ONTARIO, Calif.—New car lending will remain strong for the next 12 months, but by mid-2017 expect a slowdown that should continue due to market forces reducing consumer demand—one of those being regulation—according to one analyst.
During CU Direct’s latest State of the Auto Lending Market webinar, Steven Szakaly, chief economist for the National Automobile Dealers Association (NADA), suggested that several factors will lengthen the “buying cycle,” the time between consumers’ new car purchases, and become a drag on sales.
“Today’s new car buyer is older, 49 to 51 years old, and more wealthy than the average U.S. consumer,” said Szakaly. “As we look outward, older and richer people tend to buy fewer vehicles.”
The average price of new cars continues to climb, coming in at $33,000 at year’s end and moving up to $33,900 in January, said Szakaly. What’s leading to the higher prices are new technology, increasing car quality, and regulation impacting carmakers and dealers that’s expected to add possibly $3,000 to the sticker.
Car Quality Higher
Aside from price, improving car quality will extend the buying cycle. “People will hold onto their cars longer,” said Szakaly, noting that the average age of vehicles on the road in 1970 was five years and now it is 11.5.
These factors are leading to longer financing terms, which will push out the buying cycle further, as it will take owners longer to be in a positive equity position to afford to buy a new car, Szakaly explained.
“Today, it takes the average new car borrower 42 months to be in a positive equity position,” he said.
While some analysts have stated longer loans are a concern for lenders as terms head 84 months and higher, Szakaly said lenders should not worry a great deal.
“Loan terms are increasing as cars are lasting longer,” said Szakaly. “This is a natural function of continuous improvement in car quality. You wouldn’t borrow for six years on a car that lasts only five. But it’s perfectly rational to borrow for six years on a car that lasts 12 years.”
Turning to used cars, Szakaly said demand for used will get weaker as 2016 progresses, as will used values. He said light duty trucks will escape an increasing pace of declining value since they are in high demand.
Not surprisingly, light tricks sales trounced cars last year, accounting for 56% of all vehicles sold. While falling gas prices have not hurt truck demand, the high gas prices during the recession actually is helping their values today, explained Szakaly.
Szakaly said that during the early years of the recession consumers were not buying gas-guzzling trucks, which has reduced the number of trucks coming off lease or being traded in in recent years, keeping used demand and value for used trucks high.