When the global financial system crashed back in 2007, auto lenders described the situation as a confluence of one-off events that would likely never repeat. Investment in shaky mortgages sent shockwaves through the financial markets, clamping access to capital and catapulting the unemployment rate to 10%. Without jobs or the ability to borrow money, consumers slammed on the car-buying brakes, which ultimately led General Motors and Chrysler to file for bankruptcy and seek billions of dollars in government bailouts. Thousands of dealerships went out of business, and some lenders closed their doors. By 2009, new-vehicle sales had plunged 35% to 10.4 million units, a level unseen since 1982.
But as time went on many lenders recovered. Those who survived the crisis emerged stronger than before. They streamlined operations and built out risk-management systems to ensure solid lending fundamentals. They put provisions in place to prevent this unraveling of the auto finance market from ever happening again.
As much as I hate to say it, I’m afraid that COVID-19 — the pandemic that has locked down some of the nation’s largest cities — will hammer the auto finance sector more severely than the credit crisis and ensuing recession. You see, with COVID-19, people across the globe are being conditioned to stay home. They are working remotely, having groceries delivered, and staying inside. In simpler terms, they’re getting used to life without their vehicles.
On a smaller scale, some recent natural disasters have shifted people’s mindsets about their houses and cars. Take Hurricane Harvey, for example, which submerged portions of Houston under 60 inches of water. The 2017 hurricane was the third major rain event in three years for the city, and folks in certain flood-prone neighborhoods gave up on rebuilding their houses year after year, opting instead to move into apartments.
The same was true with cars. After the Memorial Day Flood in 2015, most people replaced their damaged vehicles. After the Tax Day Flood in 2016, many did so again. But after the third storm in as many years, some folks downsized. My parents, who owned two cars for as long as I can remember, gave up their Harvey-totaled vehicle and kept only the one that didn’t flood. And now, two years later, they’re still driving that same car.
The longer lockdown mandates continue and the easier it becomes to order everything — from groceries to clothing to household items — online, the greater the likelihood that U.S. consumers will reduce the number of cars in their households or eliminate them altogether. Even my parents, who had never before ordered groceries online, are getting the hang of it and, dare I say, enjoying the convenience. That said, we may be on the cusp of a “new normal” for vehicle sales. It took six years following the credit crisis for new-car sales to return to 17 million units. To be honest, I’m not sure vehicle sales will reach that peak again. Perhaps 15.5 million units will become the new normal.
The 2020 SAAR has been rapidly dropping in recent weeks. The SAAR started out the year close to 17 million units, but as of this week was closer to 13 million units. Practically speaking, new-car sales in March might be half of last year’s number: perhaps 700,000 or 800,000 units. April’s volume will likely be lower, depending on how long dealerships stay closed and consumers are out of work. The lowest sales volume in the past 20 years was 656,976 in January 2009. Might April volume dip below that level? I wouldn’t be surprised if it does. A 12-million-unit SAAR would represent a 30% decline in vehicle sales in a single year, likely the largest single-year decline in history.
Admittedly, when news of the coronavirus started to circulate, I figured it would be confined to Asia and finished in a couple months, sparing the U.S. auto finance market. Alas, that prediction was vastly optimistic. Instead, this microscopic virus yesterday prompted the U.S. Senate to unanimously pass an unprecedented $2 trillion emergency aid package to keep the economy from grinding to a halt. The road ahead for auto lenders is going to be bumpy, for sure. Some will survive, others will fold. Ultimately, those who survive will emerge stronger than before, but the auto finance market will be forever changed.