Will buyers flock to showrooms to buy new vehicles this year? Market optimists seem to think so. And most who attended the North American International Auto Show are utterly ebullient. But those who believe the glass is half empty say trends are heading in the opposite direction.
Key factors pushing sales up:
Rising pent-up demand
While 15.5 million new vehicles were sold in 2013, the gap between the number of new cars that should have been sold and those actually sold is huge — about 26 million vehicles as of year-end.
Scrappage rates up in 2014
Vehicles cycle through owner after owner until they’re ultimately scrapped. The ratio of cars scrapped to the total cars on the road — the scrappage rate — measures how many cars are removed from circulation in a given year. Many new vehicles bought during the auto boom years of 1999-2007 are entering the prime period for scrappage, pushing up new vehicle sales in the coming years.
Strong economy, low interest rates and new technology
Most economists believe consumer confidence will rise, interest rates will remain at record lows (around 4 percent for credit worthy consumers) and new technology will draw non-luxury buyers into showrooms.
The economy is the driving force. Here are factors that could potentially push sales down:
Auto density dropping
Auto density — or the number of vehicles per driver or household — has been sharply declining since 2006. Even a 1 percent change in this density can equate to as many as one million new vehicle sales annually.
Used vehicles more attractive
The number of new vehicles purchased has been steadily declining since 1976. Rising gas prices have reduced miles driven, and the quality of vehicles has been rising steadily, making them more reliable. These factors have prompted consumers to keep their existing vehicles or purchase a low-mileage used one.
Desire for vehicles waning
Public transportation and ride share services like Zipcar are more cost effective for increasing numbers of city dwellers. Many millennials, pummeled by the Great Recession and student loan debt, are thinking twice about buying a new vehicle. Similarly, retiring Baby Boomers no longer feel the need to buy a new vehicle every four years.
Final observations on auto market financing
New car and light truck sales for 2014 will hover around 16.4 million. The number of vehicles financed will rise, and the total cost of financing will influence buying decisions. Auto lenders, particularly non-bank lenders, will explore new ways for less-than-perfect FICO buyers to obtain credit. Auto loan securitizations among Wall Street investors are on an uptick, which will increase access to financing and raise demand for detailed consumer credit data.
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