A few years ago, in a report called A New Direction, we argued that saturation in the market for cars was one of the factors likely to lead to slower growth in vehicle travel in the future.
During the 20th century, as Americans moved from zero-car, to one-car, to two-car households, access to a motor vehicle ceased to be a limiting factor in transportation decisions for most people, most of the time. By 2006, the ratio of registered vehicles (of all kinds) to licensed drivers hit an all-time high of 1.24. By that time, it stood to reason, there were relatively few Americans who wanted or could reasonably afford a motor vehicle who did not already have one.
While the rate of growth in the motor vehicle population had begun to slow as early as the 1990s, the coming of the Great Recession (and contemporaneous tightening of credit markets) caused the ratio of registered vehicles to licensed drivers to fall by roughly 4 percent by 2010. Since then, the vehicle market has resaturated. Current data on vehicle registrations are unavailable, but recent years have seen strong car sales even as the average age of vehicles has continued to rise.
New sales figures for July 2016 show the auto industry running ahead of 2015’s record sales pace. Cheap gas, readily available financing, low interest rates, increasing employment and rising wages have continued to fuel car sales.
Now, however, auto industry observers are signaling that the party may be over. Some observers foresee a plateau at current near-record sales levels, while others see sales declines by 2017 or 2018. To the extent that resaturation of the vehicle market has helped to drive recent increases in per-capita vehicle travel, we can expect that influence to wane in the months and years to come. And to the extent that loose credit has led to the automobile market becoming oversaturated – putting vehicles in the hands of those without the economic means to sustain vehicle ownership – the potential for a pullback cannot be discounted, especially in the event of an increase in interest rates or a recession.
Here is why auto industry observers believe new car sales are likely to have hit their peak for this cycle:
- Automakers have become increasingly reliant on incentives and less-profitable sales of vehicles to fleets to keep sales numbers afloat, with incentives now reaching levels last seen during the Great Recession, according to an auto industry analyst interviewed by the New York Times.
- Used car prices have been falling during 2016 for the first time since the early part of the recession. The used car and new car markets are linked – when used car prices are high, dealers can offer better trade-in terms to would-be buyers of new vehicles or better deals to customers who choose to lease. The collapse of new car sales during the recession led to a sustained used car shortage that is now showing signs of breaking. At the same time, the recent surge in leasing is expected to lead to a glut of off-lease cars flooding the market within the next couple of years.
- The performance of subprime loans has been deteriorating – even in an improving economy. With both the U.S. government and folks like JPMorgan Chase’s Jamie Dimon warning about slackening auto lending standards, the potential for banks to be exposed to losses due to bad loans continues to grow (though the risk pales in comparison to banks’ risk exposure during the housing crisis).
- In the longer run, the extension of loan terms from the traditional 4- to 5-year payback times to 6 or even 7 years will likely shut out some people who would otherwise purchase a new car from the market over the next several years by forcing would-be car buyers who would otherwise be free and clear to repay the balance of their loan (or roll it forward into a new loan) before purchasing a new car.
The automobile market of 2016 is very different from the market that prevailed prior to the Great Recession. Today, Americans collectively carry 30 percent more car debt than they did before the recession (about 9 percent in inflation-adjusted terms) – and many of those loans still have years to run. Financing has become nearly universal in the new car market and the majority option in the used car market. Vehicle prices continue to rise.
How sustainable is all this? With the market for new cars now showing signs of peaking, we are about to find out.
Associate Director and Senior Policy Analyst, Frontier Group
Tony Dutzik is associate director and senior policy analyst with Frontier Group. His research and ideas on climate, energy and transportation policy have helped shape public policy debates across the U.S., and have earned coverage in media outlets from the New York Times to National Public Radio. A former journalist, Tony lives and works in Boston.