Meltdown of Houston Auto Sales Has Eerie Financial Crisis Look

Several simultaneous booms have turned to busts.

New car and truck sales by franchised dealers in the Houston area plunged 22.6% in March from a year ago, to 20,934 new vehicles, with sales of cars down 30.7% and sales of trucks and SUVs down 17.7%. This is the type of plunge Houston went through during the Financial Crisis.

By comparison, in the US overall, new vehicle sales declined 1.6% in March, despite record incentives that desperate automakers threw at the market.

There are no green shoots.The first quarter, with 69,936 new vehicles sold, was the worst quarter since Q1 2011, according to TexAuto Facts, published by InfoNation, and cited today by Greater Houston Partnership. It was the 15th month in a row of year-over-year declines.

For the 12-month period through March 2017, Houston area dealers sold 285,000 new vehicles, the lowest rolling 12-month total since the 12-month period through April 2012. And it’s down by a quarter from the range of 375,000 vehicles that had prevailed in 2014 and 2015.

This chart of rolling 12-month new vehicle sales shows the impact of the Great Recession, which bottomed out in 2010, the rebound afterwards, and the current meltdown that is beginning to look eerily similar to the meltdown during the Great Recession (via Greater Houston Partnership, red marks added). It’s just crazy:

The irony? In February, the industry blamed the Super Bowl, which Houston had hosted, for the sales fiasco. They claimed people stayed at home that weekend due to fears of traffic nightmares. But there was no Super Bowl in March, and yet the plunge continued unabated.

The average sales price fell to $36,537 as the percentage share of trucks and SUVs in the mix inched down to 67.9% of total sales, from 68.3% in February. With trucks and SUVs being priced higher than cars, the average price per vehicle declined. This is not good for dealers. Their profit margin is much larger on trucks and SUVs than on cars. That cars, which are cheaper, gain on trucks in Houston is not exactly a common occurrence.

The 175 or so franchised new vehicle dealers – not counting the independent used car dealers – in the Houston area employed about 30,000 people, according to the Houston Automobile Dealers Association. But that was before the sales collapse started.

Businesses react to that kind of meltdown by trimming their expenses where they can. Cutting staff and advertising are the two places where they can have the largest and quickest impact. And that has further repercussions for the economy.

Yet the signs that Houston is somehow recovering from the oil bust – that in fact the oil bust is over and that the billions are once again flowing from Wall Street and the banks into the fracking industry, particularly into the newly declared El Dorado of fracking, the Permian Basin in West Texas – have been touted for a while.

And there have been some timid signs. In March for example the Houston Purchasing Managers Index came in at 51.4 (over 50 = expansion), up from 45.9 a year earlier, according to the Greater Houston Partnership. And home sales are up so far this year, as is the median price.

Nonresidential new building contracts and permits, however, totally collapsed and are trying perhaps unsuccessfully to find their bottom.

While employment overall has inched up 0.6% year-over-year, the goods producing sector, which includes construction, continues to shed jobs, down 3% year-over-year. In the Houston-Sugar Land-Baytown area, the unemployment rate has reached 5.9%, up from 4.8% a year ago, the highest since September 2013.

And total retail sales, which include new vehicle sales, dropped 4.7% in March year-over-year, and are down 4.0% year-to-date.

Hotels are suffering too. In Q4, the latest figures available, occupancy dropped to 57.2% from 64.3% a year earlier, and revenue per available room plunged 17% to $56.67.

Houston’s economy is a lot more diversified than it was during the last oil bust. So what auto dealers are feeling is not just the oil bust but the bust of the vast construction sector – office space, healthcare, and petrochemical plants, all going down together – and the pain of sectors that are directly and indirectly affected by the construction sector. And they’re all just trying to manage the crash.

But even on a grander scale: The asset class of Beautiful Machines is heading south. Read…  What the Heck’s Going On with Classic Cars?

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  38 comments for “Meltdown of Houston Auto Sales Has Eerie Financial Crisis Look

  1. Bobber says:

    Looking at the chart, it seems everybody went out and bought a new vehicle as their stocks and 401ks were rising. Trucks and SUVs last a long time, so they won’t need another one until we climb out of this next recession.

    • azdude says:

      They don’t last any longer than a car does.

      • TJ Martin says:

        Actually body on frame trucks and SUV’s do . On an average of ten years or more assuming proper care and maintenance .

        • Dave says:

          Yup, heavier duty construction for off road and hauling creates longevity advantages. The electronics and such can still fail at rates like cars but all the other stuff should hold up better. I have 120,000 on my body on frame Xterra and am shooting for 200K. When treated gently like a car they should last.

        • DaveP says:

          4 wheel and all wheel drive trains, typically found in trucks and SUVs are much more prone to breakdowns and poor fuel economy than 2 wheel drive cars….Longevity advantage..Cars.

      • intosh says:

        They might not but I bet lots of the sales in the last few years consisted of car owners becoming trucks or SUVs owners. At some point, this “migration” will reach a saturation point. Then what’s next? A cliff.

  2. michael says:

    Interesting chart. It would appear from the chart to have taken about 2.5 years from the bottom to the current level of sales. Beyond that another 2.5 years to approximately the rather jagged plateau between 2014 to 2016. It looks like the fall to the current level occurred in just over a year from 2016.

    I think the picture is going to look far worse in six months as the snowball accelerates.

  3. akiddy111 says:

    The Houston-Sugar Land-Baytown region is a $325 billion GDP economy.

    It’s slightly larger than that of Austria, Poland or Saudi Arabia.

    A 2% US GDP growth rate for 2017 at this point might be wishful thinking.


    it is my analysis that the real hurricane coming onshore is going to be the repoing of all the cars that were sold over the last several years in houston involving lots of manufacturer incentives to “sell the iron”.

    to whomever could breathe. more liar leases and loans. and i think all the manufacturers were involved. from fiat chrysler to daimler to vw, porsche,audi and bmw.

    i won’t stake my livelihood on that denouement, but i smell the surf boiling. as i wrote previously, sitting in the customer service lounge in a m-b dealership saturday a week ago, listening to the female customers talking about their jobs, there is no way that any one of them could carry the financed car, and rent/mortgage plus any other expenses.

    i predict a real conflagration of repoed cars occurring in texas over the next 12 months. sit tight because there is going to be a lot of virtually new iron coming onto the market.

    i could be wrong, of course, but to sort of paraphrase bernie baruch, when the shoe shine boy is driving a new bmw[et alia] the catastrophe has almost occurred.

    • MC says:

      High used prices are one of the cornerstones the modern car market is built upon: it pushes people towards new cars and increases the value of trade-in’s.
      However there’s no scarcity of used vehicles on the market right now: each year Hertz and Avis alone dump over 400,000 used “risk cars” on the US market. Then there are the leases being returned, the fleet buyback programs, the ordinary trade-in’s…
      Manufacturers are running out of tricks to keep used values artificially high, and it’s starting to show: I am ready to bet nobody is in a big hurry to start repossessing large numbers of cars right now.

  5. Nik says:

    That Cart if turned upside down…is eerily Similar…lolol

  6. 2banana says:

    “Manage a crash”

    I like the implicit idea that anyone in Houston has some control over what is coming…

    How does one manage a crash?

    Be first in line to liquidate everything that is not nailed down. You are going to need every penny.

    A crash means bankruptcy, misery and ruin. There will be no magic GM bailouts being dropped by helicopters.

    Survival is victory. A victories will be few and far between.

  7. OutLookingIn says:

    Can you hear the war drums beating louder, getting ever closer?
    The bottom has been slowly falling out of the western economies.
    This fall has sped up and is now in plain sight of everyone.
    This article is just one more fundamental stat on top of all the others.

    When all else fails – the elites take the nation to war.

    • 2banana says:

      Do you are saying we have not been at war for the last eight years?

      • Begbie says:

        A 25 years old has seen this country at war his entire life. This country has been at war 93% of the time since its existence.

        • intosh says:

          In a sense, this country is socialist: huge chunk of public money financing the military-industrial complex that is vital to its economy.

  8. Nik says:

    Chart*,,,,lolol Long day

  9. Lee says:

    I didn’t see any breakdown of sales by vehicle ‘class’: ordinary versus luxury.

    I wonder how the sale of luxury cars compared to the ordinary types during that period.

    Here in Oz the number of what we term ‘luxury’ cars has increased from around 2% of the market when I moved here in 1995 to just under 12% last year.

    Based on the prices of cars here in Oz what we call ‘luxury’ may be quite different that what you Yanks call luxury as some of the high end cars here retail for 2 to three times what you’d pay in the USA!

  10. Flying Monkey says:

    It looks like the last full cycle lasted 8 years and the average demand is may be 290,000. I doubt people wear out cars in correlation with the sales numbers though. You would expect the fleet to wear out based on miles driven and that probably does not fluctuate like the sales curve. Cutting the price of cars or lowering the finance cost will probably not motivate people to drive more and “demand more cars”. Cutting the price or creating new credit for the cars will probably shift the time demand for autos. The excess availability of credit or lack of credit probably drives the sales curve from a flatter “wear out” curve that probably has a steady state value of 290,000.

  11. Kf6vci says:

    Here in Germany, even Mercedes has joined the brands offering 0 down 0% leases etc. OTOH, MB just had a great Q1. But this can’t last.
    Lots of value in the lower priced used car market with people using Ebay to replace a busted transmission. Folks are struggling more to make ends meet, JMHO.

    • TJ Martin says:

      As a ( US ) Mercedes owner and shareholder thats disturbing news but thanks for sharing it . How the mighty are falling . Oh well . I’ll keep the car but perhaps between your revelations and the amount of money they’re throwing away at F1 its time to sell off the stocks . Hmm ……

      • Dan Romig says:

        As a F1 aficionado, I will say that the engineers for the Mercedes F1 program really did a great job thinking of how to design the 1.6 litre turbo motors for the 2014 season. All the other power plants had the turbo spool(s) connected to the compressor at the rear of the engine. Mercedes figured it would be better for aerodynamics and intake air temperature to have the compressor at the front of the engine driven by a carbon fibre shaft that spins above the crankshaft.

        My brother in-law has not let anyone else, not even his wife (my sister) drive his ’09 S550 ….yet. He is aware of repair costs and purchased an extended warranty as insurance; ‘what the Heck’s Going on With Classic Cars?

  12. michael Engel says:

    If Kia open an assembly plant In N.Korea, I will not buy Kia.
    If Kia will not open an assembly plant in N.Korea, I will definitely
    not going to buy a brand new Kia.
    I might not get spare parts.

  13. beadblonde says:

    The Facebook Live killer Stephens went through bankruptcy in 2015 and was evicted twice within the past six months and still got a $10K auto loan within the past month. That’s our great economy. I’m sure the gamblers expect more government help now that they’re trained to expect it.

  14. Gershon says:

    Starting to feel like 2008 all over again.

    “In one of his last speeches as Fed Chair, Bernanke bragged about how Fed didn’t have info it needed in 2009 to say banks were solvent. How would Bernanke know? He never took significant interest in the regulatory findings, simply followed assurances of others. OCC was complicit in tolerating excesses of banks in the lead up to the Great Financial Crisis; in aftermath, teeth never shown.

    Essentially, the Great Financial Crisis was result of widespread fraud on the part of sellers of ‘securitized assets’. Books of banks masked huge SPE exposure. ‘Opaque securities’ were sold as investible quality but nothing more than mathematical approximations at time of issue. Yes, it became far more profitable to sell complex MBS risk baskets than identifiable, securitized assets

    Were there villains? Of course, there were. Place to look was Wall Street. It compensated much more for selling opaque securities. Well, there’s that reality, too. I’ve been told by more than one current and former banker that the banks tell the regulators what the rules should be.

    And let’s keep in mind regulators let each bank devise its own, unique value at risk model, rendering stress tests highly unreliable. The Way governments ended doubts about solvency of opaque banks was with stress tests and pledge of taxpayer funds to maintain solvency.”

    Harald Malmgren

  15. jo-rel says:

    Everything is fine nothing to see, carry on people.

  16. intosh says:

    “But there was no Super Bowl in March, and yet the plunge continued unabated.”

    Surprised they didn’t blame the obvious: March Madness.

  17. akiddy111 says:

    Auto stocks are up today on strong revenue and earnings growth from the likes of Carmax. I know Carmax has quite a number of locations in TX.

    I did not expect that at this stage.

    • Wolf Richter says:

      Carmax sells mostly used cars. And used car retail sales are doing well … costs are coming down (a fiasco for subprime lenders for which these cars are collateral but a boon for dealers that sell them and for customers that buy them). There is a huge amount of supply of recent-model used cars going through the auctions. Carmax is a big buyer there. For Carmax it means: a lot to choose from and lower costs. And customers are switching from new to used to save a ton of money on a similar looking vehicle. So it does make sense.

      I suspect that this has happened in Houston as well, and that used car sales in Houston are hanging in there.

  18. akiddy111 says:

    I’m short Carmax for over a year. I’m somewhat familiar with their growth history. I don’t trust it’s Financials. They have bloated out their balance sheet since the GFC without discipline. Zero FCF over the last 5 years and CF negative this past two years. Very risky.

    They say they are disciplined with approximately 15% subprime exposure. We’ll see.

    Btw, Washington Mutual posted good numbers in 2006 as they did in almost every previous year. That’s now history.

  19. alex in san jose says:

    Hello all! I’ve heard of Wolf Street for years, but this is the first time actually going to the site. I like it.

    I was a regular poster on Doctor Housing Bubble but it’s just a bunch of ultra-conservatives in flyover country bitching about California while not living in it. A regular “orange demon” love-fest.

    I posted there but they just did not “get” me. Yeah, I make about $13k a year. Yeah, I live in Silicon Valley and not with parents – I’m on my own. I do not mention these things to try to gain pity, but to show that people like me exist – there are a lot of us. Quite a number of people here in Silicon Valley make less than I do.

    I still pay taxes – almost 2 grand this time around. The little guy always pays the taxes.

    Most of how I get by is by measures like living in the place I work out of – with the blessing of the building’s owner and tenant, my employer – riding a bike instead of owning a car, and watching fixed expenses like a hawk. No smart phone, no gym membership, etc.

    I guess I’m a “living lesson” in a couple of things – first, that studying STEM will not guarantee you any better living than doing, well, anything else. If I were to do it again I’d get a music degree. And, that even in a very expensive area, it’s possible to survive on very little money. If I didn’t have this place, I’d rent a small office and live out of that.

    I’ve got quite a bit to say about Mr. Wolf’s experiences with Japanese culture too, having grown up in Hawaii which is practically an additional prefecture of Japan.

    • Snake Slayer says:

      This is an economics and finance blog. You might consider a self-help blog or a virtual knitting club website.

      • Gershon says:

        Not cool, Snake. Alex, welcome brother. Pull up a chair and stay awhile. Good to hear your take on things.

      • David Krenshaw says:

        Snake, you might consider growing up a little. Alex promises not to play with your toys while he’s here.

    • Tyronius says:

      The good thing about not having any money is that you’re not highly leveraged and therefore much less likely to suffer overexposure to the coming economic crash.

      I’m in exactly the same situation as you, only I’ve managed to own a home for 5 years while watching it double in ‘value’.

      Other than that note I have no other debts. I think it’s time to sell.

      What’s the going rate for a decent sailboat around the country?

    • Dave says:

      Alex, Very Buddhist lifestyle, or Epicurean. Perhaps your life choices are the lessons we should have learned from the follies of the great recession.

      Having things is not what is important, but having friends and freedom are.

      And BTW I tend to be a fiscal conservative and a social liberal who is a registered republican that supports gay marriage, abortion, right to death, stopping the wars, mandatory birth control for those who require welfare to survive, legalization of all drugs, legalization of prostitution amongst a few of my beliefs

  20. Ambrose Bierce says:

    I see Lease offers for 99$ are still out there. The report warning of a collapse in the Used Car market would make a lease a smart option. The automakers know this and so they kick the can down the road. Government will help out with cash for clunkers (7 years in Germany).
    Technology is the real catalyst for consumer decisions. A shortage of conventional fuel and a government moratorium, or higher fees, and insurance premiums, to make up for what the insurance companies lose in the stock crash, and though a lot of people now pay 50% of their income on rentals (used to be 1/3) the rising cost of transportation should take a bite out of the rest of their discretionary income, because the fewer cars they sell the more they have to charge.

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