Car Sales and Real Estate Still Joined at the Hip
By Paul Taylor, NADA Chief Economist
New car sales for August were better than July, but still disappointing at a seasonally-adjusted rate of 11.5 million units or so. The press may point to the big drop compared to Clunker program driven sales last year. The accurate picture is new car sales are slowly improving. That is better than the run-rate of 11.2 million units in 2010 through July. New car dealers have cut costs to the point that many are profitable above 11 million units, but we wish to see dealer thriving at new car sales levels above 14 million units. The destiny of new car sales is in the hands of our fellow citizens and the financial system. Lending for new cars is restored for prime and near-prime borrowers, but still difficult for dealers with less than very good credit. Consumers see continued difficulty in the labor markets, and, for those owning homes, concerned about the stability of their home price as well in most markets.
Those consumers concerned about staying employed and seeing a stabilization in their home values are saving aggressively at a rate of about 6 percent of their disposable income. That is good for the country in the long run, because it will help support capital expenditures in the economy, but stymies new car purchases in the near term. However, it does put us into a negative growth position that would cause the economy to double-dip back into recession. Real GDP growth, the value of output of our economy, is still positive. A return to recession would involve two back to-back quarters of negative-growth of real (inflation adjusted) GDP. We don't expect to see that.
HOUSING PRICE NEWS LOOKS BETTER ON BOTH MODEST HOME DATA AND FOR JUMBO-LOAN FINANCE HOMES, BUT THE NOW-EXPIRED HOME BUYERS CREDIT IS PART OF THE REASON
The housing market was not allowed to find a natural bottom in pricing as the recession started, in part to keep more banks from failing. As a result, we did not get the bottom-fishing investment into housing that would have stabilized ownership, and provided more rentals in the market place in recent years. Continued foreclosures and short-sales will have placed about 1 million existing houses into the market by the end of this year. That will continue to be a drag on home price improvement, particularly in the Eastern Coastal states. Low interest rates will help to work through that excess existing inventory over the next 15 months. In the meantime, home prices have been flat to down in most states.
For conforming loan-financed homes, that drift down has been 1.6 percent over the last 12 months. That is tantalizingly close to home price stability, but not quite convincing to shell-shocked homeowners. Large states, California and Texas, have had slight increases over the last 12 months that are a good sign for the entire U.S., but California particularly benefited from the First Time Homebuyers tax credit, and investors buying sub-million dollar houses that they can rent in the short term and sell in the long run. The conforming-mortgage house market of roughly $800,000 or less in California buys a starter townhouse in that now cheaper, but still expensive market. Recovery there, given the difficulty in state and local government finances of California, is good news for the whole country.
Real estate investors finding the bottom of prices in other states with significant pull-backs in typical home prices will help other states along both coasts bound into positive territory. States in Mid-West and most of the Southeast are simply nearer to reasonable long-term values and will bounce back even with the slow economic growth that NADA Industry Analysis expects. Many of those states had been stabilized or were on the uptick in the fourth quarter of last year before the banks started to disgorge the homes they had taken back and started approving more short-sales to get real properties off their books.
Big banks are loosening real estate lending standards, but also demanding documentation and fees that discourage many borrowers, and requiring bigger down payments on homes. But mortgage rates that remind us of the Harry Truman years will help sell existing homes to people who need a home, and investors will buy the rest as the economy recovers.
The major net asset holding of the middle class, home equity, has to stabilize and start to recover before customers will have the confidence to buy cars and light trucks at a pace above 14 million units per year. We should see that by 2012.
NEW CAR DEALERS, LIKE OTHER SMALL BUSINESSES SHOULD SEE AN INCREASED ABILITY TO BORROW AGAINST COMMERCIAL REAL ESTATE IN COMING QUARTERS
Recent months have seen a reluctance of banks to lend against commercial real estate held by small businesses that has slowed the recovery the economy. Many small businesses used loans against real estate to meet their cash flow need. Currently, we see evidence that commercial real estate is stabilizing in value as real estate workouts have changed the ownership of some commercial real estate.
Small business still has a hard time borrowing against all their commercial real estate holdings to cash flow the business. Thus, they cannot take available orders and expand capacity even when the business is available in some cases. Credit constraint remains a barrier to economic growth.
We will see some help from the current surge in refinancing activity at current low mortgage rates. It will put more money into the economy than the recent extension of unemployment benefits. And the re-fi's are to households capable of buying a new or used car in the next year.
THERE ARE EXCESS HOUSES IN THE MARKETPLACE AND CAR SALES ARE TOO LOW. WHAT IS NEEDED NOW?
Positive signs are everywhere in this "stubbornly slow" economy. California, with a financially-strapped state government, is attracting significant investment money in residential real estate, so those investors think it has hit the bottom. That was a surprise on the upside in that state during the first quarter and continued through the second quarter of 2010. NADA believes those investors are correct.
Wholesale used car prices are still on the way up, according to our own data from the NADA/NAAA Auction Net Database.
The strength in Boeing commercial jet orders suggests some heft to growth in the rest of the world. Concerns were more likely that Europe would drag the world back into recession several months ago, but that picture has brightened considerably as most countries in the EC finally took their own destiny in hand and quit waiting on a bailout from Brussels.
The real test for the United States is when we get many newly elected officials in Congress and at the State level and see how quickly they are able and willing to downsize excessive government spending.
Consumer Confidence will likely improve when large changes brought by national state and local elections start to bring restraint to government spending in the next three years. Polling data suggests that the majority of voters think this nation can't spend the amounts scheduled in the next five years without igniting inflation rates that we have not seen for over two decades.
So we are left with the fact that "it's the real estate" (both residential and commercial) and the recovery of these with continued low interest rates that will continue to spur economic growth. Why? Because many investors in a strong cash position are going to be willing to buy large amounts of both commercial and residential properties when they think the real estate prices have finally bottomed on a state-by-state timetable. And normal people willing to wade thought the documentation demands of mortgage providers will be willing to buy houses and commercial property one-by-one. In many states that time is now.
Residential real estate prices are already stable to upward trending in big states California and Texas, and in seven other states (by rank): Iowa, Alaska, North Dakota, Kansas, Virginia, Arkansas, Oklahoma and Louisiana. Housing prices fell by less than a percent over twelve months in ten other states, including big states New York, Massachusetts and Pennsylvania. Ohio and New Jersey prices fell by less than 1.5 percent over the last 12 months.
Florida, Nevada, Arizona and late-to-the-correction states Idaho and Delaware have declines of over six percent for 12 months for normal homes that non-luxury car buyers and many retirees typically select to live in. The 28 states between these two groups will turn positive when the excess supply of existing housing is reduced to normal levels. You can't load houses on a hauler and take them to auction where prices are strong. Recovery of modest positive price movement is likely for all 28 of those states in the next two quarters.
So current low interest rates will help the economy, assuming the mortgage lenders continue lending to more consumers assisted by less borrowing by governments, and investors in real estate take up the slack. That appears to be in the outlook over the next three years.
Real estate correction appears already underway in California. The real fear for the U.S. would be if the new crop of elected national, state and local officials do not have the will to reign in federal and state spending over the next three years.
New car dealers have cut costs so they could make it through a 12-million unit new vehicle sales year if they had to. The age of cars and light trucks suggests it will be somewhat better than that next year.
Margin leverage in stocks as a portion of income is not the problem it was in 1929. We are a much wealthier country now than in 1932.
Economist Michael Boskin warned (and did solid research to back it) about our over-investment in residential real estate as a country when President Reagan was in office. We ignored that advice and built some houses that are too big for their occupants and invested too little in our industrial competitiveness. Since then, two of the Detroit Three manufacturers have sought the protection of bankruptcy. The Fannie-Freddie propaganda machines drowned out a serious discussion about capital investment for thirty years. Bank regulators did not learn the lesson of the Thrift Crisis. We are paying a price now, in modest new vehicle sales.
In the near term for the next 12 months, we need to work through 1 million extra houses the banks will put into the marketplace, placing them with new-home buyers and investors creating rentals. If history is a guide, Congress will not sustain good spending habits for more than about five years. The bet of a mortgage at an APR near 4.25 percent (conforming 30-year) against the long-term spending and inflation likely to come from a forgetful Congress in the period 10 to 30 years from now is likely to be a very good bet. Investors should wait a little longer for the best deal on a Las Vegas condominium. And buy a new car while they wait.
The surge in home refinancing currently underway will put more money in the economy than the extension of unemployment benefits recently passed by Congress, and refi's will create cash flow for households where people are employed and able to buy a new car or truck in the next 12 months. Low interest rates will do a lot if the banks will just make sound loans and make reasonable documentation demands, even when the state and federal governments have to slow spending. Higher incentives from the manufacturers would help the volume of new car sales as well.
Perhaps the August sales data will motivate the manufacturers.
