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:
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.