“Replacement Demand” from Hurricane Harvey Overhyped, Carmageddon Returns to US

Houston-area auto sales rise, but not nearly enough.

The total damage Hurricane Harvey inflicted on parts of Texas, particularly the vast Houston area, may never be fully known. In terms of vehicles, the estimates were all over the place. But one thing is known: Before the flood waters had even begun to recede, the entire industry, was salivating over that huge “replacement demand.”

This would come just in the nick of time, as total new vehicle sales in the US had already fallen by about 300,000 units for the year through July, despite record incentives, historically low interest rates, and muscular all-encompassing marketing. The industry’s elements on Wall Street propagated the idea that post-Harvey “replacement demand” would boost auto sales in 2017, turn the year around, and possibly create another record year, with more booming sales in 2018.

The estimates I have come across at the time ranged from 300,000 vehicles at the low end to over 600,000 vehicles that would need to be replaced. Much of this replacement demand would occur over the remaining months in 2017 and early 2018. These sales would be so big that they would boost US sales overall to new highs.

But now the first real numbers are emerging. Turns out even the low-end estimates of replacement demand were too high, and all that salivation over the projected sales boom based on the larger estimates was wasted. Harvey-based sales increases of new vehicles are real, but they won’t be able to pull out 2017 unit sales.

New vehicle sales in the Houston metro, battered by the oil bust, had already plunged to Financial Crisis levels before the hurricane. In the 12 months through July, dealers sold 284,000 new vehicles, down 25% from the levels in late 2015 and early 2016, according to TexAuto Facts, published by InfoNation at the time.

Hurricane Harvey brought sales to a halt in late August, and new vehicle sales plunged 45.5% from the already beaten down levels last year to just 15,473 vehicles for the month.

In September, the first few days of sales were essentially zero. But then dealerships reopened, and the mad scramble began, and in the remaining days of the month, Houston-area dealers sold an astonishing 28,246 vehicles, up 22% from the beaten-down levels a year earlier. The rolling 12-month total, at 277,621 vehicles, was still down 10% from the same period a year earlier.

In October, Houston-area new vehicle sales spiked 31.6% year-over-year, to 33,211 units. It was a huge increase. Dealers were red-hot. But it wasn’t enough. During the 12 months through October, dealers sold 285,604 vehicles, still down 6.3% from the beaten-down levels a year earlier.

“Demand for replacement vehicles in the aftermath of Harvey has caused sales to spike since August, though the short-term rebound is unlikely to reverse the overall downward trend,” said InfoNation at the time.

Today, TexAuto Facts released the November sales data, published by InfoNation, cited by the Greater Houston Partnership: New Vehicle sales in the Houston-area jumped 35.4% year-over-year to 30,670 vehicles. It was huge for a November. Compared to 2015, before the oil bust collided with the auto industry head-on, November 2017 sales were up 25%! The rolling 12-month total, at 293,614 vehicles, was still down 3.1% from the financial-crisis levels a year earlier (chart by the Greater Houston Partnership, red marks added):

These are booming sales by any standard, a big breath of fresh air for Houston dealers, but just not enough to meet the prior estimates of replacement demand that were hoped to pull out the rest of the nation’s auto sales.

InfoNation, whose estimates of replacement demand had already been at the very low end of the spectrum, put it this way in its report:

InfoNation estimates that Harvey replacements account for 26,600 of the 92,127 new vehicles sold since the start of September. The DMV counted 175,102 flood damaged vehicles through the end of November. Though that number will likely continue to rise, it may signal that the scope of damage was less than the 300,000 vehicles previously estimated.

Initially, InfoNation had estimated that replacement demand would create an additional 75,000 new-vehicle sales over the five months from September 2017 through January 2018. Given that only 26,600 replacement vehicles were sold over the first three of those five months, the replacement demand will likely fall far short of the 75,000 vehicles through January estimated earlier.

And there’s more, according to InfoNation: Sales of used vehicles actually dropped from a white-hot 83,000 in October to 62,500 in November. The replacement boom is already fading.

In other words, sales at dealers in the hurricane-affected areas are booming. And dealers are busy and are loving it, but it’s just not enough to overcome the downturn in auto sales in the rest of the nation, and even those effects are beginning to fade.

Nationwide through November, industry sales are 232,600 new vehicles behind the same period last year. In order to end the year 2017 flat with 2016, new vehicles sales in December in the US would have to surge by 13.8% year-over-year, an impossibly large nut to crack. The industry will be lucky to not fall further behind because December 2016 had been a phenomenal month and will be hard to beat.

So 2017 will be a down year for the auto industry – and not by a hair either – despite record incentives, historically low interest rates, and muscular marketing. And in 2018, replacement demand will peter out after the first few months, and auto sales will be left to their own devices.

This is where Hype Goes to Die. Read… Carmageddon for Tesla

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  24 comments for ““Replacement Demand” from Hurricane Harvey Overhyped, Carmageddon Returns to US

  1. Petunia says:

    I heard on the weather channel, just this morning, that Harvey in Houston will cost much more in dollar terms than Katrina in New Orleans. There are areas in NOLA that have not come back.

  2. Typically after such a disaster you have a lot of people who leave and never come back.

    • alex in san jose AKA digital Detroit says:

      And as per current trends, they’re more likely to head to somewhere where they’re less likely to need a car – to a city where there are jobs.

      Less and less people can afford cars, yo.

      I really wonder if I’ll live to see the US become like France where the cities are the places to be and the suburbs are where the second-raters live, the rural areas where the third-raters live etc. At least France, recognizing this, really tries to make sure even the country kids get a decent education so the smart ones get a chance to get out.

      • will says:

        “At least France, recognizing this, really tries to make sure even the country kids get a decent education so the smart ones get a chance to get out.”

        You’re talking about the Midwest right? – because this is already how it works (although it’s been happening less and less as many of those states have flipped red over the years).

      • Jos Oskam says:

        I live in France but I do not recognize your description of the situation here.
        At all.

      • Frederick says:

        Alex Your evaluation is very simplistic Of course many people want to be in the cities where there are cultural events, Great restaurants etc but I am choosing to retire in a rural area after spending 60 years in a suburb of NY and I’m loving it I also dont consider myself in any way inferior to city folk for living where I do When I want culture and diesel smoke to breath I can always head to the city for a week or two

        • Begbie says:

          The number of cars with New York license plates in my state/neighborhood is depressing. People from there are cashing out and relocating here at much,much lower prices. Also bringing along the NY attitude. I’m patiently waiting for the eventual crash so that they all go back to where they came from with their tails between their legs

        • James H says:

          Good luck trying to find a doctor or other professional service in rural America. When you get sick, you will realize the value of urban living. Also, 2016 was a monumental year for car sales, so a small drop from those levels is not unexpected or suggestive of a pending crisis.

    • Tom says:

      I imagine many of these folks were glad for the opportunity to get out from a subprime auto loan & not going to make that mistake again:At least not right away.

  3. Petedivine says:

    Have all the car insurance claims been processed? That would be a good indicator of demand. Maybe there is a delay in payouts.

  4. Rates says:

    Hurricanes, fires, no problem. The economy is super resilient, meaning people have more money than they say they have.

  5. ian says:

    Also, these replacement cars are now bought, in essence these were possible future sales brought forward due to unforeseen events. Anybody who was perhaps in the market in the next year or 2 for a new car and has now replaced is out of the market for a good while.

    • JB says:

      ian – that’s a good point , the flood related auto replacement cycle will subtract from future sales

  6. Silly Me says:

    Possibly, there was a price hike too, which motivated buyers to buy out-of-state.

  7. Begbie says:

    The average age of a car on the road in my state is 11 years.

  8. Mike Earussi says:

    There is a maximum amount of credit available in any system. Ours is close to being maxed out. Today the only way people can afford to buy anything new is to first pay off old. This is a concept that retailers don’t seem to understand. Eventually “growth” plateaus because of this and slows down to maintenance levels, which is where we’re at now.

    The only way for this to change is for more money to be available to the consumer, which is unlikely to happen at least regarding the lower 90% who haven’t had a “raise” in 30 years. Until a vast redistribution of the wealth occurs from the rich to the poor GDP will remain stagnant at the 1-2% inflation replacement rate.

    • alex in san jose AKA digital Detroit says:

      I have no idea about the Trump tax plan, and it seems what may pass now is a moderated version, but one thing that keeps popping up is a doubling of the standard deduction, which I believe would actually cut my taxes in half. Right now my “tax” rate (I’m including all I have to pay out, so SS and Medicare too) is 20% of my gross, not net, but gross, income. In other words I have to have a savings rate of 20% of my gross, that’s Japan-level savings/frugality, before I can actually accrue any savings for myself.

      Those of us making $10k – $15k a year, and we’re probably 30% – 40% of the population where I am, getting our taxes halved, would put a ton more money into the economy.

      We’re stretched as it is. I just barely had $300 to get a tooth fixed. If I were any poorer I think I’d probably just let it rot.

      • alex in san jose AKA digital Detroit says:

        Edit: That the supposed doubling of the basic deduction would help the 40% of the American population making $15k a year or less tremendously, and help the economy tremendously, tells me this will almost certainly not happen.

  9. Jim Graham says:

    IF you were NOT underwater on your destroyed car loan to start with, you will be when you see the insurance company payout….

    No new car to replace your two year old car – you will have to go looking for a used car…. Probably more than two years old to boot…..

  10. T.J., not the real TJ says:

    It always made sense to buy used cars. Then, from cash for clunkers forward, it no longer made sense to do so. I think it now is making sense to buy used cars again, and that is what will start happening big time.
    People want SUVs, but used sedans are so cheap that you have to be really committed to an SUV to buy one. 2 year old low mileage sedans are half price.

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