J.D.Power sees “tremendous growth in Gen Y buyers” after sales increases stall

Checking out Edmunds and TrueCar, no doubt

Checking out Edmunds and TrueCar, no doubt

After going into the carmageddon toilet, the U.S. market is powering back to pre-crisis levels. The year should end anywhere between 15 and 16 million units sold in the U.S. How far will it go in the years to come? Will the 17.4 million record from 2000 be beaten? Will we see 18, or even 19 million units? Outsell those pesky Chinese perhaps? Recently, J.D. Power’s Deirdre Borrego gave a pep talk to auto industry conventioneers in Las Vegas, NV. Executive summary: Those sales increases will likely peter out – until hordes of well-off Gen Yers storm the car lots.

In her talk (bulleted here), Borrego deemphasized sales growth. That’s not the real story, she says. Indeed, there are many indicators that the industry is getting comfortable with reaching a 16 million unit peak, and taking a rest on top of the mountain. 16 million is said to be a “magic number” in the industry. After all, the old 16 million record stood from 1986 through 1999, and the 2000 peak was, as old warhorse Jim Henry writes in Forbes, “sustained by price discounting and dumping units into daily rental fleets.” Welcome to the new age of sustainable sales records.

The industry appears to quietly agree with the notion that there are limits to growth. Most auto factories are working at or above capacity in America, nevertheless, the new car factories are being built elsewhere.

The real story, said Borrego, is not unit growth. The big story is that consumers are paying more than ever for a car – often unwittingly, it seems.

The average transaction price stands at $29,200 – nearly $3,000 more than what it was in 2008. The archetypical blue collar vehicle, the full-size pickup, carries an average transaction price of $40,000, says Edmunds. Meanwhile, a brand-new Mercedes-Benz CLA famously starts at a hair below $30,000. Luxury is getting affordable, while workhorses provide luxurious profits for their makers – your chicken tax at work.

“Sub-prime consumers,” said Borrego, “account for roughly 16% of sales so far this year. This population is on track to deliver 300,000 incremental unit sales to the industry in 2013.” That’s $8.7 billion in incremental revenues for the car industry, provided by people in straits. Borrego thinks the market can digest more sub-prime, after all, in 2007, 20% of all sales were from sub-prime buyers.

Record high auto prices don’t seem to deter buyers. Often, the price of the car doesn’t even register. Most buyers shop payments instead of price. Lenders are more than willing to bring the payment down by stretching the term. “Nearly one in three retail sales are facilitated by a loan carrying a term of 72 months or longer,” Borrego said. Six or seven-year loans keep monthly payments down, make lenders rich, and are a great fix for the industry. They also will lead to hangover. Under-water owners will be hostage to their no longer new car. After the warranty is up, the car dealer won’t see these folks for years. The old three year new car purchasing cycle has been declared dead. Last year, Polk said that new car owner hold on to their car for nearly six years on average. They expected that trend to continue for the foreseeable future.

So, no growth, but higher profits for carmakers and banks? Not exactly. J.D.Power sees “tremendous growth in Gen Y buyers coming into market.” Yes, the analysts bet on the same demographic that, depending on which car blog you trust more at the moment, either shuns cars and instead posts Facebook pics on its smartphones, or is unemployed and penniless. J.D.Power has a new twist on the story:

“As Gen Y consumers progress in their careers, they are better able to afford new cars.”

Before that happens, there is a little nagging detail: Gen Y is hostage to $1.2 trillion in student-loan debt. To put it in perspective, that’s about the same money as the United Sates owes China in Treasuries. Except that this money is owed by well educated jobless. “The sum surpasses all other kinds of consumer borrowing except for mortgages,” writes Bloomberg. About one in seven borrowers already defaulted on their federal student loans, and this is believed to be just the tip of the iceberg. Uncle Sam makes a lot of money on the interest ($51 billion this year alone, enough to bail out GM another time,) and he can get nasty when payments stop. A student loan default goes on the credit report, nixing chances to get the scarce job. If the employer wasn’t subscribed to Equifax, paychecks can be garnished, bank accounts can be attached. Bankruptcy is not an option – student loan debt generally does not get wiped out in a bankruptcy.

With these prospects, a good chunk of Gen Y might never emerge from their parents’ basements. There’s always hope for the next generation; that would be Gen Z.

Seems to be the last generation on earth, at least according to the alphabet.