Credit’s Crunch & Car Sales

It’s been a rewarding career, following the reporting on major issues and economics over the past 16 years and getting to refute incorrect statements or facts with which reporters too often validate false stories.

Take reformulated gasoline: a "cleaner-burning" gas, they said, and the annual emissions tests were going to clean the smog out of the air in cities across America. Well, it’s been almost 20 years that we’ve been performing emission tests and 12 years since we started using this miracle "cleaner-burning fuel," but the smog still hangs in the air year after year.

Was Peak Oil the reason for the unbelievable price of oil, or was it serious disruptions in the supply and demand equation? Nah. As I pointed out, it was just the massive amount of money thrown into oil by speculators in dark, unregulated futures markets. The media has since accepted my position; as the oil bubble burst, and as you may have noticed, they’re now reporting that the speculators they refused to acknowledge just months ago are leaving the oil futures market en masse. And with the speculators’ departure, the price of oil is collapsing.

The fact that a supposed expert says something to the press doesn’t make it true. In my 11th-grade journalism class, we learned that you should verify any given statement with a second reliable source. But nobody questioned the expert’s assertion that car loans were hard to get these days. The fact is, people with prime credit can get a new car loan today in a matter of minutes at any of the 20,000 dealerships in America.

Yes, there’s a reason I won’t use quotes from many so-called experts in my work: I read what they have to say on a regular basis in other publications, and their positions are rarely credible.

Reality Check, Please

Yes, in September car sales dove sharply from a year ago, even in our local market. However, Classic Chevrolet sold 436 new vehicles in September (more than last September), and Tom Durant said it took only a little more work on their part to make it happen. Well, if Classic Chevrolet can sell that many vehicles and provide that many loans for their customers, other local dealers could have done it, too. Likewise, Meador Chrysler Dodge Jeep had their best September for new vehicle sales in possibly a decade. When asked about the credit buying standards at his store, General Manager Mike Biggers said he couldn’t tell any difference at all in the way customers’ loans are being approved. Two local Toyota dealers told me that last month they were still getting loans for clients whose Beacon scores were 610 – 620, or the high end of the mediocre credit range.

Yes, what dealers told me is the exact opposite of everything that has been reported in the media. How does that happen?

Ken Thompson of Classic Chevrolet had the best story. About a week ago a journalist with Barron’s magazine called him to discuss September’s sales. Well into the interview, she realized that Ken was suggesting that Classic’s sales had not been bad (she didn’t ask that first?), and people were not being turned down for loans except under the usual circumstances. She finally asked Ken if the dealership was doing well; he replied that their sales this September were superior to last September’s and credit really hadn’t really been an issue.

Her response: "I guess that ruins my story."

Where’s the Real News?

The Wall Street Journal story that was reprinted in the Star-Telegram used JP Morgan Chase as a source, saying they were asking for larger down payments, granting no subprime loans past 72 months and capping all car loans at 84 months. Really? This isn’t news: Chase’s loan parameters haven’t changed much from five years ago.

As for fewer subprime auto loans being written, that changed early this year and for the obvious reason: The worst of the worst subprime loans had to cease, whether there was a credit crunch or not. It’s just too hard to make a profit on that business over the long haul. Besides, the loss of subprime loans hit mostly the used car business.

Left out of the national media’s discussion on falling car sales is the fact that Hurricane Ike took out the electric grid in Houston; most car dealerships there couldn’t do any business for at least seven days last month, 10 days at many stores. And Houston’s car market is as dynamic as ours, maybe more so; shutting down hundreds of high-volume dealerships for a third of a month is bound to hurt the nation’s total sales.

Then too, Ike’s damage had our refineries running at just 66 percent two weeks ago. That caused severe gasoline shortages from Georgia to North Carolina and parts of Florida. History shows us that when motorists have to wait in line for an hour to buy gas, they lose the mood to go car shopping.

Good Credit Backed Out First

Here’s what really happened: All month long we were bombarded with the most negative financial news imaginable. Don’t get me wrong; while many of my dealer friends wish the media would cut back on this reporting, I personally believe it’s the media’s job to inform the public on issues of grave importance — and this financial crisis, however negative, certainly qualifies as important news. However, as a direct result of the non-stop coverage on the mess Wall Street has gotten us into, the number of people shopping for new cars fell by 39 percent in the first half of the month. And when the media started reporting that we might be about to witness the next Great Depression, showroom traffic fell by 50 percent.

There are only two other times I can recall showroom traffic falling by that much: The 10 days after the attacks of 9/11 and the two weeks after the Arabs embargoed the oil in 1973. I’ve asked many, many dealers, "What caused your sales to fall, the media-reported credit crunch or the lack of buyers coming into the showroom?" One-hundred percent blamed the latter.

Sadly, it seems the media suffers under the delusion that car sales fell in September because people couldn’t get loans. As proof they point to how the rate of approvals fell from 83 percent to 64 percent over the last year. Besides the drop-off in subprime lending, there is a logical reason for that decline in approval rates; it probably had little to do with severe changes in lenders’ loan-buying requirements. It’s not a secret; it’s historical fact.

When traffic slows down at new car dealerships, the first customers you miss seeing are the best informed with the best credit. For whatever reason, people with good credit who are aware of the world around them are the ones to first show due caution. What is left for dealers are those of lesser means – the kind of customer whose credit elicits higher decline ratios for new loans. Credit rejects were that much higher because there were so many fewer people with exceptional credit applying for automobile loans.

I hate to use myself as an example, but I wish someone had called me. Just before September began I received a letter offering a pre-approved loan from Honda Financial Services for $10,000 more than the list price of anything Honda or Acura sells. -Some credit crunch.

Preaching by Pratfall

I will not go on record as saying that things were great in the auto industry last month. They weren’t. But you do have to ask how dealers like Tom Durant of Classic Chevrolet and Mike Biggers with Meador turned in performances that were nothing less than outstanding in one tough month. Similarly, Toyota dealers and others said there wasn’t a severe fundamental shift in getting new car loans approved, yet GM’s sales nationally fell by 16 percent;Toyota’s by 29.5 percent.

One more little non-secret, historical fact: It is true that dealers told the media that they had a stack of folders for loans they couldn’t obtain for their clients. The media could have but didn’t discover that that statement is true in any dealership in any month and in any year. There are always 10 to 25 customers at the end of the month that finance managers felt sure they could get loans, but couldn’t.

But for the media to suggest the end of the world for automotive loans because approval rates fell by 19 percent – without wondering if the 50 percent drop in showroom traffic meant that people with good credit weren’t shopping for cars – is almost comical. They say that history happens first as tragedy, the second time as farce. There isn’t a more accurate way to describe last month’s sales.

Next week things might be completely different for car loans, just not last month or now.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net