US Auto Market Recession – Stage Set for Recovery

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Wow – Car sales down by 20-35% across the board for GM, Toyota, Honda, Chrysler, Ford, etc. in the month of September. Doesn’t anybody want a shiny new car nowadays? Is it just the financing that is hurting sales or are people not going to the dealerships? Actually, it’s both. People can sense that we are going to be in a recessionary environment for the foreseeable future and getting a car loan is not so easy anymore. Why walk into dealership to try and buy a car when your 620 FICO score will no longer fly with the finance guy.

Recently, the largest Chevrolet dealership in the country (according to its owners) went bankrupt. As opposed past downturns, this one feels different. The incentives that manufacturers offered in the past (0% financing, $4,000 cash back) just aren’t enough to convince people to purchase a new car when the economy is – let’s just say it – scary. I expect a significant number of dealer bankruptcies over the next year – especially the domestic manufacturers.

New car sales have been averaging about 16 million units per year. This over-capacity has been absorbed because of the incentives mentioned above and the ability to get cheap money. After all, in the past 5 years, anybody – and I mean anybody – could get a loan for a car. But, it is different now. Banks will be reluctant to lend to all but the best customers for the next several years. The finance divisions of the major car companies (GMAC, Honda Finance, etc.) will continue to be the best chance for many buyers to purchase a car, but even these finance divisions are not immune from the credit crisis. In addition, many of the auto companies are no longer offering leases, a guaranteed driver of dealership traffic because the leases lasted three or four years which meant the buyer that to come back for a new car/lease or buy the leased car outright. I see yearly car sales in the U.S. dropping down to 10 to 12 million units per year. Which means many more layoffs at auto factories, dealerships, steel companies, etc. The reality is the fact the many buyers “pushed up” their car purchases because of the incentives and cheap credit. With the average car having a 10 plus year life span, car buyers won’t be going back to the dealerships for a long time. Another reason the automotive market depression could last several years.

On the bright side, if you need a new car and have cash to pay for it, the world is your oyster! See this related article for Ten Car Buying Tips to Getting a Great Deal in today’s market.

This post was by Tony Parker, a regular contributor to this site. Picture courtesy Escape Vehicle

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