First Cars, Then Houses?

Although it was obvious from the start that the cash-for-clunkers program would not live up to the promises of proponents, hard evidence is beginning to trickle in that the pessimists were right. Instead of priming the pump for a self-sustaining recovery in the beleaguered auto sector (or the economy at large), the initiative simply borrowed sales from the future. Now that the government is no longer throwing free money at buyers, Automotive News reports in "September Sales Rate Will Tie Lowest on Record, Edmunds Says," the bottom has fallen out:

Edmunds’ SAAR of 8.8 million would be lowest in nearly 28 years 

September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.

After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976.

Amid a global recession, U.S. sales fell to 13.2 million units in 2008, from 16.2 million in 2007. The slide continued, with demand ranging from 9.1 million to 9.9 million in the first half of this year.

End of clunkers

But the cash-for-clunkers program’s official run from July 24 to Aug. 24 bumped the sales rate to 11.1 million in July and 13.7 million in August.

Now that consumers can’t receive $3,500 to $4,500 for trading in gas guzzlers for new vehicles with better fuel efficiency, they aren’t rushing to purchase vehicles, Edmunds.com analysts said.

“Many people regard February as the darkest month of the recession, but even then the SAAR was higher, at 9.1 million units,” Edmunds.com senior statistician Zhenwei Zhou said in a statement.

Cynic that I am, I wonder if this rapid and painful reversal of fortunes is giving us a taste of what's to come in the housing market, which is at risk of losing at least some of the substantial financial assistance being provided to it by Washington in the months ahead? In "Policy and Housing: Someone’s Gotta Give!" Angry Bear's Rebecca Wilder highlights some developments to keep an eye on:

Housing demand is being propped up by government subsidies and low mortgage rates, and the level of supply is held back by low prices. Right now, the housing market is a complicated hodgepodge of policy, foreclosures, and very weary potential home-buyers.

Home sales are stabilizing; home building is stabilizing; and home prices (might be) stabilizing - the chart to the left illustrates a positive trend in sales away from distressed and first-time home-buyers, the targets of policy, according to the NAR. But what would the housing market look like if the massive policy expired this year? Not good, and it will.

Some points on the housing market:

1. Subsidies are set to expire. If the Fed continues to buy its average of $105 billion in GSE-backed MBS per month (see the NY Fed’s website for weekly updates), it will max out the announced $1.25 trillion in four months. The $8,000 tax credit for first-time home-buyers expires at the end of this year. The Fed’s Treasury buyback program will run its course by October.
2. There are several home price indices out there, each painting a slightly different picture of the level and trend in aggregate home values (see AB post).
3. The foreclosure modifications program is holding off some foreclosures; but the program is no match for market forces.
4. There is a large shadow inventory out there - potential sellers that are reluctant or unwilling (TIME calls some of these sellers accidental landlords”) to relinquish home ownership at current prices. However, if home values continue to take baby steps forward, shadow sellers (new supply) will emerge.
5. There is a bimodal distribution of sales across the high-end and low-end housing markets. Low-end sales are hot, while the upper end is not.

The housing market still has a long, long way to go before unsubsidized demand equals supply at a price that doesn’t exacerbate foreclosures – strategic or otherwise. With virtually all of the subsidies expiring within four months, it’s hard to believe that policymakers won’t give.

So who’s gonna cry uncle? My bet’s on the Fed, as it lacks Congressional approval. Some Fed officials even tout that the MBS program should be scaled back; that’s ridiculous, given points 1. through 5. above. I agree with Daniel Indiviglio at the Atlantic: the Fed is more likely to increase its MBS purchase program, rather than to curtail or even adhere to the current limit.

By the way, the Fed and the Treasury have successfully dropped mortgage spreads to 2006 levels, even lower on the 30-yr; but it took an accumulation of $1 trillion in MBS to date to do that.

Comments

[Your Future]

Only 8 million? That's 8 million too many. I never drove one of those toxic-waste machines, and never will.

[yobob1]

There are a a couple of issues at stake here. First you must recognize that unlike other Central Banks the Fed is a private for profit entity. It is likely that the Fed is already at a point of insolvency and its owners may decide enough is enough.
Secondly the money give away program has likely burnt through whatever demand there was with subsidies considered. Home sales will likely plunge with or without additional or extended subsidies. These time limit activities (the $8,000 credit expires Dec 1, 2009) tend to pull future demand into the current. In other words hitting the patient with the paddles again will have a muted response, if any.

[HSpencer]

Vehicle buying has always been a con game. "Let us put you in one" or "How can I earn your business today?". If you hear either of these sentences from a dealer you better think twice. A dealer buys cars (new and used) for resale. He pumps up the price from what he paid, considering overhead and commission costs, and then has a very set and effective way of picking the customer's pocket in selling a car or truck. The dealer has in the past, made more on the financing of the vehicle than he has on the sale.
Now that Cash for Clunker is over, walk into a dealer with your old beater and try and get $3500.00 out of a dealer for it. Of course the dealer will say, OK, $3499.00 for YOUR old car, and retail + 20% for what your buying! In other words: "Give them yours, and buy theirs".

(Conclusion:) Arm yourself with data and buy from a private party or specified-commission consumer negotatior.

[roger]

Never got straight honest talk from a car salesman
( got my first car in the 50's ) The objective of
any sales person,is to transfer $ from your pocket
to theirs, no matter how sweet the talk.If you believe
in honest even trade,personal or on the International level
your just plain naive.

[edgar]

I know too many car salesmen. They would sell their mother for a commish.

[HSpencer]

The car salesperson is indeed an odd breed. Their whole purpose in life is to sell you a "unit", hopefully before the first of the month. I have seen their "chart" behind the salesmanager's desk. Some color code the sales with different meanings. The one I saw had some names in red, which meant if the salesman did not come through "soon" they were history. So, it's not just the commission, but the very fact of their keeping the job another month. To me this practice is barbaric for an employee to have to work under. This is why if they get the slightest scent of you, then its letters, phone calls, and contacts worse than a bill collector would do. When you walk in the showroom or lot, and they are fronted to you first, you become their "up". In otherwords you are "up" for them. I think its sort of taking turns or first sighted, first attacked. They will begin your interrogation, trying with all might to get your stats--name, address, phone, work, even to see your social security number or driver license to attempt at pulling up your credit score without your knowledge, which is against the law. If you breathe and have a job your a good target. At the very least they can get out of you, they can add you to their contact list (which MUST grown daily, or they are fired at the end of the month). It is their job to "prep you up" and then in comes a "closer" to nail you hard and fast. The salesman is pretending to be your buddy, while the closer first the last and final shot as the "bad guy". So it is to be preceived its you and the salesman against the dealership. When the salesman says it might be his job if he does not sell you, that could well be true.
As long as people buy this bullshit, these snakes will continue to plague the American car buyer. It is time for it to STOP.

[roger]

HSpencer: very educational.
my first car was a second hand 1949 Chevy,was delivered
to my home without a speedometer (LOL)
Course in those days I was young,stupid,inexperienced and
very trusting.Le Capitalism Sauvage as made me, a very
cynical hold frt.

[lawlady]

Uncle!!

[adfKFJ11]

My guess is you paid just as much for a car with the clunker rebate as you would have at any other time, the dealers simpley moved up their selling price. They do the very same thing ever time there is some type of rebate.
The soul purpose behind any of the programs is make you "think" you are getting a deal.
The dealer always wins.

[just.a.guy]

adfKFJ11, this will only be true when demand outstrips supply at the subsidized price. This is because the car business is pretty ruthlessly competitively efficient.

So, you probably COULD get your C4C rebate on a slow-moving Kia. But for short-supply in-demand fuel efficient vehicles like the Prius, prices doubtless got jacked by close to the amount of the C4C rebate.

This is reflected in dealer profit per car, which went up during the C4C program, but not by the full amount of the rebate -- just by whatever amount of rents the dealers were able to extract from scarcity value on hot models.

By the way, Carmax is good way to avoid the hassle of car buying. You'll pay a little more, but to me my time (both searching and haggling) is worth more than that.

[Sage]

Wonder why whenever I see a car salesman, I think of a slot machine in an Indian casino? Just a quirk? Nah, don't think so.
They are both rip offs, and the House always wins in both cases.

[HSpencer]

Sorry lawlady, we are just getting started. My next post will cover the F&I Department, the most ruthless department in the dealership. (ToBeCont).

[Bert]

I think the housing market has still yet further to fall. Reason? People can't afford the homes, period. They couldn't before, but under more flexible lending rules, they were still able to sign the papers. Now, reality sets in, and banks(Gasp!) discover that people with low incomes just can't afford those monthly payments. Whoever it was that had the idea of lowering the bar to the point of stupidity for mortgage lending, well, put em in the cell next to Bernie.

For a lot of people, renting is how it works in life. You're going to be renting the roof over your head, period, end of story. All the people, foreigners included, that decided to speculate, speculate, and speculate some more on real estate prices were riding high, but now the Bad News is on the table, and a lot of people have lost jobs, cars, homes, basically the whole 9 yards.

Was it all because of speculation, or just extraordinarily bad book-keeping? No, some of it was incompetence, some of it was just a roll of the dice that didn't come up the way they wanted to, and the rest was unrealistic expectations backed up only by hyped-up promises to investors.

Soup is good food...