. Photographer: Matthew Busch/Bloomberg *** Local Caption *** Matthew Gann© 2016 Bloomberg Finance LP
Home and automobile sales could be in for a 2008-9 style crash, due to “pent-down” demand.
Homes and autos aren’t selling that well lately. Total vehicle sales in the US dropped to 16.70 million units in January from 17.55 million in December of 2018. While that number is still above the long-term average (1993-2019 period), it’s well-below the all-time high of 21.77 million reached in October of 2001.
Meanwhile, sales of previously owned homes in the US dropped 6.4% to a seasonally adjusted annual rate of 4.99 million in December of 2018.
That’s the lowest reading since November of 2015. Single family home sales declined by 5.5% to 4.45 million, and sales of condos dropped by 12.9% to 0.54 million.
In a recent note, Torsten Sløk, Chief International Economist and Managing Director of Deutsche Bank Securities, sees things headed south from here for both markets, due deteriorating conditions of buying vehicles and homes.
Coming at a time when the US economy is strong and unemployment at record low, the decline in auto and home sales raise fears that the two sectors may be in for a big and prolonged decline that parallels that of 2008-2009.
The reason? Pent down demand, in my opinion. It has been “stealing” sales from the future, since the era of “free money” began. A period of ultra—low interest rates, that is.
To get an idea how “pent down demand” (a concept I coined) affects sales for high ticket items, a good place to begin with is the more familiar concept of pent up demand, the lack of current demand for discretionary items like automobiles, homes, and appliances.
Pent up demand usually emerges ahead of periods of consumer euphoria. It’s caused by such things as lower price expectations, depressed consumer confidence, or a credit crunch.
And it disappears together with these conditions when that future day comes, and consumers rush to buy the items they put off in the past.
In contrast, pent down demand emerges after a period of consumer euphoria. It’s caused by low cost of financing — which blurs the distinction between present and future. Why wait to buy a new car or a new home appliance next year when you can have it this year, with a “zero percent” financing plan?
Simply put, pent down demand “steals” sales for high ticket items from the future. It causes market saturation, and eventually depresses spending on these items when the future arrives.
That’s what happened in the six years that preceded the 2008-9 collapse in US auto sales. “Zero percent” financing sales promotions induced consumers to rush to purchase vehicles they would normally buy years later. That’s how automobile sales grew from an average of 15 million in the 1980s and the 1990s to 17 million in the first six years of 2000s, before they tumbled during the Great Recession.
Nonetheless, the Federal Reserve and other central bankers around the world didn’t take notice of the impact of pent down demand on future growth. They upped their ultra-low interest rate policies, refueling pent down demand again (vehicle sales are above the pre-Great Recession levels).
Meanwhile, auto loan originations for 2018 reached an all-time high, according to a recent Federal Reserve report.
While more loans helped boost auto sales in the short-term, those debt levels depress them in the long-term, as debt payments chip away at spending. And they set the stage for the next collapse in automobile sales, which may not be too far in the future.
Loan delinquencies among subprime borrowers are on the rise, according to the same Federal Reserve report. And that could speed up the declines reported in recent months.
Still, Haris Anwar, Senior Analyst at global financial platform Investing.com, doesn’t see things going that far. “I don’t see anything even remotely close to an apocalypse-like scenario developing anytime soon,” says Anwar. “U.S. consumer sentiment remains strong and the economy continues to show resilience, even in the face of trade risks that have created uncertainties for the economic growth in the short-run.”
Anwar sees banks auto companies better prepared to deal with an economic slow-down or an outright recession, this time around.“Banks remain vigilant under the stringent stress-test requirements, while carmakers are going through restructurings to get ready for consumers’ changing preferences, and to deal with the challenges of a shared economy,” he notes.
In the end, only time will tell for sure whether, this time around, this turns out to be the case.