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US auto sales, housing starts, will be hit by oil price collapse

Consumer demand
By Paul Hodges on 28-Jan-2015

US autos Jan15The best view is always from the top of the mountain.  That’s probably why the outlook seems so promising for US auto and housing markets.  Both appear to be doing well on the surface, but dig a little deeper and concerns soon emerge.

The chart above demonstrates the point, updating the data from my July post with the full-year outcome for 2014.  It shows auto sales along the x-axis, and housing starts on the y-axis. The available data starts in 1973, and falls neatly into 4 different eras:

  • 1973-84, very volatile, purple.  High volumes in 1973, 1976-9, but crisis levels in 1974-5 and 1980-2
  • 1985-98, very stable, green.  Auto sales generally rising, whilst housing starts were plateauing
  • 1999-2007, Y2K and sub-prime mania, red.  Easy money pushed volumes to unsustainable levels
  • 2008-14, slowing demand, blue.  Low interest rates have supported auto sales, but housing remains slow

Back in July, there was already reason for caution.  The long-term trend for housing and auto sales had clearly peaked some years ago for common sense reasons, due to the ageing of the BabyBoomers.

The Boomers are no longer buying new houses for the first time, as they are no longer settling down and having children.  Nor are they fleeing race riots in the inner cities, and needing cars to drive to the suburbs.  Instead, as Dept of Transport data confirms, they are driving fewer miles as they age.

And there is no obvious replacement for their buying power.  Of course, the US population is still growing, but the younger population has a quite different profile from the Boomer generation, as the Pew Institute have reported:

  •  In 1980, only 1 in 10 young Boomers were still living at home with parents.  But today we are ‘going back to the future’, with 1 in 5 young adults living at home with parents due to economic pressures.  This reduces the need for single family homes, and instead means multi-family units are now (as in the pre-Boomer era) around one-third of total housing starts
  • Since 2000, an astonishing 92% of population growth has been in minority communities.  And whilst the White population has a median age of 42 years (very similar to that of Europe and Japan),  the median age of Blacks is 33 years and for Hispanics just 28 years.  This matters in terms of housing and auto markets, as Blacks and Hispanics earn much less than Whites, and have much higher levels of joblessness

Thus the auto market is already seeing the first signs of strain, as the Wall Street Journal reports:

More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November

Today, there is even more reason for caution, given the collapse of the oil/shale gas bubble.  Back in Q3, probably most people disagreed with my forecast that oil prices were about to see a major collapse.  But today, major lay-offs are taking place across a variety of industries, as companies rush to adapt to the New Normal world of energy prices:

  • This will inevitably reduce housing starts, as workers will no longer be moving to new oil/gas-related jobs
  • It will also reduce auto demand – not only from builders for pick-up trucks, but also from laid-off oil workers

The last oil price collapse in 1986 hit Houston, Texas (where I then worked), very badly.  Many people lost their jobs and left the state penniless, even posting their house keys back to the bank as the mortgage payment had suddenly become unaffordable.  This will likely happen again, right across the oil’/gas belt.

In addition, many will have to return their cars, due to the rise in auto leasing.  27% of new car sales last year were leased, not bought, versus 22% in 2012 and just 17% before 2005.  But it is hard to maintain the typical $199/month payment if your job has just disappeared.