The pace of auto sales in the U.S. blew away expectations in August.
For the first time in eight years, light vehicle sales surpassed a seasonally adjusted annualized sales rate (SAAR) of 17 million units.
“This was the highest level of auto sales since January 2006 and suggests that real consumer spending is rebounding in August after declining in July,” said Barclays’ Dean Maki.
Audi and Subaru report last month as being the best in company history with sales for both brands jumping 22%. While others like Chrysler (20%), Mazda (11.4%), and Toyota (6.3%) have posted the best August sales in more than a decade.
Mitsubishi lead the way with 28.6% growth which represents the best sales month for the Japanese automaker in 6 years. Nissan also posted double digit growth this 11.5% while Mercedes Benz sales rose 9.4%. Fellow Germans, BMW, saw sales rise 5.5%. The Korean duo of Kia and Hyundai saw sales jump 5.1% and 6% respectively. On the other hand, Honda and Ford both post 0.4% gains in sales while GM posted a 1.2% drop in sales.
This August sales boom can be mainly attributed to the perfect confluence of cheap credit, high manufacturer incentives, and dealers desperate to move existing inventory to make way for eagerly-awaited 2015 model-year cars.
Cheap And Easy Credit
One of the driving factors for the recent sales growth has been the almost “scary growth” in subprime auto lending, Kelley Blue Book senior editor Karl Brauer tells Business Insider.
Due to the cost of cars rising at 9% and income only 4% over the past four years, buyers are more concerned with fitting a new car into their monthly budget than the total cost of vehicle, reported The Car Connection’s Richard Read. Car dealers have taken advantage of this mindset to juice sales by putting sub prime borrowers into long-term stretched out loans as recently captured by Business Insider’s Myles Udland in a conversation between Morgan Stanley automotive analyst Adam Jonas and a Ohio Chevrolet dealer.
On the whole, Read reports that Americans owe upwards of $US902 billion in auto loans.
In fact, according to Brauer, 20-30% of all auto sales are done via subprime auto loans. Fortunately, default rates for subprime automotive loans are relatively low. In addition, Brauer adds that subprime sales do not represent a higher percentage of sales than in the past times of general economic stability.
“With the average age of vehicles on the road at roughly 11 years-old there is certainly pent up demand for cars,” added Brauer. “Since people are keeping their cars for longer periods of time, a seven-year subprime loan makes more sense than before.”
Prior to the 2009 recession, the average amount of incentives offered by automakers represented 9% of the average transaction price of car. That figure fell to roughly 7% in wake of the recession.
However, incentive figures have been growing ever closer to pre-recession numbers with current manufactures incentives at 8.4%. In fact, the average incentives offered by GM and other domestic automakers amount to roughly $US3,000 per vehicle while Toyota offers around $US2,100 and Nissan $US2,200 per car. The effect incentives have on sales can be significant. In August, Toyota increased their level of incentives by roughly 19% and saw 10% growth. GM, on the other hand, upped incentives by only 3.5% last month and saw sales slip by 1.2%.
Why do manufactures do this? Brauer says, “car companies are really anxious to keep growth and sales volume high. They are willing to sell vehicles at a discount as long as they can still make a profit.”
In With 2015, Out With 2014
Around August of every year, dealers begin their annual tradition of clearing out the existing inventory. By upping incentives and offering cheap credit, dealers were especially successful in moving their 2014 stock that cost significant overhead everyday they sit on the lot. Since 2014 models are coming to the end of their production life, they are sold at heavier discounts than the more novel and new 2015 models. The introduction of 2015 models like the new Chrysler 200 and Cadillac Escalade have paid dividends for their respective brands. The 200 helped the struggling Chrysler car brand reach positive sales growth for the first time in months, while the new Escalade proved to the be sole bright spot in Cadillac’s highly praised but underperforming lineup of models.
With the flow of subprime loans, manufacturer incentives, and eager dealerships unlikely to curtail, so will this sales surge.
“There’s no indication of a drop off,” says Brauer. “Growth hasn’t fallen even when we thought it would.”