New Car Sales vs New Home Sales.
New Car Sales at Record Highs/New Home Sales at Multi-Decade Lows.
New auto sales were up 13.6% in October year over year.
New home sales fell 11.5% in September.
Zero Interest Rate Policy has helped new car sales but done little for new home sales.
Earlier this year in “New Home Sales vs New Car Sales,” we noted that new car sales were robust while new home sales were stagnant. The most recent data regarding new car and home sales indicate that dynamic remains the same.
New car sales were up 13.6% in October year over year and are approaching an annual record, while new home sales were down 11.5% in September and are at near all time lows.
Poor new home sales reflect the general state of the economy far better than the “robust” new car sales.
Here is why:
New Car Sales
New car sales are headed towards a record and strong sales are being achieved by all the major automobile manufacturers (other than Volkswagen which was/is mired in an emissions scandal)
According to AP:
General Motors’ sales were up nearly 16% over last October.
Fiat Chrysler’s rose nearly 15%
Ford and Toyota sales rose 13%.
Nissan sales rose 12.5%
Honda sales rose 8.6%
What is causing the surge?
The main stream media, attribute the record new car sales to the improving U.S. economy.
Wall Street Journal: “an array of incentives and a favorable economy”
AP: “Sales have been greased by cheap financing, low gas prices and an improving economy.”
The Reality: Massive Incentives & Long Term Financing to Sub Prime Borrowers at 0% are Driving New Car Sales
While the media is touting record car sales as a sign of an “improving economy” the reality is far from that rosy scenario. New car sales are not being driven by a strong economy, but rather from:
Increased Dealer Incentives
New car sales were up 13.6% year over year in October, but dealer incentives were up even more. According to TrueCar, car companies spent 14.1% more than last October on cash-back promotions and other deals. Without the dealer incentives it’s a safe bet to argue that new car sales would have been flat at best in October.
Long Term Financing at 0%
During October many car dealerships were offering zero-percent financing for up to 72 months on select vehicles and up to $2,000 cash back, essentially paying people to take cars off their lots and recording such transfers as “sales”.
Car dealers tout “affordabiity” as a reason for the surge in new car sales. Car payments are more affordable, however, because the terms of car loans are longer. By stretching car loan payments at 0% interest rates over seven years, the monthly payments may be relatively low, but the overall cost of new cars is rising.
Indeed, driven by cheap financing at low or no interest rates, the price of an average new car is at an all time high of $33,560.
No Credit, No Problem
The dealer incentives have not been reserved for those with the best credit. According to Kroll Bond Rating Agency, more than three-quarters of auto loans are to people with credit scores under 600. A stunning 14% of borrowers have no credit score at all!
Record “Sales”, Record Debt
According to the Federal Reserve Bank of New York, auto debt was at $1.01 trillion at the end of the second quarter of 2015.
New Car Sales 1975 – 2015
Let the good times roll! New car sales in the U.S. head towards a record.
The Down Side of Record Car Sales
With the massive increase in sub prime lending, deliquencies are on the rise.
New Home Sales
New home sales fell 11.5% in September to seasonally adjusted annual rate of just 468,000. New home sales during the past six years are at levels last seen in 1960’s and 70’s when the population was 30-40% lower (see chart below). With a “favorable economy” why aren’t more new homes being sold? Are people buying new cars to live in instead?
Perhaps the surge in new car sales and the attendant long term monthly payments, rising food bills and skyrocketing college tuition and health insurance costs, have left the average American with little money left over to save to buy new homes.
Media Characterization of Poor September New Home Sales Figures – a “temporary” setback, data “unreliable”
Reuters: New home sales dip “likely to be temporary” “sturdy housing market is supporting consumer spending and the economy”
It’s hard to comprehend how Reuters can characterize the lowest home sales in decades as “sturdy” and supporting consumer spending and the economy.
Consumer spending in September rose a tepid 0.1%.
New York Times: on the poor September new home sales citing David Silver, economist at JP Morgan “the data is “unreliable” and “many more reliable housing indicators have been sending upbeat signals”
USA Today: “Solid hiring” “Sales of new homes have soared 17.6% during the first nine months of 2015.”
The “soaring” new home sales earlier in 2015 were off some of the lowest new home sales numbers over the past fifty years. The new home sales increases off the bottom were large on a percentage basis, but relatively insignificant on a nominal and historic basis. (see chart below) Those “surging” sales have since abated.
The Law of Small Numbers
“That’s quite enough–I hope I shan’t grow any more.”, said little Alice
The Reality: New home sales are atrocious, the low sales are not “temporary” and the housing market is not “sturdy”.
The housing recovery has been in price alone. New and existing home sales have been sub par mostly due to rising home prices while wages stagnate.
New Home Sales 1963 – 2015
New home sales have yet to “recover” and remain far off the highs a decade ago and are at multi decade lows.
The decline in the homeownership rate belies the propaganda that the economy and housing market are recovering. The homeownership rate has fallen from an all time high of 69.2% in the second quarter of 2004,to 67.3% at the start of the “recovery” in Q3 2009 to 63.7% as of July 2015.
The homeownership rate has fallen steadily since the “recovery” began in late 2009.
Economic recovery cheerleaders claim the housing market is “driving” the recovery. It’s not. There is no recovery but they are making a lot of cars and financing them to borrowers with poor credit.
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