Entirely Predictable

This is going to sound really arrogant, but I just have to say it: Some things in this world are entirely predictable.

Like the fact that the extraordinary boom in house prices was destined to end in tears.

Or the fact that almost anything the government plans to do to "rescue" homeowners won't work -- and will probably do a lot more harm than good.

Or the fact that the auto industry is going to crash and burn, as the following New York Times report, "As Credit Tightens, the Auto Industry Feels the Pain," seems to make clear.

The auto industry is getting sideswiped by the housing crisis.

Auto lenders and banks, closing their wallets, have prevented hundreds of thousands of consumers from getting the financing for a car. Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. And used-car prices have fallen nearly 6 percent as repossessed cars and gas-guzzling trucks and S.U.V.’s flood auction lots.

Those forces, on top of the softening economy, are putting enormous pressure on the American auto industry as it faces what may be its worst year in more than a decade. About 14.95 million vehicles are expected to be sold in 2008, down from 16.2 million last year, as sales reach the lowest levels since 1995, according to the marketing firm J. D. Power & Associates.

The impact on the broader American economy could be profound. Not only is the car a consumer’s second biggest purchase after the home, but the auto industry remains one of nation’s most important economic engines. With less money available to fuel the industry’s growth, the businesses that support it are also facing the prospect of a sharp slowdown.

“It is a bleak picture, and it all hinges on the availability of financing,” said William Ryan, a financial analyst at Portales Partners who has followed the auto business for years. “The whole universe related to the auto industry is touched in some way — parts suppliers, manufacturers, salespeople, trucking people, the paint and metals industries. Even semiconductors.”

Within the auto sector, problems stemming from the continuing tightening of credit have already started to spread. Auto lenders like Chase, Capital One and GMAC are finding it harder and more expensive to obtain money for loans. Profits also look dimmer as the lenders absorb losses from defaults and pull back from making new loans.

Car dealers and manufacturers will probably face months of weaker profits as they offer more incentives to sell new vehicles. Luxury car sales, which provide outsize profits for auto companies, are off 13 percent from last year, according to the Autodata research firm. And consumers, facing potentially higher mortgage payments and $4-a-gallon gas, are delaying purchases of midmarket cars.

“The housing crisis, defined with the credit crisis, has really knocked consumers back on their heels,” said Michael J. Jackson, the chairman of AutoNation, the largest automobile retailer.

But the auto industry may not suffer the same severe downturn as the housing sector. One reason is that auto lenders have long issued loans expecting that vehicles, as collateral for the loans, start to lose value as soon as they are driven off the lot. In contrast, mortgage lenders during the housing boom believed that home prices would keep rising.

Still, the parallels are striking. Easy money and lax underwriting helped extend a boom for automakers from 2005 to early 2007. With Detroit pumping out new cars, consumers were encouraged to buy even though they might not have needed a new vehicle.

Now, just as in the housing sector, the auto industry is suffering, too.

Borrowers are falling behind on their car payments at a rate faster than in other recent downturns. And losses are considerably worse. Auto lenders sustained losses on about 3.4 percent of their loans in the first quarter, a rate about 30 percent higher than in 2002, according to data from Moody’s Economy.com. Even some of the most creditworthy borrowers are stressed.

Meanwhile, auto lenders have struggled to find investors willing to buy packages of new loans. Just as in the mortgage markets, a sterling credit rating — the bond insurer’s seal of approval — is no longer trusted.

“It’s a challenge, but it’s not a crisis,” said William F. Muir, president of GMAC, the former financing arm of General Motors.

As the pool of money available to auto lenders has dried up, they have cut back on making new loans. Since late last year, nearly every auto finance company has tightened its lending standards. They are forcing borrowers to put more money down. They are also demanding higher monthly payments and requiring stronger credit records and more stringent documentation.

Subprime auto lenders have been forced to pull back the most. AmeriCredit, a big subprime finance company, said it would issue about $3 billion in new auto loans this year, compared with $9.2 billion in 2007. That translates into around 340,000 fewer vehicles being financed this year. But lenders catering to less risky borrowers are also retrenching.

“Capital One is pulling back, Citi is pulling back, HSBC and Wells Fargo are pulling back,” said Mr. Ryan, the analyst. So are the finance arms of the major automakers, like GMAC, Chrysler Financial and Ford Motor Credit. “What you are seeing at AmeriCredit is probably happening everywhere else, but probably to a lesser degree.”

Many dealers say that buyers who would have been shoo-ins for a loan a year ago are now being turned away. Ken Somerville, business manager at Pedigo Chevrolet in Indianapolis, said the tougher standards were having a “significant impact” on his ability to help customers get financing and close a sale. “Chances are, if we can’t help them they’ve already been somewhere else that couldn’t either,” he said.

Not surprisingly, some of the biggest drops in car sales have been in areas where home prices have fallen most sharply. The housing boom created thousands of jobs, robust consumer confidence and strong demand for pickup trucks. Today, that has all vanished amid the current slump.

As home values have declined, millions of consumers have maxed out on home equity debt. In hot markets like California, nearly 30 percent of all consumers tapped into the value of their home to help finance their new car, according to CNW Marketing research. In Florida, about 20 percent used a home equity loan. New car sales in both states are down about 7 percent.

Those same areas are also seeing a surge in repossessed vehicles. Bill Glover, a veteran repo man in Fort Meyers, Fla., says he has recovered more than 100 cars a week since October, doubling his usual business. “I’m picking up 2008s already,” he said.

In the past, Mr. Glover mostly took back cars from borrowers with sketchy credit who habitually fell behind on their car payments. But with gas prices and unemployment rising, that circle has widened.

“Lately what we’re picking up is crew-cab pickup trucks,” Mr. Glover said, “and anything having to do with construction.”

The rise in recovered vehicles, along with tighter loan terms and weak demand from buyers, has put pressure on the used-car market too. In April, sale prices dropped 5.9 percent from a year earlier, with S.U.V.’s and pickup trucks plummeting even more, according to the Manheim Used Vehicle Value index, a widely followed measure that was not adjusted for seasonal differences. Prices had been rising for more than four years until last fall.

The sharp drop in resale prices has also meant bigger losses for the lenders as recovery values decline. It has also taken its toll on high-end automakers, which lease many of their cars. BMW, for instance, took a $375 million charge after it was stuck with thousands of cars with resale values that turned out to be lower than it projected.

Analysts say there are few signs that this downward spiral will end soon. At the Midwest Auto Auction lot in the Detroit suburbs, there were plenty of deals one recent Friday morning.

Drivers shuttled more than 180 vehicles across the auction lot in two lines as the auctioneer, Ed Dunn, wearing an ivory cowboy hat from his perch above the floor, bellowed their make, model and year.

The first car up for sale was a 2007 Lincoln MKZ luxury sedan with leather seats, which had been repossessed by a local credit union. But there were no bids. So Mr. Dunn lowered the starting price again and again.

At long last, somebody bid $13,200 for the car. Sold? Sure. But at roughly $10,000 below its Kelley Blue Book value.

Comments

[roger]

What's happening to day is by no means an accident or the result of bad management by a few,it was predictable decades ago, money no longer used as a medium of exchange or investment as become the main source of speculation ,thats problem #1.in the pursuit of this modern (insane)life style we are destroying the very base of life thats problem #2.intelligence and stupidity are 2 sides of the same coin and stupidity always comes on top thats problem #3

[Harleydog]

Mike

At the time the NY Times article came out detailing that in California 28% of new car sales and 16% in Florida were done using home equity lines. So like you said... entirely predictable, but only if you want to. And as we all know many don't ! Usually identifiable by the disinterested, glazed over, prozac stare.

HD

[Peter of Lone Tree]

CNN:
"At a time when gas prices are at an all-time high, Americans have curtailed their driving at a historic rate."
http://www.cnn.com/2008/US/05/26/gas.driving/index.html

[Lady From Middle America]

I'll probably be buying used cars for the rest of my life. Even if we had easy credit I still wouldn't buy new. The automakers have "improved" the cars completely out of my price range.

[dearieme]

LFMA, don't be too sure. The only time I've ever bought a car new, and with a loan instead of my usual method of using my savings, was in 1974. It was obvious that inflation was going to rocket off in Britain, so I borrowed and bought; it soon looked a great bargain and I kept it for 15 years, until it was in the category "would suit keen welder".

[Bruce]

Personally, I refuse to pay over $30k for a vehicle that will most likely be junk in 5 years. I can play this game as long as Detroit keeps insisting on building substandard cars. I've been buying used vehicles since '93, and have never had a bad experience. Of course a lot depends on what you buy, and finding a reputable dealer who will stand behind the purchase even after the sale. I've never seen so many used cars waiting to be purchased as I have lately...