Some Fear Auto Industry Returning To Bad Habits

 

The good news is that the auto industry has been doing well as it rising back from the recession. However, not everyone is happy about where things appear to be heading:

As the auto industry strives to sustain its post-recession comeback, car companies are resorting to tactics that some experts warn will lead to trouble down the road.

Vehicle discounts have risen 5.5 percent from a year ago. More than a quarter of new buyers are choosing to lease, a historically high percentage. Auto company lending arms are making more loans to people with low credit scores. The industry is adding factory capacity. And the average price of a car keeps rising, forcing some customers to borrow for longer terms to keep payments down.

Annual auto sales in the U.S. should top 16 million for the first time in seven years. But the pent-up consumer demand that has driven sales is ebbing. Sales are predicted to grow 5.5 percent this year, the slowest pace since the financial crisis.

If the consumer demand does not rise then what will the car makers do? Cutting costs is the only other way to keep increasing profits and it is not clear where that will come from:

Automakers have cut costs and are better positioned to handle a downturn than they were in 2008 and 2009.

Still, easier credit brings back not-so-fond memories for at least one auto dealer.

“It just seems like 2007 all over again,” said veteran Toyota dealer Earl Stewart of North Palm Beach, Florida. “The credit ease with which people are financed is as liberal and loose as it ever was.”

Among the numbers that concern some experts:

- $2,702: Average discount per new car through July. They’re heaviest in two segments: Midsize cars (up almost 21 percent through July) and compacts (up 10 percent). Automakers need to move the cars because a lot of factory space is committed to building them.

- 12.7 percent: The year-over-year increase last quarter in auto loans to “Deep Subprime” buyers – those with credit scores lower than 550. Loans to “subprime” buyers (credit score lower than 620) rose 5.3 percent, according to Experian. Combined, both are just over 12 percent of all auto loans. Those with lower credit scores generally have a higher default risk.

- 32 percent: Percentage of auto loans that are 72 months or longer, up from 23 percent in 2008, according to LMC Automotive. Longer loans keep buyers out of the market because it takes longer to build equity for a trade-in.

- 26 percent: Percentage of sales that are leases, up from 18 percent in 2008, according to LMC. A flood of expiring leases in three years could depress used-car prices, hurting new car sales.

- 70 percent: The increase last quarter in auto repossessions, according to Experian Automotive. Sixty-day delinquencies are up 7 percent. Still, both are below 1 percent of all auto loans.

“This was the trap that got everyone in trouble before the recession,” Brauer says.

Others are more sanguine. Melinda Zabritski, senior director of auto finance for Experian, says repossessions and delinquencies still are extremely low. And longer loan terms keep payments down, reducing late payments and defaults. Some Fear Auto Industry Returning To Bad Habits CBS New York