By Ray Birch
LAWRENCEVILLE, Ga.—2020 could turn into a “lost year” for credit union auto lending as a result of the coronavirus pandemic, a development that, if true, could leave many CUs’ lending portfolios painfully stalled.
The pain won’t be limited to portfolios. With one expert forecasting up to four-million fewer new automobiles sold in 2020, it will also mean the foot will be off the gas on membership growth that in recent years has be driven in large part by indirect auto loans.
All in all, the picture is one of a very difficult year in the making for credit unions that will struggle with slow loan volume at the very same time many members are in strong need of financial help.
CUToday.info spoke with a number of automobile industry and lending analysts who noted when the new year arrived the forecasts called or approximately 16.5-million new unit sales in 2020. Now, that number that total could slip below 13 million, a level not seen since the Great Recession.
A variety of factors are putting the brakes on sales. Consumers in many markets are being kept off car lots by lockdown orders preventing people from leaving their homes for anything other than necessities. Although online shopping for automobiles has gained traction, buyers who fear for their jobs will put off any purchases. Already numerous dealers have sent their own employees home, and a number of the major auto manufacturers have idled their plants.
Lenders are already feeling the slowdown, with two credit unions observing anecdotally to CUToday.info they had no loans in their respective pipelines, something neither CU had ever before experienced.
A Tougher Prediction
Alex Yurchenko
Alex Yurchenko, SVP of data science at Black Book, said his company is predicting new car sales units will be off by four million due in part to consumer confidence being shaken even after the pandemic passes.
“A week or two ago we were projecting a 1.5-million drop, but now we have moved to an even tougher position,” said Yurchenko. “There are two reasons for this. One, no one is producing cars, as the factories are closed for at least four weeks. And, two, I think consumer confidence will suffer and that will translate into lower sales when the pandemic is over. We are projecting car sales will rebound, but not this year—it's going to be tough on everyone.”
While there was a flurry of used car sales activity just over a week ago, when the wholesale auction lanes were packed with dealers scooping up inventory when they could, that has changed, said Yurchenko. He said auction lanes are empty, and if they are being held they are conducted only remotely.
A Lost Year
Bloomberg Intelligence’s Kevin Tynan fears auto dealers and lenders may now be looking at a “lost year.”
Kevin Tynan
“So 1.5 million off of 17 million is reasonable and I would tend to think the risk is to the downside,” said Tynan, senior analyst, new vehicle and auto part manufacturing.
Tynan said there is no way to tell how deep or prolonged the lack of demand will be.
“What I will say is this is different than 9/11, or even 2008-09, in that auto sales actually increased after 9/11 as automakers rolled out 0% interest rates to spur demand. It worked. However, it created a very incentive-dependent industry that became a bubble and collapsed in 2008-09. But this is where the coronavirus impact is different. Post 9/11 was all about the nation coming together and supporting the economy. This pandemic is about separating and isolating people. So, where low interest rates will eventually help demand, it will take an ‘all clear’—and then some—for consumers to let go of the social distancing that could last into the third and fourth quarter.”
Changing Habits
The pandemic is changing consumer and dealer behavior when it comes to shopping for and selling cars, experts stated.
“Right now, it seems there are pockets of normalcy and areas where business has been hard hit,” said Maryann Keller, principal at Maryann Keller & Associates and a former Wall Street auto industry analyst. “Seattle is one area where business is hard hit. I am hearing from dealers that more customers are calling or e
Maryann Keller
mailing instead of test driving. But as this goes on, both new and used car sales will decline as the unemployment rate rises. I am especially concerned about job offers being pulled from 20202 graduates and other white collar jobs disappearing. Prices in the used car market adjust immediately based upon supply and demand, so it will probably fall in the short term but recover as it did in 2009 and 2010. New car buyers can defer purchases, especially fleets, and I worry more about fleet demand dropping than retail.”
Manufacturers Sweeten Offers
As they have in the past when facing slowdowns, Scot Hall, executive vice president of Swapalease.com and EVP of operations for Wantalease.com, noted automakers are stepping up their offers.
“Ford is advertising 0% financing for 84 months—wow, that is an incredible offer,” said Hall. “And dealers and automakers are also offering to defer payments on a new sale.”
Jeff Wyler Chevrolet in Cincinnati, for example, is advertising a 120-day first payment deferral and 0% financing.
Scot Hall
“Dealers, too, are offering to bring cars to customers for test drives,” said Hall.
Hall also suspects dealers will rely more on the “Carvana model,” where cars are advertised and sold online and then delivered to the customer’s home, allowing the buyer to return the vehicle if they are not satisfied.
“This model might not work as well for used cars—buying a car without being able to touch it. But for new I could see it working,” said Hall. “This pandemic could change the dealer model.”
Indeed, Hall said the shift to online selling is already happening. “If this appears to be successful during the pandemic, then I think absolutely it could become part of the dealer sales mix going forward.”