Housing Slumps Deepens; Auto Sales Hurt
August 27, 2007

The housing slump is lousy for the auto business. And the housing market is worsening.

Some statistics that have got to be scary to automakers and automotive lenders came out of the National Association of Realtors’ monthly report on home sales Monday:
   · sales of previously owned homes fell to a five-year low in July;
   · the glut of unsold properties climbed to their highest level since 1991;
   · delinquencies on loans to subprime borrowers (people with poor credit) hit a five-year high in the first quarter;
   · the median price of an existing home dropped 0.6 percent in July from a year ago to $228,900;
   · new home starts in July hit their lowest level in a decade.

Perhaps scariest of all to auto companies –- besides the fact that economists see no end in sight to the housing slump –- is the fact that lower property values and higher mortgage costs threaten to weaken consumer spending (think cars!) and slow economic growth.

“Much attention is being paid to tighter credit, delinquencies and the subprime issue,” Ford’s top analyst George Pipas told AutoObserver. “Slower consumer spending growth is the bigger issue.”

Growth in consumer spending decreased from the first quarter to the second and resulted in spring and summer car sales that were lackluster at a time of year when they are usually the highest.

Pipas, for some time now, has been sounding the alarm about higher mortgage costs due, in part, to people signing up for adjustable rate mortgages (ARMs) when rates were low. Many people used those lower rates to finance more home than they could otherwise afford, but now those ARMs are coming due, and the monthly payments are higher. Those higher rates and higher payments are combined with higher property taxes, higher insurance costs and higher energy bills.

“If you got an adjustable rate mortgage (ARM) from 2002 or 2003 and say it is say a five- year ARM, your new mortgage payment is about $200 a month higher than it was yesterday for every $100,000 you financed,” Pipas calculates. “If your mortgage payment goes up $400 a month -- roughly equivalent to a new car payment -- you might think twice about getting a new car. Maybe keep the old car.”

Economists see no end in sight to the housing slump.

“Unfortunately, worse news lies ahead,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, told Bloomberg News. Stricter borrowing rules mean more foreclosures and fewer qualified buyers, which will be "adding up to lower home sales and lower prices. It is hard to see a bottom before mid-2008.''

As a result, the automotive industry will continue to be challenging for the rest of the year and possibly into next, Pipas noted.

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