Solid Start for New- and Used-Vehicle Market in February

New-vehicle sales are off to a strong start in February because of better floor traffic and closing ratios, as well as a looser credit market, according to CNW’s Retail Automotive Summary.

Despite poor weather hitting several major markets, consumer are still visiting dealerships and signing new-vehicle contracts. Floor traffic is up 17 percent and closing ratios are up 6.4 percent in the opening days of February compared to the year-ago period.

As a result, same-store sales rose nearly 11 percent in February compared to the year-ago period. Many of these volume increases occurred at dealerships that were previously under threats of closure, wrote CNW’s Art Spinella.

These positive trends in the retail industry could help new-car sales top 920,000 units this month, a 17 percent increase from the year-ago period. Total volume is expected to pace out at a 12.5 to 12.6 million-unit “True Delivery Rate,” which is similar to the industry’s seasonally adjusted annual rate.

FICO Scores Fall in February

Driving the steady uptick in new-vehicle are lenders, which are increasingly accepting shoppers with FICO scores of 670 or less. These shoppers have benefited from the looser credit market and “the willingness of both captive finance companies and major banks to cash in on the pent-up demand for new cars,” Spinella wrote.

Preliminary data revealed that the average credit score of new-car buyers continued to drop in February to 692.5, the lowest figure since December 2005. Consumers with FICO scores under 670 represented 12.7 percent of total loan approvals, the highest share since October 2009. Subprime approvals increased 61 percent in the opening days of February compared to the year-ago period, but this improvement is nowhere near subprime’s hey-day, according to Spinella.

Finance and Lease Deals Grow

A breakdown of finance, lease and cash deals completed in January indicates a growing interest in leasing and less interest in cash purchases among new-car buyers, according to Spinella.

Leasing accounted for 23.79 percent share of new-vehicle deals and cash accounted for 7.06 percent of deals. Finance accounted for a majority of deals with 69.16 percent share.

While finance-based deals dominated the market, the brands with strong captive arms — such as Ford, CNW’s report noted — held onto a significant share of finance customers. In Ford’s case, 71.4 percent of deals were financed, but more than half of those deals went to Ford Motor Credit. Other automakers, such as Suzuki and Chrysler, held a small share of finance contracts. Most of the finance-based deals went to banks, credit unions and other financial institutions.

“Clearly, the ability to finance a sale is a significant profit center for any automaker, so matching a strong credit arm along with solid products works for the brand’s bottom line,” Spinella wrote.

Used-Vehicle Market Summary

The used-vehicle market is following in the footsteps of the new-vehicle side and reporting strong sales in the early days of February.

“Based on the first eight days of the month, sales are looking to hit 1.75 million units, an 86 percent increase over a year ago,” Spinella wrote.

The sales increase is spread across all channels. Franchised dealers, independent dealers and private-party sales are expected to improve 5 percent, 11.8 percent and 9 percent, respectively. 

This current performance is setting up a solid foundation for the industry to reach at least 39 million units this year. However, Spinella estimated that about a third of used vehicles are either too old or too worn out to be resold and are likely to be wholesaled to independents or auctions.

A majority of the more than 2 million used-vehicles sold in January through private party sales, franchised and independent dealers were financed. Forty-seven percent of vehicles (or 943,200 units) were originated last month, up two percentage points from January 2009 and up 1.5 percentage points from December 2010.

“If the early February used-vehicle numbers hold throughout the month, originations will jump another 10 percent versus February last year,” wrote Spinella. “Much of the increase can be attributed to looser credit approvals for those with lower FICO scores.”

The combination of looser credit approvals and increased consumer demand for new and used vehicles may help both markets sustain volume in February. The question is whether lenders will continue to approve FICO scores below 670, and if leasing will continue to take a bigger share of the market in the months to come.