When you look at the US auto industry by numbers, you would think that all is well and business is booming.
In 2016 over 17.55 million new vehicles were sold in the US. These numbers top the pre-financial crisis numbers from 2005 which peaked at 16.98 million vehicles. But, the auto industry being profitable isn’t about the volume of vehicles sold, but the breakdown of SVUs and light trucks. The percentage of these types of vehicles plays a large part of total vehicle sales. A record high of 64.5% was reported in June of 2017.
The fact of the matter is this; automakers make a much higher profit on selling trucks and SUVs over selling smaller cars. Current retail prices for vehicles in the US are: $25,966 for new mid-sized cars, $40,045 for new mid-sized SUVs and $48,450 for new full sized pickup trucks.
This has caused average vehicle prices to push upwards. Since 2 out of 3 vehicles in the US being sold are light trucks and SUVs, which are a higher cost for consumers while producing higher profits for automakers, these types of vehicle sales are accountable for the increase. In fact, a record high average sales price was reported in the end of 2016 at $35,700. This is up $5,700 from the end of 2009.
To truly understand the increase in these numbers, we must look to the American consumer. How are they driving this trend? Some experts attribute this spike in price and sales of SUVs and light trucks to the economic recovery the US has been feeling since the Great Recession of 2007-2009. Other attribute the rise to the heavy fall of gas prices over the past 5 years. But the real reason for these increases cannot be attributed to either of the factors, but to easy auto credit.
Did you know that since 2015 roughly 30% of cars purchased in the US were via a lease option, instead of an outright purchase? With lease rates at rock bottom, many consumers are able to get “more car” at a smaller monthly payment by moving to a lease instead of purchase option.
Sounds great right? More car, lower price for consumers….dealers and automakers are still moving cars off their lots and making profits. But consider this....the average lease lasts 36 months. At that time, the vehicle is returned to the dealership and sold as a low mileage, usually well maintained used vehicle. And this is where the problem lies. These formerly leased vehicles are added to a dealership’s used car inventory and become very formidable competition to new vehicles on the lot.
And while this is a problem, it wouldn’t be deferential to dealerships if formerly leased vehicles were being added to their used inventory in small numbers. But, at the moment they are not. Over the past 5 years the number vehicles coming off lease and entering the used market has significantly increased from 1.7 million in 2012 to 3.2 million in 2016, with trends predicting an increase to over 5 million by 2021. If this trend continues it can (and already has) cause irreparable damage to the US auto industry.
The damage is being felt in many areas of the auto industry. Dealerships are finding great difficulty incorporating the 3.6 million vehicles that are entering the used market in 2017 from leases ending into their already robust inventories. In addition, used vehicle prices are plummeting, showing numbers of a loss of nearly 4.3 percent since 2016 alone. These numbers have continued to drop throughout 2017 and are projected to decline through 2021.
For any person that works in or studies the US auto industry, you know and understand why this decline in used vehicle prices is such a dark cloud hanging over the industry. It is actually quite easily explained. As we previously discussed, off lease vehicles are incredibly attractive to consumers due to the low mileage and general well kept maintenance of the vehicles, but with used vehicle prices falling to well below new vehicle prices, they become even more attractive. But this is only the beginning of the problem….
We’ve discussed pricing and how it will affect the market in coming years, but financing will also be hit hard by the assault of formerly leased cars entering the US auto market. To begin, the finance agreements of a lease are highly affected by used car prices and values. If you’ve never leased a car, let me explain.
The residual value of a leased vehicle is the expected value of the vehicle at the end of your leasing term. Your financed amount is basically the difference between your residual price and your purchase price. But, when used car prices decline, so does your residual value. This will cause your overall financed rate to increase with your monthly payments, many times making them unattainable to the average consumer causing the loan to go into default.
Because of this, lending becomes much more uncertain in not only lease situations, but purchases as well. In a normal situation, when a consumer defaults on a loan, the car is repossessed and sold on the used market in order to recover a portion of the bad debt. And in a healthy market, this is accomplished and the loan overall is considered lower risk. But with the decrease in used car values, recovering the loss of the debt has been increasingly difficult for lenders.
Remember the housing market burst and how many lenders were issuing risky loans in the years leading up to it? The same can be said for the auto lending industry over the past couple years. Subprime loans, loans to borrowers with lower (540-640) credit, longer loan terms (8-10 years in some cases)…and the list goes on. Alarmingly, lenders that offer these types of loans have seen a significant increase as well and have become the segment growth leader in the auto lending industry.
So, it is no surprise to many experts that the Federal Reserve reported that in the 1st quarter of 2017, auto loans that were 90 days past due had reached a whopping 3.82%. This number had shown a steady and significant increase from the same period of 2014. While this number was enough to make many experts take notice, the subprime net losses also skyrocketed in February to over 7.5%.
Once again, we revert back to the housing market burst. During that time lenders kept credit flowing through bonds called Asset Backed Securities or ABSs. They packed portfolios of loans into ABSs to be sold to investors. Investors hopped at the chance to purchase due to the profit involved. In essence, a collapse of the ABS market was a major factor of the housing market burst. And if the US auto lending industry doesn’t tighten up soon, it could face the same kind of collapse. At the moment there are $196 billion worth of outstanding ABS auto loans, a frightening number.
So, where does the US auto industry, especially automakers and dealers go from here? I believe the solution lies in how they market themselves. In this time, dealerships will need to advertise more and more. A focus will turn to the audience that dealerships are targeting for their marketing. This will be specifically true for new vehicle marketing and taking the time to truly hone in on the “ideal” target audience, but finding that ideal audience won’t lead to a rush into your dealership’s showroom. As the numbers of lesser qualified new car buyers dwindles, the number of marketing offers they receive will increase, so dealers will also need to strategize and create marketing materials that allow them to stand out from the competition.
There are also many unknowns on what this all may mean for the US auto industry as a whole. Will dealerships that are more savvy marketers have higher success rates? Will some dealerships go out of business? As with the real estate bubble, will the US auto market crash causing smaller automakers to shut their doors? These questions remain unanswered, but at BB Direct, our expert auto team is on top of what is happening throughout the US auto industry and how it affects marketing and our auto dealership clients.
Better dealership targeting can be achieved by working with a team like the BB Direct Auto Team that offers years of experience in dealership marketing backed by reliable enhanced auto data. Through our Premium Auto Database we provide dealerships with the best-in-class Shelby act compliant automobile ownership data on the market include VIN, Black Book and Kelley Blue Book data. If your dealership already has a large, responsive database, we offer Recall Append Data, so you can make more of your current customer records. In addition, we offer modeled credit score data, NADA Value appends, resident/occupant databases and much more.
You can also expect our expert team to be creating custom, strategic auto marketing plans that are in line with what is currently happening in the auto industry and how consumers are responding. While the unknowns are present in the auto industry, you can also be sure that we are providing the most up to date solutions to allow your dealership to thrive. For a count today, contact BB Direct at (866) 501-6273.