What’s the New Normal?
With lenders in a better mood these days, could we see a return to normalcy? Well, not so fast. Consumers still need some TLC.
What is the new normal? That was the question posed to four dealer-group executives at the J.D. Powers and Associates’ 2010 International Automotive Roundtable.
DARCARS Automotive Group’s Tammy Darvish put the new normal at 13.5 million new units per year. AutoNation’s Mike Maroone put it at 16 million, but said he expected those 16 million units to be profitable for dealers and manufacturers.
Dealer Chuck Basil said 15 to 16 million units per year will be a push, while Lithia’s Sid Deboer said 14 million will represent stable growth. He even believes the market could reach 20 million units in the future.
Projected volumes aside, all agreed that the market will be extremely profitable for those dealers who remain. That belief was echoed by ADP Dealer Services’ Steve Anenen. “We see the market as healthy at 14 million, but dealers will be making good money if the market returns to 15 to 16 million,” he said.
It’s one reason why inventory management tools are morphing into solutions that manage the lifecycle of each vehicle on the lot — from the time it arrives on the lot to the day it rolls over the curb. Exhibitors at the National Automobile Dealers Association’s annual conference said the goal right now is to prepare dealers for what is going to be a highly competitive market.
But let’s not get ahead of ourselves. We’re still facing an 11.9 million new-unit year, according to Paul Taylor, the NADA’s chief economist. And as we saw last year, we’re going to need a healthy lending market to get where we hope to be. Make no mistake about it: What we just experienced was a credit-driven recession, nothing more.
Let’s go back to October 2007. The subprime mortgage bubble, inflated by about $900 billion in suspect securitized debt, had just popped over the summer. The credit card companies were now waiting for the other $915 billion shoe to drop. Commenting on the rising credit debt at the time, a Citi executive told analysts that cardholders were taking cash advances for the first time on those cards, foreshadowing the recession that struck in December of that year.
But that was then and this is now. It’s clear that auto lenders are in a much better mood these days — at least, that’s what I came away with after the American Financial Services Association’s 2010 Vehicle Finance Conference.
Now, don’t get me wrong, not once did I hear about lenders loosening guidelines. What I did hear is that investor appetite for auto securitizations is growing, and, as we all know, an active asset-backed securities market means more liquidity, which means more funding for originations. While that’s certainly good news, I’m not sure that’s the main reason lenders are in a better mood.
In my view, the better outlook is directly linked to the fact that they now have a better feel for whether consumers are going or coming. It’s one of the reasons lenders were quick to point out that 2009 originations are performing as well as they did in 1982, the year we were exiting a recession many economists say mirrors the one we just went through. Now remember, delinquencies don’t typically start until two to three years after a loan is originated, but that’s certainly good news.
My point is that as much as it was a transitional year for lenders, it was also a transitional year for consumers. They spent much of 2009 deleveraging themselves and getting their debt-to-income ratios back in line.
And just think about this stat: Until the economic upheaval, the savings rate was averaging a historically low 0.5 percent from the start of 2005 through April 2008. In 2009, consumers were saving 4.6 percent of their incomes — the highest rate since 1998.
So what does the future hold? Well, don’t expect the exuberance of years past. Anything outside of prime is still being pushed to the used market. That’s what GMAC was seeing when it decided to make itself available through the DealerTrack credit platform. The company knows that many of its former customers are now in the used market, so it’s looking to move with them.
But lenders will be operating with a new mindset. Speaking to me about Wachovia assuming the Wells Fargo name on March 20, Tom Wolfe summed up the new approach to the market when he said, “We’re a transportation lender. We finance vehicles to get to and from work.”
After posting the interview online (go to www.fi-magazine.com/Wachovia to read the full interview), one of our F&I Forum members commented, “Yes, they’re willing to look a little harder at someone in need of a vehicle. The same consumer looking to buy a second vehicle isn’t getting that same opportunity.”
Yeah, that’s how I read it, too.
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