Credit crunch cools demand for automobiles

Roland Jones • Profile • E-mail

Just when the U.S. automotive sector looked to be getting its legs underneath it after a years-long slump, another stumbling block has come along to knock it off kilter — the credit crunch.

The ongoing pain in the housing sector — including higher monthly payments for some owners and declining home values for others — is persuading many Americans that buying a car is not a good idea right now, according to market research company CNW Marketing Research.

Recent polling by the company shows that nearly 18 percent of people in the market for a car or a truck are delaying their purchases because of home-related issues, up from 9 percent in 2006.

Other data show consumers may be turning their attention to used cars instead. According to automotive information Web site Edmunds.com, online interest in used cars is up 24 percent this year over last year, while interest in luxury cars is down 19 percent and interest in economy cars (typically small, inexpensive models) is up 18 percent since December.

Adding to the lack of enthusiasm for new cars is the fact that automakers are not offering the same enticing incentives as in years past. These incentives, whether rebates or zero-percent financing options, are designed to lure car buyers into automotive showrooms, but auto deals are not as sweet as they were in recent years, when automakers were on a stronger financial footing said George Magliano, director of automotive industry research for the Americas at Global Insight.

“Manufacturers are tightening up on this,” he told CNBC. “Fundamentally, we think the consumer has been hit hard by the declining housing market, and also by higher energy prices and a slowdown in employment. So it’s not just the short-run impact of the credit crunch that’s having an impact here.”

Certainly, automakers are feeling the pinch. General Motors said last week that it has cut production at six plants that make large sport-utility vehicles and pickups, citing fuel prices, market competition and the impact of the struggling housing market.

Ford’s CEO Alan Mulally went a step further, becoming the latest high-profile executive to suggest that the Federal Reserve should cut interest rates. Mulally said volatility in global credit markets was a “big headwind” to the automaker’s plan to turn around its operations, according to a report in the Financial Times.

Ford and GM have been busy cutting costs and closing plants to get their balance sheets in order and become more competitive, and have begun critical contract negotiations with the United Auto Workers union.

Just recently, both automakers appeared to be turning a corner. In July, Ford surprised Wall Street by posting its first quarterly profit in two years, and GM chalked up its third straight profitable quarter with results largely driven by strength in its overseas operations, particularly in China.

But optimism turned to concern when automakers reported weak July sales figures that were blamed partly on the soft housing market. The question now is whether the pullback is temporary, or will continue into future months.

Brian Bethune, an economist at Global Insight, points out that the slowdown in automotive sales has paralleled the slowdown in housing and in U.S. economic growth, so if the economy weakens further, or the housing market weakens further, there may be a continued impact on automotive sales.

Bethune also notes that 60 percent of new automotive sales are financed sales and that a significant proportion of down payments come from home equity loans. If the source of those down payments dries up, it may affect future sales figures.

“Throughout the [automotive] industry we have seen sales come down over the last few months, and in July they were below 15.5 million, which is low for the industry overall,” Bethune told CNBC. “So there has been slowdown in overall sales along with a slowdown in the overall economy and decline in the overall housing sector, so we are seeing an impact here.”

However, automakers are beginning to sweeten their sales incentives once again, he added, and so automotive sales may get a boost. Carmakers will report August sales results on Tuesday.

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