Sales Likely To Turn Positive in 2010

January 8, 2010
Here's a simple prediction for 2010, car sales are likely to bounce back by two to four million units, possibly more.

How can we possibly know that? Well, whether a lot of folks know it or not, the economy, for many people, actually started going south in about 2006 and the car industry had a lot of product to move. At the time, we were associated with a Boston area dealership and we saw that they were writing more leases for longer terms than they were for sales.

Oh, the sales business was brisk, but it seemed that management, at the time, was pushing leasing and so was the manufacturer that the dealership represented (Honda). At this time, too, we were in the midst of the junk loan boom where anyone with a pulse could get money from a secondary or a third-level lender.

There were a couple of catches in this (if this sounds like I'm repeating myself, I am):

  • The interest was huge

  • The interest was higher

  • There were more ways to push the interest higher than a kite in a high wind

Oh, was there a problem with the interest on these so-called junk loans? Yes, if you happened to get one many people who should not have been given credit under any circumstances were given loans the interest was high, when they started and, if you fell behind, they started adding on penalties and increasing your interest so that a loan at 14.5 percent suddenly in a couple of months could be at 21 percent and then at 29 percent. One thought that the usurers had been driven out, but, the junk loan scandal brought them back but this is a side issue.

The main issue here is that many people who couldn't afford the payments to purchase a vehicle outright opted for leasing. The difference between leasing and purchasing a vehicle can be between 30 and 60 percent in monthly payments so that a person who wanted or needed a new car could lease one and still keep money in the checkbook at the end of the month even if it wasn't a lot and other bills could still be paid.

The issue that arose here, though, was that the standard lease term was now being pushed out so that people could afford the monthly payments. Spreading a lease over 48 months, in many cases, made a car affordable for many people and so they opted for the four-year lease.

Now, if our basic math is good, 2006 and four comes up to 2010 and there are many leases that will be up and likely there are many people who will just want to walk away from the lease so that they can get into a new car or may want to purchase a preowned vehicle so that they can cut their monthly payments even further, providing, of course, that they haven't lost their jobs or had other economic difficulty in the first place.

Actually, if you look at the cyclical nature of the car business there seems to be a four-year boom/bust cycle where four years of good sales are followed by four years of poor to mediocre sales and then we start to climb out again.

So, if the math is right and the cycle is right, this is the year when sales are due to start moving in the right direction again, following an abysmal 2007-2009 period when sales reached their nadir, about 11 million. Indeed, even the world's number-one car seller, Toyota, which reported a $4.3 billion loss last march is said to be figuring it will suffer another loss when figures are announced in a couple of months, but the loss will be in the $2.7 billion range, according to published reports. Indeed, if they can come out with enough affordable hybrids to meet the demand, they may just be able to cut even that loss. (The Prius is a great hybrid, but why not come out with a Yaris hybrid? It would make a great deal of sense as an urban commuter car and it would be the type of small vehicle that one could charge on Tuesday and not have to worry about a recharge until Friday. It is a lightweight and seems to fit the mold that many city-dwellers would like.)

Another pointer that things could be turning around is the fact that in the third quarter of last year, Ford reported an operating profits of $397 million and General Motors has reported also reported a quarterly profit, although The General, which has emerged from federal bankruptcy, is only a shadow of its former self as it has shed four divisions, Saturn, Pontiac, Saab and Hummer. Even the venerable Oldsmobile marque is gone, but, this, again, is beside the point.

It's likely that sales will be coming back this year on the strength of the fact that leasing went to four years in 2006.

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