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Car Prices Headed Higher?


Changing assumptions about auto industry.

Conventional wisdom is becoming less conventional as assumptions about our economy seem to change overnight.

Declining sales, eroding profit margins and dependence on incentives to close deals is causing the auto industry to look disturbingly similar to the U.S. housing market. Home prices are plunging, something we were told would never happen. Could higher car prices be in our future?

Automakers released North American sales data yesterday, showing a drop in February sales to an annualized 15.4 million units, compared to 16.6 million a year ago. The Financial Times reports Ford (F) and General Motors (GM) plan to cut production in response to slowing demand. Declining sales were nearly industry-wide:

  • GM sales down 12.9% to 308,411 vehicles
  • Ford sales down 6.9% to 196,618 vehicles
  • Toyota (TM) down 2.8% to 182,169 vehicles
  • Chrysler down 14.0% to 150,093 vehicles
  • Honda (HMC) up 4.9% to 115,397 vehicles
  • Nissan (NSANY) up 1.2% to 86,219 vehicles

Many in the sector blame tight credit conditions, falling home prices and a weak economy for the poor results. But there's hope. As GM sales analyst Mike DiGiovanni said, "[W]e think there's going to be a lot of stimulus in the economy in the second half of the year, and we're banking on that." We appreciate the enthusiasm, but we're not sure if Mr. DiGiovanni received the memo that the bailout is meant to prop up a different troubled market.

One stark difference between housing and auto is that cars are depreciating assets, while home prices typically go up. But the deflating housing bubble has forced homebuilders to slash prices to shed inventory, and the principle of guaranteed appreciation is being proven false.

If fundamental assumptions about home prices can be flipped upside down, why not cars? Tougher standards for fuel efficiency are our only realistic hope of breaking our dependence on foreign oil. If Washington ever gets around to figuring that out, it could make many older model cars and gas-guzzling SUVs obsolete. Coupled with production cuts, crimped supply could pave the way for car prices to actually go up.

Even though cars deteriorate and lose value as they're driven, if the last nine months has taught us anything, it's that no assumption is safe.

No positions in stocks mentioned.

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