A big bad surprise for Wall Street’s auto gurus.
New-vehicle replacement demand in the Houston metro area after Hurricane Harvey was supposed to be so huge that it would boost US auto sales overall and turn the year around. Over the first seven months of 2017, total new vehicle sales in the US had been down nearly 300,000 units compared to a year earlier. At the time, 2017 was shaping up as the first down-year since the Great Recession, and Harvey, as far as Wall Street auto-industry gurus and stock promoters were concerned, came just in time to fix this problem – not only for 2017 but also for 2018.
The numbers that were promoted as “replacement demand” grew bigger and bigger even before the Hurricane had disappeared and were so huge that they would make up for the new-vehicle-sales weakness in the rest of the nation.
This turned out to have been sheer hype.
After collapsing by 45.5% in August, as Hurricane Harvey was hitting, new-vehicle sales boomed in September, October, and November, but not nearly enough to pull US new-vehicle sales out of their funk. And by then, the fuel had been burned.
In early January, before we knew how sales had done in Houston in December, we got the bitter news: total new vehicle sales in the US fell 5.2% in December and ended the year down 1.8% from 2016, and down 1.4% from 2015.
Today, the Houston Automobile Dealers Association’s InfoNation released the data for the debacle that had happened in December in the Houston metro: against all expectations, new-vehicle sales plunged 13.5% from the beaten-down levels a year ago to just 20,806 units, right back into oil-bust territory. And POOF went the “replacement demand” theory that was supposed to help out in 2018:
It brought sales for the rolling 12-month period to 290,354 new vehicles, according to TexAuto Facts, published by InfoNation, and cited by the Greater Houston Partnership. This was down 3% from the oil-bust levels in 2016, and down 23% from the levels of 2014 and 2015 (chart via Greater Houston Partnership, red marks added):
And here is the bitter disappointment, according to the report: “Harvey replacements accounted for an estimated 30,000 vehicles….” Just about 10% of Houston’s beaten-down 2017 sales.
But here’s the good news: Texans like trucks, SUVs, and crossovers, on which automakers slap massive Monroney stickers and even after discounts and incentives obtain fat margins. Dealers also fare better with them than with cars. In December, in the Houston metro, the share of trucks, SUVs, and crossovers reached a record 71.4% of total sales (for the US overall it was 63.9%).
Given the higher prices of the truck-and-SUV segment – average retail price of $40,803 in December, vs. $32,289 for cars – the average retail sales price for all vehicles reached an all-time record of $38,320.
The used-vehicle market in the Houston metro experienced the same kind of debacle: total used-vehicle sales in December dropped 14% from November to 53,965 and was down 35% from October – which had been the peak in used-vehicle replacement buying with 83,000 sales.
InfoNation’s report added:
The DMV counted 232,429 flood damaged vehicles through the end of December, significantly fewer than InfoNation’s estimate of 300,000. That may mean that a large number of owners never reported damage to the DMV.
InfoNation’s initial estimate of a replacement demand of 300,000 new and used vehicles had been among the most conservative out there. Wall Street gurus promoted figures of 500,000 vehicles or even 600,000 vehicles.
“Many flood damaged vehicles were apparently sold out of state or salvaged without reporting a flood damage change to the vehicle title,” said InfoNation’s Steve McDowell.
Canadians, are you getting some real deals on used vehicles from south of the border? Flood cars can travel far to find inattentive buyers.
“Purchase of used vehicles to replace flood damaged vehicles was higher than anticipated, while replacement by new vehicles fell short of estimated volume,” McDowell said, referring to his conservative estimates, and not the hype from Wall Street. “This was a result of a large inventory of late model used vehicles and consumer focus on repairing or replacing damaged housing, some of which is not yet completed.”
With this data of December sales in Houston, the Wall Street propaganda about replacement demand pushing up new vehicle sales in 2018 has once and for all fallen flat. This demand was largely taken care of by November. New vehicle sales this year will get no push from Harvey’s replacement demand. Instead, it will be the same tough slog on a downward slope as in 2017.
But this time, there’s no Financial Crisis, and no QE in sight. Read… Asset Class of Vintage Cars Drops More than during 2008/2009
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Buying a used vehicle will take some back ground work in the future. Perhaps there are used vehicle flood inspectors who can certify it for a “modest fee”. LOL
They’re fairly easy to spot – look for corrosion on parts that are higher up in the engine compartment – parts that should otherwise be nice and shiny.
You know, I was just thinking earlier today, I wonder if Wolf could post some “big picture” data on how the auto industry is doing? Things like miles driven per capita and whether that’s trending up or down, average vehicle age and what’s the trend there, things that give an overall picture of how things are doing, because my impression is that the trend is for people to not own cars unless they really need them.
But my own observations are from the position of being in the bottom 80% who are falling downward in wealth … the top 20% are making all the gains and maybe they’re doing so well that they’re carrying the auto industry on their shoulders.
This should help:
Average age of vehicles was 11.6 years in 2016 (last year available from RITA), the highest ever, up from about 8 years during the early years when I was in the business.
Here’s a good chart of average miles driven (we drive more than ever before):
https://www.advisorperspectives.com/images/content_image/data/48/4879c836d5c1105cdf88db440a5400d9.png
Average miles driven adjusted for population growth (we drive less than before):
https://www.advisorperspectives.com/images/content_image/data/92/92d192695a646578ef7c9383e7326134.png
Vehicle sales per capita. But careful, this is seasonally adjusted annual rate – SAAR – not total sales, indexed to the size of the population:
https://www.advisorperspectives.com/images/content_image/data/02/02fb23e6d5585fed6c86de71f55a24ac.png
Cars are better built than ever, and the car leasing business model, car rental business, guarantees that the average used car will have fewer miles driven per year of ownership. Also the used car market is very transparent, most used car dealers buy at auction, and the history on every vehicle takes the guesswork out at the wholesale level. They may dump those flood cars on overseas markets, but the US market is pretty tight .
Meanwhile, Auto sales here in Vancouver BC, are way down, new and used, more than usual are buying out leases, financing is harder, and so many are underwater on existing vehicles. Ive seen upside down cars being traded in on new ones, and lenders were loaning like 70k on a 50k car, mind you at 8-10% … Home values are falling and helocs are maxed. Tough times ahead for certain.
I for one never imagined that our debt-fueled “growth” enabled solely by the central bankers’ created-out-of-thin-air “stimulus” could turn out to be illusory.
/sarc
Coming from you Gershon I didn’t need the sarc Couldn’t agree more
According to the US census Bureau the Houston Metro had 5,920,000 inhabitants in 2010. 2017 estimates put that 6,772,000, meaning about 14.4% growth in seven years. Which is a lot and puts Houston metro squarely among the fastest growing metropolitan areas in the US.
This population growth would hence support a similar growth in “baseline”car sales but the problem is we don’t know what this baseline would be: there hasn’t been a year since 2005 in which car sales haven’t been affected by either ultra-loose lending conditions or adverse financial conditions.
I can put hypothetical 2010 baseline sales at 250,000 vehicles/year, which isn’t too shabby as it means one brand new car a year for every 24 Houston metro residents, including those without money, a driver’s license or both.
Add 14.4% and you get 286,000 vehicles/year, which is very very close to 2017 sales.
In short those pitching far higher numbers have been either believing the sales pitch or flat out lying.
There are however other things to consider. In the US average miles driven per person have been steadily declining for a while. Manufacturers have been offering longer warranties and maintenance plans to try and entice long-term buyers into opening their wallets.
And let’s not forget with higher sticker prices come longer car loans and that there’s a steady supply of second hand cars, usually recent models with acceptable mileages.
In short with population remaining stable (such in the St. Louis Metro) baseline sales will slowly but surely come down as people keep their cars longer. Any growth in baseline sales will come from high population growth such as most of Texas and Florida metros are experiencing.
Of course you can goose up sales, but those sales will have to come from future ones: it’s a classic case of deciding between scrambled eggs today and roast chicken tomorrow.
The UK had it’s own Hurricane Harvey Moment when 1300 cars got destroyed in a carpark fire.
http://www.bbc.co.uk/news/uk-england-merseyside-42542556
1) You wrote: “Many flood damaged vehicles were apparently sold out of state or salvaged without reporting a flood damage change to the vehicle title,” said InfoNation’s Steve McDowell.
Used car sales(persons) and Congress(persons). Caveat emptor.
2) Auto sales peaked in late ’16 or early ’17 for this cycle. Somewhere there’s data and a chart for this. Demand was pulled forward tremendously via sub-prime + massive dealer incentives. IMHO, the majority who wanted to buy/lease a car have done so already. Air pocket dead ahead. Flood damaged replacement sales was a short-term blip, much like “cash for clunkers”.
While everyone is working to suspend the economic cycle, it somehow has always reasserted itself throughout history time and time again. This expansion has been extended with truly Herculean efforts, without regard to the consequences. This applies to most every aspect of the U.S. economy. Let’s see what happens next.
“You can ignore reality, but you can’t ignore the consequences of reality.” – Ayn Rand
“Sooner or later everyone sits down to a banquet of consequences.” – Robert Louis Stevenson
“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” – Sir Josiah Stamp
“It is difficult to get a man to understand something when his salary depends on his not understanding it.” – Upton Sinclair
I’ve wanted to buy my wife a new SUV for the last several years, but when a middle of the road Toyota Highlander starts around 40k, we just can’t stomach it.
We’ll keep our 10 year old CRV, drive it till it dies and replace with the something similar when it goes. I’ve had good luck with used Honda’s over the years, so this is probably what we’ll continue to do. But it would be nice to buy my wife a new ride, without selling my left kidney to do so.
Just wondering how long this madness will continue, before it pops.
I find myself thinking the same thing about my vehicle situation. I have an 18 yr old rusty pick up that won’t die and I only plan on buying another old beater after this one. A small diesel truck would be nice but they run 60k around here.
I get inquiries all the time from folks wanting to buy my 1995 Cummins diesel-powered Dodge Ram pickup.
129,000 miles on the odo on good old trucks is hard to find.
A low mileage mechanical pump Cummins is liking finding a Unicorn.
Don’t ever let it go, unless you get a fortune for it. The electronic fuel systems and DEF systems are having a hard time for all makes. Can’t beat the old mechanical fuel systems for reliability.
We are similar. We have a 2000 Camry, missing two hubcaps, that I refuse to get rid of because it keeps on running fine. It does tend to stand out among all the BMWs and Mercedes around Eastside Seattle.
Driving an old car or truck is a lot easier today with all the YouTube videos on auto repair. I like the idea of fixing things so they keep working – largely because it’s good for the environment. On my last SUV, I did about $5,000 worth of repairs on my own. A lot of the stuff the repair shops do is not difficult. For example, you can change your own brake pads and/or rotors in 30 minutes, without need for fancy tools, once you understand the technique. Also, changing brake fluid is a snap. I now people that pay over $1,000 for this work regularly.
You also save on the parts markup. Most repair will mark the parts up 100% or more relative what you can buy them for online.
3 Weeks ish
We are now down to a 3% savings rate. There is no more financing capacity for auto sales. The economy is at or near peak consumer leverage. Doesn’t look good for the fixed cost auto industry.
The only good thing is the increase in average sales price. The rich have more wealth than ever, but that could go poof in a heartbeat.
Prairies, That old Dodge of mine also is among the last without “tattle-tail” computer innards.
Exactly, I refer to them as mechanical because the injection pump is mechanical. The mechanical age had no “baby sitting” wired in to put you in limp mode and strand you in a blizzard. The old 5.9 12 valve, 7.3 Ford and 6.2 gmc were the last of the simple, low horsepower, low maintenance torque machines.
What we need now is some unexpected / unusually weak activity data across the board and we can reprice assets higher again on account of less hawkish central bankers !
As I have stated multiple times, they is no really underlying recovering. It’s just CB driven asset inflation.