Conventional wisdom holds that what's good for U.S. home sales is also good for U.S. auto sales, but I take issue with that notion. In fact, a shift in U.S. consumer preferences for housing at the expense of autos looks probable to me.
Historically, lower financing costs driven by lower U.S. Treasury yields were good for both home and auto purchases. But while affordability concerns haven't thwarted auto demand over the past several years, it's a different story with housing.
I foresee lots of pent-up demand for housing coming to the fore if mortgage rates decline to the record lows that I'm expecting them to over the next six to nine months. By contrast, I see no pent-up demand for autos -- and little likelihood of any arising even if financing costs decline further.
Now, while Americans saving up for first-time homes can reduce spending in discretionary areas like restaurants, travel, etc., many find that their ability to qualify for a mortgage hinges on whether or not they have car loans. Autos are also necessities for most working people, so consumers generally fund vehicle purchases out of disposable income, just as they do rent, food, etc.
This has traditionally meant that any income-related restrictions on a consumer spending habits don't impact auto sales as much as they do other discretionary items. But if the shifting consumer trends that I've been writing about recently are really occurring, many first-time homebuyers trying to save up money to qualify for mortgages will have to reduce car purchases.
After all, while banks and the U.S. government have made changes to help consumers handle mortgage and student-loan costs, they've basically done nothing to alleviate auto-loan expenses. So, the only way that consumers can cut car costs is by scaling back on auto purchases. This week's earnings disappointment from Ford (F) indicates that this might have already begun.
Now, auto sales have risen dramatically since the 2008-2009 financial crisis, thanks to low interest rates, extended repayment terms and subprime loans' reintroduction. But if my thesis is correct, the auto industry will bear the brunt of the shift in consumer-spending habits that I foresee.
It's also worth noting that unlike almost every other consumer product over the past few generations, cars no longer have planned obsolescence or targeted life cycles. In fact, automakers engineer today's cars to last much longer than vehicles used to. This will represent a real problem for the industry if U.S. personal incomes don't start to broadly increase and consumers decide to reduce auto spending to fund home purchases.
Conventional wisdom holds that auto sales will stay strong as long as interest rates stay low and underwriting criteria remain loose. This stems from the assumption that buyers trade in vehicles once their cars are paid off and immediately take out loans for new ones.
However, cars produced within the past 10 years or so can easily last for two to three times longer than a typical auto loan does. So, many would-be first-time homebuyers are discovering that car payments are one thing that they can limit in their budgets.
As these consumers' desire for first-time homes becomes greater than their demand for new cars, it's very likely that auto sales will suffer. In fact, annualized U.S. auto sales have already dropped 8.5% since October, when they hit their post-2008-crash high.
The fact that sales are falling even as auto-loan rates have dropped indicates to me that many consumers are making the decision to forgo new cars after after paying off their old ones. The bottom line: As U.S. borrowers increasingly pay off their car loans over the next few years, I think we'll likely see a shift in consumer spending toward home purchases and away from auto sales.