It is assumed for most people the largest purchases are their homes and cars; known as the ultimate in durable goods in economic parlance.
Thus some recent news from the automobile market started to get me wonder are trends in the two markets similar? The catalyst for my question? The luxury German automakers all reported a slow-down in sales.
Granted the article I lined to above also mentions macro forces i.e. tariff/trade-war, Brexit and other issues however the bottom line is the same; luxury auto sales are slowing.
The same can be said about luxury housing on both coasts and in Denver, which is witnessing price adjustments to the downside concerning luxury residences.
Manhattan’s high-end apartment prices suffer as NYC real estate cools.
Luxury home sales see biggest slump in nearly a decade.
Now I am the first to admit luxury car sales and luxury home sales are probably not the best leading indicators of an economy’s health. Then how about run of the mill cars?
Between 2009 and 2016 sales of new cars and trucks rose steadily the longest growth streak since at least before the Great Depression. Millions of Americans traded up to bigger and more sophisticated vehicles decked out in leather and outfitted with gee-whiz electronics and safety features.
The same trend happened in housing with the housing growth streak beginning in 2010 as green-shoots started to peak out of the carnage of The Great Recession. The growth in housing sales and prices seemed to run unabated until approximately 2017.
Back to cars, concerning automobiles sales to individual buyers are now falling. Even once popular sport utility vehicles and pickup trucks are sitting on dealer lots for longer stretches. I know; do not feel sorry for car dealers as they have a 7-year boom cycle. Yet how about the effect on our overall economy?
Let’s consider auto sales: Consumer purchases, which are known as retail sales, fell 3.5 percent in the first half of the year to their lowest six-month total since the first half of 2013, according to J.D. Power and Associates. Such sales are considered a more accurate measure of demand than total sales, which include purchases by fleet operators like car rental companies. Related, AlixPartners, a consulting firm with a large automotive practice, estimates that sales will drop more than 2 percent in 2019, to 16.9 million vehicles. The firm expects the industry to sell 16.3 million vehicles next year and 15.1 million in 2021.
While not delving into too much detail concerning economics one should note a slowdown in auto sales as noted above could weigh on the United States economy. The auto industry is the largest manufacturing sector and makes up about three (3%) percent of our gross domestic product. Automakers, parts manufacturers and dealers directly employ more than two million people. Car companies spend billions of dollars every year on research and development.
On a more micro level consider the following concerning AutoNation with more than 325 franchises, AutoNation is considered an industry bellwether and other dealers often follow its lead. AutoNation has been paring inventory for the last three months, and now has 64,000 new vehicles in stock, 9,000 fewer than a year ago. The company has been limiting orders to top-selling models and cutting back on vehicles that tend to languish for weeks or months and often need to be heavily discounted or sold at a loss.
Personally I see similarities concerning the housing market including price adjustments, longer days of market and homes that are not in prime high-demand neighborhoods or located on busy streets languishing on the market.
One additional parallel concerning housing and cars; the average price of new vehicles has risen to around $35,000, while interest rates on auto loans have edged higher. That means people have to be willing and able to spend more to buy a new car than they were just a few years ago.
Sound familiar? While housing prices are adjusting downward in most markets prices are still at or close to record highs, demand for entry-level housing is not being met and even though interest rates on a conventional mortgage can still be had for under 3.75% the housing market seems to be directionless.
Now I do not know how the Federal Reserves monetary action of last week i.e. cutting Fed Funds rates by 25 basis points AKA .25% will have in igniting the housing and auto markets, two markets tied to loan products I believe the following quote sums up my feeling from a family run 6-showroom dealership in the heartland “After such a long period of growth in a cyclical industry, we know we’re headed for a recession.”
Of note as this blog was composed the day prior of the Fed Rate Decision the following article crossed my desk post composition courtesy of The New York Times: Lower Rates Already Hit Housing. They’re Not Helping Much.