For the third-straight month this July, new-vehicle sales in the US topped a seasonally-adjusted sales rate of 17 million units. That means there’s a good chance that 2015 will mark the first year since 2006 that Americans bought more than 17 million vehicles in a full year, assuming current trends hold out for the remainder of the year. The industry reached its highest-ever number in the year 2000, with 17.8 million new cars and trucks sold.
What’s bringing the market to near decade-high levels? Easy credit and plummeting gas prices are two big market drivers, as well as pent-up demand as the economic recovery continues. Despite six straight years of increasing sales since the height of the recession, the average age of American vehicles has reached a record high 11.5 years, according to consulting firm IHS Automotive.
61% of consumers purchased their last vehicle new
With the vehicle fleet reaching that high of an average age, consumers will be continually trafficking showrooms, looking for new rides. Indeed, Mintel’s Car Purchasing Process US 2015 report shows that 61% of consumers purchased their last vehicle new. The drop in gas prices also helps, as lower fuel prices means consumers will drive more.
Proceed with Caution
Everything isn’t sunshine and roses, however. There are reasons to be cautious. Some automakers may see slight sales dips this year, for example, after extremely strong performances in 2014. Another caution flag: Some cash-strapped consumers are arranging for longer loans – sometimes for six or seven years. Thanks to depreciation, that means many of these consumers will owe more than what their car is worth before the loan is up, which could cause problems when it’s time to trade in the current car. They may need to borrow enough money to not only cover their next vehicle but also the gap between what’s owed and what their current vehicle is worth.
Leasing is also approaching an all-time high right now, and that will cause a flood of used cars a few years down the line. That surge in quantity will depress used-car prices, and that can affect new-car financing, as trade-ins will be worth less.
Finally, over 8% of car loans made in June were subprime, according to Edmunds.com, and while subprime loans in the auto industry are less risky than they are in the housing sector, they are still inherently risky. It’s disconcerting to see that so many new cars are financed with subprime loans.
Still, it’s “up, up, and away!” for new-car sales at the moment, and it doesn’t appear the tide will stem anytime soon. Barring another prolonged economic downturn, the momentum should carry for another year or two.
Tim is an Automotive Research Analyst at Mintel. As an auto expert and seasoned journalist with more than 10 years of professional experience, Tim has a deep understanding of the automotive market, influencing his work on the US Reports team and with clients.
