This Time It's Different?

April 30, 2013 - A few days ago I was watching a video-clip of former Fannie Mae Chief Credit Officer, Ed Pinto, discussing the Fed’s artificially induced low interest rates, his views on their effect on home prices, and his views on their effect on what many are calling the current housing market ‘recovery”.
At approximately two-minutes-and-thirty-seconds into the video interview, Mr. Pinto says, ‘These low interest rates are starting to make people buy houses the way they buy automobiles.’ “They don’t ask what’s the price? They ask what’s the monthly payment?*.

Mr. Pinto’s comparison of the economics of home buying, to economics to automobile buying, ignited my curiosity. I began to wonder . . . how are automobile prices, auto financing, and auto sales reacting to this artificially low interest rate environment? This morning I did a key words search on: ‘low interest rates auto sales’.

My search yielded several good and informative articles, one of the articles seemed to survey current conditions more broadly than the other articles. I’ve copied and pasted that article below:

March 2013 Car Sales: Juiced By Low-Interest Loans?*

Spring is finally here, and the jobs picture is brightening--but the biggest factor in rising car sales could be easy money.

March 2013 car sales are being reported today, and for the most part, all the brands sold in the U.S. are posting moderate gains over the same period a year ago. Subaru and BMW are up strongly at 13 percent each, while the domestics are showing single-digit gains. Only the South Korean brands so far are down, with Kia posting the least encouraging numbers of the news cycle.

In all, the seasonally adjusted annual rate (SAAR) in March is expected to reach 15.3 million units, according to a joint survey from J.D. Power and Associates and LMC Automotive. That would be flat against February's numbers, despite the average retail price of a new car going up 3 percent, to $28,504.

The retail sales SAAR of 12.1 million units should remain unchanged as well.

What's at the root of continued healthy sales? J.D. Power and Associates senior vice president of global automotive operations John Humphrey says that the steady upward pressure of price has pushed buyers into longer-term loans, but says shoppers also are leasing more, as well as capitalizing on low interest rates.'s average for new 48-month auto loans currently sits at 2.44 percent, near historic lows.

"While longer loan terms have traditionally been a cause for concern to the industry due to the risk of purchase cycle extension, it is not necessarily as daunting as it may seem." said Humphrey. "The longer loans are being offset by more leasing and the low interest environment, which means that consumers are able to put more of their monthly payment towards their loan principal rather than interest fees."

The financial climate's led Power partners LMC Automotive to hold its forecast for total 2013 light vehicle sales in the U.S. to 15.3 million units, with the retail sales forecast holding at 12.5 million units.

"We expect the economic environment to improve throughout 2013, as the likelihood of a dark cloud slowing the recovery pace diminishes," said Jeff Schuster, senior vice president of forecasting at LMC Automotive. "Consumers do not appear phased by headwinds from Washington."

The automakers themselves are upbeat about prospects for the remainder of the year. GM predicts a SAAR of between 15 and 15.5 million units for the year; Chrysler estimates the March SAAR at 15.6 million vehicles, including retail and fleet.

Do you think lessors are actually increasing their up-front lease contract payments? At what point - in a 48 month purchase or lease contract - does the obligor / purchaser have positive equity in the auto? Are those buyers who are using these methods to finance rapidly depreciating assets (automobiles) economically sophisticated enough to make decisions without close supervision?
(1) Actually, I don’t believe this is a recent phenomenon. I think, when buying a home, most people consider how much they can afford. or are willing to spend on their mortgage payment, then they buy as much house as that payment will allow. Every real estate sales person I’ve ever met encourages this approach to home buying and home affordability.