While Upbeat, Outlook for 2016 Auto Sales Contingent on Interest Rates

December 21, 2015 CO-OP Financial Services

Couple visiting a dealershipEditor’s Note: This is another in a series of entries by CO-OP thought leaders as they share their insights on the top industry trends for credit unions heading into 2016.

By John Caddell and Carol Cline-Parton

Predictions Forecast Another Great Year Before Tapering Off in 2017

A rising tide lifts all ships and the improving economy has certainly lifted the U.S. auto industry out of the lows of the Great Recession.

As reported by Reuters on August 4, 2015, the National Automobile Dealer Association projects 2015 auto sales to reach 17.17 million vehicles, a 4.4 percent increase from 2014. Steven Szakaly, an NADA economist cited in the story, predicts that U.S. sales will peak at a record high in 2016 of 17.46 million vehicles and then slide back to 16.65 million vehicles in 2017.

Healthy auto sales translate into good times for those in the lending business, according to CU Direct, the nation’s leading provider of automotive loan products and strategic lending solutions to the credit union industry.

During an October 8, 2015, webcast for its lending partners – “State of the Credit Union Auto Lending Market” – CU Direct underscored that auto loans have hit the $1-trillion mark in outstanding balances for the first time in the U.S. history.

CU Direct also reported that credit unions captured 25 percent of all U.S. auto loan originations in the second quarter 2015 and continue to maintain a strong lending presence with a national market share of 19.6 percent in June of 2015, up from 18.8 percent at the same time last year. Riding the wave, CU Direct partner credit unions experienced 16.7 percent in loan growth through mid-year.

“Fundamental indicators point to an outstanding market, with auto sales poised to hit a 15-year high,” said Larry Dominique, Executive Vice President of TrueCar, Inc., an automotive pricing and information website for new and used car buyers and dealers (October 1, 2015, news release). “A flourishing industry positions annual automaker revenue to hit $565 billion for the first time.”

All Good News

It’s all good news. Even the sales of used autos have been at record levels, which has depleted used vehicle inventories and pushed up prices. This lack of supply may redirect consumer interest toward new autos. In addition, auto dealers will most likely continue to offer great deals and manufacturers will continue to step up design and technology innovation as well as introduce super fuel efficient and alternative fuel cars.

So, how long will these robust auto sales last? As long as employment continues to improve, interest rates stay relatively low and gasoline prices remain at their current level. We tend to agree with market researchers who believe strong sales will last through 2016 and then perhaps begin to taper off as demand for new cars softens and lending rates increase.

A key factor in the outlook is interest rates, and today’s very low interest rates can’t stay low forever. An October 13, 2015 article in the New York Times points out that the last time the Fed raised rates was in June 2006. “The Federal Reserve’s decision to raise the federal funds rate will be akin to a doctor’s decision that a patient is well enough to be gradually taken off medication,” the article states. “The thinking inside the central bank is that the economy is finally healthy enough that borrowing costs should return to more ‘normal’ levels to help keep future inflation from accelerating too much.”

What Will the Fed Do?

Although the Fed decided not to increase rates after its September 2015 meeting, some observers believe that “no change” policy will change before the end of the year. Still, points out the New York Times article, “there is a lingering fear that by raising rates too much could send markets into a tizzy (if past experience is any guide), lead to a slower economic recovery and make it harder for workers to press for higher wages. For savers, it could signal higher returns, but those borrowing to buy a house or a car may soon have to pay more.”

From our perspective, when the Fed boosts the borrowing rate for financial institutions, it usually follows suit that other rates such as mortgage and consumer loans will increase as well. By raising rates, the Fed’s decision would most certainly affect the purchase of higher priced goods (autos, RVs, motorcycles, etc.). Since many of these more expensive products are traditionally bought on credit, it will cost consumers more to finance them. Consequently, while increased rates may reduce the number of collateralized loans transacted by credit unions, the rate of return would be higher with greater margins.

However, at this point, this is all educated guessing at best and we simply will not know how higher rates will affect the marketplace since it depends on how much the rates go up.

Credit Unions a Major Player

But we do know that whatever happens, people will always need vehicles, whether new or used. Auto loans have been the fastest growing segment in credit unions’ lending portfolios fueled by indirect lending, which, according to CU Direct, has more than doubled since 2005.

Credit unions that have been able to benefit from the current loan environment with aggressive promotions, attractive rates, and financial and service relationships are well positioned to continue to profit from the lending activity into next year and possibly beyond. More than one in four credit union members has an auto loan through their credit union.

Credit unions that, for whatever reason, have not been able to take optimum advantage of this robust auto sales marketplace can still do so by preparing now for 2016. Establish relationships with dealers to accommodate more indirect lending, provide 24/7 call center service to capture off-hour loans through partners such as CO-OP Member Center, offer creative programs and promote that your ability to take on more new lending business. Finally, do everything in your power to ensure that when one of your members is in the market to purchase a vehicle, that loan comes to you first and not to one of your competitors.

About the Authors

John Caddell is Credit and Lending Services Manager, and Carol Cline-Parton is Vice President, for CO-OP Member Center, a wholly-owned subsidiary of CO-OP Financial Services based in Fort Worth, Texas. Caddell can be reached at john.caddell@co-opmc.org and Cline-Parton at carol.cline.parton@co-opmc.org, or by telephone at 1-888-869-5522.

The post While Upbeat, Outlook for 2016 Auto Sales Contingent on Interest Rates appeared first on Insight Vault.

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