It’s been more than two years since the credit cycle started turning. It was in late 2006 when there was a realization that credit had been too easy and that originations would slow and losses would rise. Two long years have passed without any positive sentiments for the future. Two very long years.
At the Auto Finance Summit this week, I felt for the first time since 2006 that the long downward momentum in consumer credit was finally turning around. I can cite several examples, but the one that sticks out most was Paul McCarthy’s presentation. Paul is a proud economist — Ford Credit’s senior economist, in fact. He presented a cogent and comprehensive view of the auto and auto finance markets to date. Then toward the end of his presentation he threw up this slide, and it made an impression on me:
The implication of the slide is, cars on the road today are getting older, and they’ll have to be replaced eventually. Never mind all the other positive factors in the market — the higher wholesale prices, the resurgence of the capital markets, the leveling out of credit performance — this slide said to me that the future is looking brighter for the auto and auto finance markets based on fundamentals alone. Lo and behold, the economist was upbeat, and I loved it.
I came home from the Summit charged about the future. Sure, there are minefields yet to be managed, but at least the prognosis for the future is not soundly pessimistic. The bottom line is, the vibe matters, and it was good.
BULLETIN — CHRYSLER, FIAT AND CERBERUS REACH AGREEMENT ON GLOBAL ALLIANCE.
There is certainly pent up demand! There are still credit challenges based on the unemployment level and hits consumers have taken to their credit reports. It seems evident that people at the top of the credit scale can mostly get financing for a vehicle. The folks at the bottom can still get financed from the BHPH segment with limitations brought about by a shortage of both inventory and capital. But it’s the consumers in the middle, between Super Prime and BHPH where there is difficulty getting financing put together. If it weren’t for credit unions, this extremely large segment would be even more under served.
We still have to deal with the fact that so many people are upside down in their mortgages. This will take a long time to work out, and I don’t have a clear picture of how it will come about. Here in Las Vegas I am told 67% of mortgages are upside down. Fortunately that doesn’t represent the entire economy.
Having said all this, the pent up demand and high pre-owned vehicle prices will be strong going forward. Of course, there will be a severe shortage of premium pre-owned inventory. As people have kept their vehicles longer, running up more and more miles on them, values will stay high for low mile premium units. IF the OEMs can resist the urge to return to over production and large incentives, there is even more room for pre-owned prices to rise.
We are truly in uncharted territory. It is hard to predict exactly how things might play out. But it is clear that there is a HUGE opportunity for residual based financing, both lease and balloon, for those with capital to put on the street. They can pick their spots, stay conservative on residuals and be protected by the ongoing pre-owned shortage. And there is always the depreciation that institutions can realize on leases because the vehicle title is held in their name!
It seems clear the worst is over. The vibe at the conference was certainly optimistic and it was the most informative conference I have ever attended. I also got a lot out of Paul McCarthy’s presentation! Economic data can be pretty “dry” but Paul made it come alive.
Jerry Thompson and Adam Berger’s break out session on opportunities in leasing was certainly eye opening. Having Rene Abdulah from RVI present added to the session as he had some new developments to announce.
Great conference JJ! And what a coup having Rick Wade from the Auto Task Force speak! How did you pull that off?
First, thanks for the compliments about the Auto Finance Summit. We really enjoyed hosting the conference. Thanks for being there — and being so engaged in the dialog, David!
Rick Wade? I have a cousin, who has a friend, who’s married to a guy … I’m kidding. In all honest, hard work. Nothing more; nothing less.
As to you point about potential, I see the sector as being loaded with it. Firstly, if credit deterioration hasn’t peaked, at the least it will soon. And, regardless, autos have been performing well through this whole credit mess. (Did you notice how Bank of America in its earnings release today indicated that it had reduced its provision for auto loan losses? That’s a good sign from a TARP-ed bank.) Couple that with a SAAR that can only go up, and you can safely feel positive about the industry’s prospects in 2010. Now, if only the Yankees sweep …