When Housing Market Bounces Back, So Will Automotive Sales

Car dealers looking for an increase in sales need to keep a watchful eye on the real estate market in their area, since deep declines in housing values, increases in foreclosures and slow new and existing home sales prompted the slow car market in the first place.

At least, that’s the view of Raul Vazquez, CEO of Focus Inc, a direct response auto marketer based in Tampa, Fla. Vazquez has more than 20 years of experience in the direct marketing industry. He was a pioneer in the infomercials business for clients such as the Juiceman, the Sonicare Toothbrush, Carleton Sheets, the Ab Roller and Tiger Direct. He also launched the George Foreman Grill media campaign, catapulting Salton’s bottom line from $75 million annually to today’s $900 million.

“The housing market has been a prime influence on the automotive industry,” Vazquez said. As the housing market began to collapse in 2006, the automotive market followed suit. Automotive sales began to drop in late 2006, and the Wall Street Journal reported automotive sales figures for 2007 were projected to be the lowest in nearly a decade. In 2008, major changes have been made to incentive programs to compensate for revenue losses, and dealers have had to adjust inventory to meet changing consumer demands.

Vazquez said many in the U.S. blame rising fuel costs for the slow down in the car market, but he said that isn’t true.

“Gas prices have helped change what kind of cars people are buying,” he said, “but it’s had no direct affect on total units sold. In actuality, total numbers have changed because the housing decline has given consumers and lenders less flexibility with their budgets. Moreover, in 2006 when the auto market began to experience serious decline, gas prices were well under $3 per gallon.”

Instead, it is adjustable rate mortgages, which have had the detrimental effect on car sales. As consumer mortgage payments adjusted upward it left them with fewer dollars with which to buy a vehicle. Also, as foreclosures began to skyrocket, many consumers were not focused on buying cars, new or used.

Vazquez said for more than a decade consumers were using the equity from their homes for lines of credit to purchase everything from home remodels to vehicle purchases.

“This gave many consumers eligible for home equity loans an extra $30,000 or $40,000 a year in income,” he said. “That’s simply not available any longer.”

Predictions among economists, said Vazquez, regarding the start of the housing market recovery range from late-2008 to early-2009. As the market rebounds, Focus expects a rapid improvement for the automotive industry to closely follow. As home prices rise again lenders and buyers across the country will find more flexibility, and dealers who have worked hard to adjust through this supply and demand evolution will not only survive in the coming months, but they will thrive.

He said dealers who focus on special finance customers will be able to really reap these benefits.

“For the past 14 to 16 months we have seen 200,000 to 250,000 Americans go through a foreclosure,” he said. “Only 20 percent of these were subprime customers, so next year dealers should see 30 to 40 percent more subprime customers coming on their lots.”

He said that the credit bureaus are not dropping customers as low as they used to for having a foreclosure. Most of these customers are dropping to a 599 credit score, which is up from the current average subprime score of about 550. This means, said Vazquez, that as more banks and finance companies come back into the subprime market, more customers will be candidates for their programs.

“Yes, banks and other financial institutions have tightened up their criteria, but as the housing market comes back they will once again be in the subprime automotive business. Many of them have short-term memories and they know that to make money they need to loan money. They are not going to just sit on their hands.”

He said that as the pool of subprime customers grows larger, dealers will benefit from a wider selection of the credit-challenged.

“They’ll be able to look for people with more time on the job, larger down payments and higher incomes,” he said. “All this bodes well for dealers, as the issues in the housing market subside.”