U.S. automotive sales are about 1 million units below where they should be given the long-term historical patterns in the industry.
That’s according to a range of analysts who spoke at the Center for Automotive Research’s Management Briefing Seminars held earlier this month in Traverse City.
Most analysts at the CAR conference expect U.S. light vehicle sales to reach about 16.2 million units this year, up from a recent low of 10.4 million in 2009. But if historical patterns had held up in the recovery, experts said they would have expected to see sales of around 17.4 million vehicles in 2014. That deviation from historical patterns has many in the industry questioning what’s changed.
The answer is part behavioral, part economic and part a reflection of the industry making better products. But economics trumps most other factors for people considering big-ticket purchases, analysts said.
“Consumers are cautiously optimistic,” said Emily Kolinski Morris, senior economist at Ford Motor Co. and one of the speakers at the CAR event. “They see the positive trends that are going on in the economy right now overall, but they are also observing that it is not flowing through to their real incomes to the extent they would like to see. So that’s a little bit of a red flag for consumers.”
While economists acknowledge that the economy of the last few years has been anything but normal, they pointed to a range of factors that have played a role in consumers’ vehicle-buying behavior. Moreover, it’s been the result of cross-generational shifts — not just related to the millennials, the industry’s favorite scapegoat, according to experts.
Here are some of the highlights MiBiz aggregated from the presentations of Ford’s Kolinski Morris, Steven Szakaly of the National Automotive Dealers Association (NADA), Itay Michaeli of Citi Investment Research and Analysis, Jeff Schuster of LMC Automotive, Michael Robinet of IHS Automotive Group, and Yen Chen of CAR.
- Tempered optimism
The University of Michigan July 2014 Index of Consumer Sentiment was 81.8 and has mostly held steady since the beginning of the year. But while consumers are generally optimistic, they’re not seeing much growth in personal income or disposable income, which has barely inched forward in recent years. That’s led many of them to hold off on buying a new car.
- Financial uncertainty
The number of people buying a second car is down, according to Citi research. About 45 percent of people who expect to have fewer cars in the future say financial reasons drive their outlook. They likely want to buy a second car, but their unease about their future financial situation is preventing them from making the purchase.
- Cars cost more
The average purchase price of a new vehicle last year was $31,762, up 15 percent from a decade ago, according to data from the NADA. Prices have also increased at a pace higher than the rate of inflation, which has likely affected young buyers the most, according to CAR.
- Demand for features
As more families are comfortable having just one car per household, they’re willing to spend more on the single vehicle they do purchase. That’s led to demand for more premium technological features and driver-focused comforts across all vehicle types, from compact cars to pickup trucks.
- Cars last longer
The average age of vehicles on the road today in the U.S. is 11.4 years, older than at any other time in history. Experts say that’s due to a combination of factors both economic and behavioral, but they attribute a significant portion of the trend to the fact that cars today have better build quality.
- Longer loan terms
Economists expect 72-month loans to account for about a third of auto loans this year. Car buyers have flocked to longer terms to drive down their monthly payments. The trend is also a byproduct of cars lasting longer. Consumers will still have a vehicle that’s worth something at the end of the six-year period, which today is about half the useful life of a vehicle.
- The rise of telecommuting
According to the Census Bureau, nearly 3.2 million workers telecommute for their jobs, a practice that was virtually nonexistent just a decade or two ago. By leveraging technology and working from home more of the time, people are not putting as many miles on their cars in getting to and from work.
- Driving behavior
Adjusted for changes in population, Americans have been driving fewer miles each year after peaking in the middle of the previous decade. That’s led to less wear and tear on their vehicles, which has lengthened the buying cycle. In short, consumers don’t need to get a new vehicle as often as they did in the past.
- Better access to transit
Multi-family housing construction is expected to increase every year through 2019, according to projections from the Federal Reserve Bank of Kansas City. Since most of those units are often close to public transit, residents have better access to local stores and schools than they would in the suburbs. As such, their need for a vehicle is diminished.
- Garage space shrinks
As the population shifts back to more urban areas, consumers are giving up garage space, perhaps going from a two-stall garage to a one-stall garage — or no garage at all, as is the case with most multi-family housing. The trend could be affecting discretionary purchases the most.
- Budgets have shifted
Americans have reallocated funds in their monthly household budgets away from automotive expenditures in favor of spending more on electronics and phone or Internet services. Their allocation for monthly automotive expenses — $596 — declined 15 percent from 1999 to 2013, CAR said.
- Student loan debt escalates
Experts believe the high cost of higher education is taking a toll on car buying. That’s because the average student loan debt for graduates in the class of 2014 is more than $33,000, up from $18,600 in 2004, according to the Gallup-Purdue Index. About 71 percent of graduates had student debt.
- Millennials delay adulthood
A range of factors exacerbated by the Great Recession has caused millennials to put off many major life decisions like getting married and having kids, a key driver for car purchases. Particularly, many millennials are struggling to find full-time jobs. But they’re expected to make up 38 percent of the car market by 2020, when about 25 million new drivers will be coming into the market.
- Where’s the passion?
The millennial and younger generations lack the passion for vehicles that many of their predecessors had. Instead of viewing cars as a means of experiencing freedom, most millennials see cars as little more than a utilitarian product, which means they’re less excited about buying one.
- Shopping habits are evolving
With the rise in technology, people are able to do more research online and cut down on the number of dealer visits. From 2000 to 2013, the total shopping time for a new vehicle fell 4.5 hours to 15.5 hours. Consumers now spend 12 hours online doing comparison shopping, up from 2 hours. The average number of dealership visits per purchase fell from 4.1 to 2.5 in the same period.