Credit crunch puts brakes on auto sales
The slumping housing industry, already hitting Americans hard in two areas - escalating adjustable-rate mortgages because of the credit crisis and decreased borrowing power due to declining home values - is now sending tremors through the automotive industry.
As a result, The National Automobile Dealers Association this month lowered its sales projections for 2007 from 16.5 million to 16.1 million. Many industry analysts have downgraded their sales expectations even more.
The link between housing and auto sales is strong. Recent studies conducted by CNW Marketing Research, an Oregon-based company that follows car buying patterns, show that almost 19 percent of potential buyers are abandoning or postponing their plans to purchase a new vehicle this year - double the percentage in 2006. The number one reason they cite: worries about home values.
Of those who are still interested in buying a car, some are finding it more difficult to obtain credit or have to pay higher interest rates on their car loans. Many are turning to auto dealers for help.
"They come in asking, 'Can you beat 7 percent?' " said Matt Thompson, general sales manager at Watertown Ford, referring a typical rate offered by credit unions and banks. Not so long ago, he said, interest rates as low as 4.9 percent were common, and customers expected Thompson to go even lower through a manufacturer-based loan program.
But since problems in the subprime mortgage loan market surfaced this year, "It's pretty rare that someone comes in off the street" who is holding an offer for a loan under 7 percent, Thompson said. Only buyers with high credit ratings are likely to obtain rates significantly lower than that, he said.
Jesse Toprak, senior analyst for the automotive website Edmunds.com, said lower auto sales forecasts reflect "the most direct impact of people postponing purchases because of uncertainty in the housing market."
Toprak said that at today's prices, financing is a given. "Most people, if they can't finance a car, you can't sell them a car," he said.
With the average price of an automobile approaching $30,000 - and far more for SUVs and luxury cars - and with many families owning multiple vehicles, car purchases are often the second-largest investment they make. But cars are also one of the easiest investments to delay during tough economic times, analysts say.
Sales of new cars are especially vulnerable. Edmunds has reported that online interest in used cars is up 24 percent this year while interest in new luxury cars is off 19 percent from a year ago.
And it is not just consumers burdened with swelling mortgage payments who are growing skittish about car purchases, Toprak said. When the value of any home declines, the ability to obtain equity loans and the consumer confidence that high home equity once instilled suffer.
"Customers are not in the mood to go buy a new car," he said.
The market lethargy is not limited to family cars. House builders and contractors whose business has slowed are making do with older trucks they would replace in better times.
In an effort to jump-start sales, auto dealers nationwide are pushing for more industry-backed loan and incentive programs so they can offer lower rates and less stringent qualification rules. The call is being heard by manufacturers, said Thompson. He cited the availability of 2007 Ford Explorers with zero-percent financing for 36-month loans (60 months used to be standard for such loans). In addition, Ford is allowing most buyers to make lower down payments.
Even with attractive loan terms, Toprak said, a new car can still be a tough sell for dealers. "There are cases where consumers are not able to even think about buying a new car because they can't even pay their mortgages," he said.
Royal Ford can be reached at ford@globe.com.
