New car sales in September were the worst they have been since 1993. J. D Power reported that September, 2008 sales of new cars were down 26.7% from September, 2007.
The numbers state the obvious, the auto industry is in trouble.
Sept 2007 new car sales – 1,312,291
Sept 2008 new car sales – 962,097
down 26.7% month over month
2007 new car sales as of 9/07 – 12,322,000
2008 new car sales as of 9/08 – 10,740,758
down 12.3 % year-to-date
New car sales for 2007 came in at 16.1 million, but don’t expect that number for 2008. J.D. Power is forecasting 14.2 million for 2008, but if the sales numbers for the last three months of 2008 are the same as September, the car industry will barely sell 13 million cars.
What is causing this double digit decline?
The sales decline is no longer because of the price of gasoline, if it were you would see a decline in just the Detroit 3 because of their reliance on big SUVS and pickups. This freefall includes all the auto manufacturers, with double digit declines for most of them.
This downward spiral is a credit crunch caused by the greed, shortsightedness, and the stupidity of the mortgage market.
The mortgage market created a financial cancer that blew a ring of second hand smoke around the auto industry’s credit neck. This credit crunch has a stranglehold on the auto industry and they have been left gasping for air.
Is there a difference between the $700 billion bailout and the $25 billion loan for the auto companies?
Both are loans to companies that the taxpayer hopes to get back, and even make money on. The difference is that the auto companies can only use the $25 billion loan money for advanced technology. General Motors, Ford, Chrysler and Honda all meet the requirements for this loan agreement.
The $700 billion bailout is supposed to alleviate the credit crunch the United States is in. The devil is in the details of the 451 page definition of that bailout.
Will the $700 bailout include any money for the car industry?
Financial institutions have made it easy for car buyers to purchase cars by stretching the loan payment to six or seven years. Just like home mortgages, lenders in the car sector relaxed their standards, allowing zero down in some cases.
Automotive News wrote an article on September 23, 2008 that asked “Will Uncle Sam take on bad car loans?” According to the Industry magazine Congress is considering allotting $7.5 billion of the $700 billion to take care of bad car loans.
Automotive News made sure to note that “The car-loans question is separate from the $25 billion in government loans being sought by the auto industry to help retool plants to build fuel-efficient vehicles. Congress is considering up to $7.5 billion in funding to begin financing those loans.”
Nancy Pelosi, D- California, has been saying that the incentives for clean renewable money would be in the $700 billion bailout. The Detroit News says that Congressional leaders have added $1 billion in tax breaks for plug-in electric vehicles. The provision would grant all-electric vehicles or plug-in models with at least a four-kilowatt battery pack a $4,168 credit. A vehicle like the extended range Chevrolet Volt with a 16-kwh battery would qualify for the maximum $7,500 credit for vehicles under 10,000 pounds.
The Detroit News article went on to clarify, “The incentives are estimated to cost about $1 billion over 10 years and would be phased out after the auto industry sells more than 250,000 plug-in vehicles in a calendar year, unlikely before 2012 at the earliest.”
“The bill also has larger tax breaks for plug-in versions of medium and heavy-duty trucks. It would award a $10,000 tax credit for vehicles over 10,000 pounds; a $12,500 tax break for vehicles more than 14,000 pounds; and a $15,000 tax break for vehicles over 26,000 pounds.”
Automotive News’ Harry Stoffer brought a new question to the quagmire. If any of the auto companies, or their subsidiary credit arms, use any of the $7.5 billion for bad car loans will the CEO pay limit go into effect?
How bad is it? How bad will it get?
Tom Kontos, chief economist for Adesa, an auction house for vehicles has seen repossessions go up.
2007 – 1.6 million
2008 – 1.9 million (forecasted)
2009 – 1.9 – 2.0 million (forecasted)
CNW marketing’s Art Spinella gives dismal numbers for delinquencies and credit loan defaults as well.
Credit loan defaults: (on vehicles purchased new)
2007 – 2.31%
2008 – 2.57% (forecasted)
2009 – 2.53% (forecasted)
Credit approval ratings
September 2007 – 90% were approved
September 2008 – 79% were approved
September 2007 – 84% were approved
September 2008 – 76% were approved
September 2007 – 67% were approved
September 2008 – 20% were approved
Delinquencies on new cars (60 days or longer):
2007 – 8.74%
2008 – 10.96% (forecasted 25% higher than 2007!)
2009 – 11.3% (forecasted)
What this says is that repossessions and credit loan defaults will stay about the same for 2009, but delinquencies will continue to rise. Perhaps, instead of giving customers zero percent financing they could give their customer a longer period of time to pay their bill, say 45 days. This could spur sales and help the consumer from going into default. After all, the banks are loaning the customer the money from the bailout we loaned them. We should have some leverage with the banks, now is the time to use it.
How is today’s economy affecting the car dealers and their buying power?
Paul Taylor, chief economist for the National Automotive Dealer Association (NADA), “smaller dealers often do have not have floorplan costs locked over a multi-year period in most cases, so they are more subject to floor plan costs going up.”
But even big players are being hurt. Mega-dealer Bill Heard owned thirteen stores, making it the largest Chevy dealership in the nation. Automotive News reported on September 24, 2008 that Heard closed shop saying, “the company could not raise operating capital and could not finance it’s floorplan.”
NADA’s Taylor said that as of January 1, 2008 there were 20,770 dealerships open for business, 66% of them were domestic brands. 487 dealerships are forecasted to close their doors this year. 113 of those are slated to be converted to a used car operation. From September, 2007 to September, 2008 Taylor estimated 590 dealerships have closed their doors.
Which states are hurting the most? Is it regional?
New light vehicle sales have been dramatically reduced by falling real estate values. Many people all over the nation refinanced their homes and used the cash from their home equity to buy a new car.
Susan Bies, a former federal governor, was on CNBC October 2nd, 2008 talking about the one million home mortgages that will be foreclosed on in 2008. Many more were averted from foreclosure, but she noted that many wouldn’t be, and many people wouldn’t be able to stay in their home even if the mortgage were interest free.
The real estate correction is about over in 28 states, according to the housing index produced by the Office of Federal Housing Enterprise Oversight (OFHEO), mostly in the mid-section of the country, but in 22 states home prices will continue to fall somewhat, and that will likely continue to slow new car sales in those 22 states in 2009.
The biggest car buying state is California and it also has the distinction of being the state that is still falling the hardest.
The other states in order of turmoil in real estate is:
Rhode Island, 47
District of Columbia, 44
New Jersey, 42
New York, 35
By allowing this bailout the mortgage market has taken this great country of ours from a free market to a welfare state. This is the same nation that balked at the idea of having socialized health care because we are a free market society. Now, if we can’t get socialized medicine we will see our premiums for health care go up while the pharmaceutical stock prices go up.
Unfortunately, we have to allow this bailout. Though we might be as mad as hell, falling on our financial sword would only lead to the following on our financial tombstone:
She was right
She’s dead, but she was right.
Watch Lou Ann Hammond on MSNBC as she talks to Alex Witt about the future of the auto industry: