. Perhaps in the coming years credit unions won’t have to depend on replacing maturing investment securities with more low-yielding securities.