More Waiting, Less Spending

Was there ever any doubt that that the combination of an overextended consumer, a signficant economic downturn, and a sudden recognition of the value of old-fashioned thrift would have an impact on the market for big-ticket items like automobiles?

Take that together with the many advances in quality stemming from years of relentless global competition and the following report from the Associated Press, "People Keeping Cars and Trucks Longer, Report Shows," seems entirely expected (except to private equity buyout funds and Wall Street strategists, that is).

People are keeping their cars and trucks longer as quality improves and the uncertain economy makes new purchases less appealing, according to a study released this week by automotive consulting firm R.L. Polk & Co.

Polk said the median age of cars on U.S. roads was 9.2 years in 2007. That ties the previous year's record high. In 2007, 41.3 percent of all cars were 11 years or older, compared with 40.9 percent the year before.

The median age for trucks and sport utility vehicles rose 4 percent to 7.1 years. Dave Goebel, a consultant for Polk's aftermarket team, said those numbers are starting to reflect a surge in truck and SUV purchases in the mid- to late 1990s.

Goebel said he expects the average age of trucks and SUVs will rise and eventually be on par with cars once the segment stops its tremendous growth and settles into a more stable pattern.

Purchases of new cars fell 3 percent in the U.S. in 2007 as a combination of factors, including high gas prices and the housing crisis, weighed on consumers and led many to put off buying new cars.

But Goebel said increasing durability, not the economy, is the main driver of rising vehicle age. There are more vehicles per household than in the past, he said, indicating that people buy cars and then hang on to them because they last longer.

"Each new model year the technology continues to get better and there are fewer components that fail, so we expect to see these trends continue," Goebel said.

The Service Contract Industry Council, a trade group for providers of extended warranties, said it also sees evidence people are keeping their vehicles longer. Despite the 3 percent drop in sales last year, there was a 3 to 7 percent increase in the number of auto service contracts sold as buyers sought more coverage than the traditional three-year manufacturers' warranty, according to Tim Meenan, the executive director of the council.

The group expects 5 million people to purchase auto service contracts this year. The contracts often cover components that manufacturers' warranties don't, such as electronics, air conditioning or a rental car during repairs, and may cover vehicles for up to seven years.

Meenan predicts continuing growth in the market for service contracts since an increasing number of buyers are purchasing vehicles with loans of seven years or even longer. While the vast majority of auto loans -- 78.7 percent -- now cover a five- to six-year period, 4 percent are for seven years and 0.1 percent are for eight years or longer, according to the auto information firm J.D. Power and Associates.

"A lot of consumers can't get out of a car even if they want to, when you consider the value and depreciation versus what you still owe," Meenan said. "We think that portends the need for these service contracts."

The Polk report was based on a survey of 240.9 million cars and light trucks.

Comments

[Thomas Shawn]

Watch the stocks for Snap-On Tools and Autozone

[Snappy Tom]

So far we've resisted the slow blizzard of extended service offers for our 2002 Buick Century. We purchased it with a 0% interest 5 year loan from GMAC that we paid off a year early. There are plenty of small, inconsequential imperfections that we find we can live with. It has 93,000 miles and I can't really say when we'll trade or sell it. Our other vehicle is a '92 GMC pickup with just a bit more mileage. I bought it from a recently widowed neighbor so I knew the vehicle well. It too shows its age. So what. Relentless global competition has, indeed, served us well.

Here in south central Kansas there are plenty of "granny cars" 20-25 years old, in excellent condition, plying our streets and highways. Usually with the left turn signal permanently on.

On a side note; we raise a LOT of wheat in this part of the world. I mean a lot. One of the world's largest grain elevators is about two miles from my home and there a couple more besides that one. Last year our weather was marked by widespread, devastating floods of the type not seen in a generation. Personally, I had never witnessed anything like it my 48 years. I firmly believe that the resulting poor harvest played a role in today's phenomenal wheat prices. As far as this year's crop goes, we're having a fine, fine winter. Plenty of moisture of just the right type like todays light rain mixed with snow. No exceptionally hard frosts that mean winter kill. Many things can happen betwixt now and mid-June but based on what I see when I'm out and about I don't think I'd be long wheat right now. Unless something changes, which around here can happen pretty quick, we're going to have a fantastic harvest.

In case we do, you heard it here first.

I also want to be on record as saying that I've recently begun to take a gold/DJIA scenario seriously that has, for me, up to now been unthinkable: that gold will not set new inflation-adjusted highs in this cycle. I've begun to consider the odds on whether gold and the Dow will meet suddenly at around 1450 as the result of a shockingly fast smash-up in equities due to a horrific deflationary down-draft and those same deflationary pressures limiting gold to $1450 give or take a smidgen. Of course the meet-up will last only a brief time and gold bugs especially will have a hard time giving up the belief of $4,000 gold. Silver does the best in my latest hare-brained scheme topping out at $90 to $95 in a parabolic frenzy for the ages. The timing for all this? As we all know thats the truly hard part. Whatever situation plays out it's denouement will be complete by late 2010. The 1450 gold/DJIA scenario is getting a 30% chance from me and $2200 gold/DJIA gets 50%, $3,000 gets 15% and anything above that is a 5% chance.

I'm also begun considering a crisis in the Chinese banking system as the most likely catalyst for the disaster.

Our current calamity will not be a replay of Japan, the Great Depression or the 1970's. It will be what it will be and my current thinking reflects that.

[Tester]

I decided to buck the trend and bought a new car this week rather than start spending seroius money on my 2001 Impala that was starting show its age.

I was astonished at how much the dealers were willing to give me on the trade and gegotiate in general.

In the end they must have taken a loss on the trade. They paid me 1500 more than Blue Book, came down to 4% financing after starting at 6.5% and knocked $2000 off a 2009 Nissan that had only been on the market for about 6 weeks.

My conclusion is this is a great time to buy a car if you need to and dont have alot of other debt.

[Lady From Middle America]

What rock have I been sleeping under lately? Is it really true that 78.7% of auto loans are for 5 or 6 years now? All of a sudden I can figure out how people are making their monthly payments. Now I KNOW my next car will be a used car.