Can tomorrow follow today's affordability? - automobiles

Unemployment is at record-low levels. Household incomes are increasing. Mortgage rates are improving and the robust U.S. dollar is making everything more affordable, including cars and trucks.

Average new vehicle transaction prices have increased 33% faster than overall inflation in the last 25 years - driven by booming sales in the luxury car and sport-utility segments, and government mandates for emission controls and safety equipment.

But vehicles are more affordable now than four years ago. In fact, fixed new vehicle prices and dropping interest rates lowered average monthly payments in 1997.

The average new-vehicle transaction price rose just 2.8% in 1997. It's expected to be less this year. The average new vehicle purchase represented 17 weeks of the typical family's income 25 years ago, peaked at 26.4 weeks in 1996 and fell to about 25.6 weeks in 1997.

"You might say cars are more affordable than ever, though the original price is more," says Greg Sutliff, owner of Sutliff Chevrolet in Harrisburg, PA.

Automakers' massive capital investments and cost-cutting measures are reaching consumers, but this age of affordability affects no one more than dealers.

Dealerships' profit margins are down as manufacturers hold, and in some cases even reduce, suggested retail prices.

"Automakers are just taking all of our money. They hold down the sticker price by cutting dealers' percentage," says Corey Costango of Winner Ford in Newark, DE.

Leasing, super stores, dealer and automaker ingenuity, and old-fashioned capitalism often are cited for today's new vehicle affordability.

Dealer opinions on what that means are as varied as the cars they sell.

What got dealers to today, however is pretty clear-cut: Financing has been continually extended and refined over the last 20 years to keep new-vehicle monthly payments on par with household incomes.

In the 1970s, three-year financing was the contract of choice. By the early 1980s four-year financing had taken over, segueing to five-year financing later that decade.

Now leasing is dominant, accounting for nearly a third of all retail sales. And that percentage likely will continue to rise, for better or for worse, dealers say.

"I would think it would continue to go upward as more and more consumers grow comfortable with it," says Don Crevier, owner of Crevier BMW in Santa Ana, GA.

Initially, leasing appeared perfect to keep new vehicle transactions humming. It put consumers in cars and trucks they otherwise might not afford, while investing money elsewhere that previously would have been spent on buying a vehicle.

But leasing is not the industry-wide savior as some might expect. Most dealers say manufacturers are supporting a costly sales tool. "But I guess it's not as costly as not selling cars," says Mr. Sutliff.

Several dealerships selling entry-level or luxury import vehicles say their leasing percentage has changed little in the 1990s. Others more affected by its widespread use view leasing with an "every-rose-has-its-thorn" approach.

While it does sell new vehicles, the usual short leasing cycle of two years is flooding used car lots with vehicles that don't appear so used.

Model lines sometimes make few styling and technological updates in a 24-month period, and due to contractual mileage agreements, leased vehicles are returned to dealerships with fewer than 50,000 miles.

Used vehicles are depreciating slower. Operating costs are down due to better durability and decreasing gas and oil expenses. Those have dropped 51% since 1975 to a current rate of 4.8 cents per mile.

Growing consumer acceptance of used cars has increased that segment's market share, forcing automakers and dealers to make new cars more affordable. A recent survey published by the automotive research firm, Dohring Co., says the number of people likely to buy a used car from a dealership grew to 32% in 1998, up from 27% one year ago.

"Used car inventory takes away from the new car market. With most leases just two or three years, they're back on your lot before there's much change to the model," says Roger Pollack, a sales manager at Coggin Honda in Jacksonville, FL.

Incentives have become a regular tool in new vehicle sales, dealers and industry observers say.

"Prices have really been driven down by competitive factors," says David Cole, director of the Office for the Study of Automotive Transportation at the University of Michigan. "Everybody has really pulled out all the stops."

But some dealers think automakers have gone too far. "Some measures have become excessive. Consumers need to drive the market, not manufacturers," says Henry Hutton, president of Chuck Hutton Chevrolet-Geo in Memphis, TN.

Says Mr. Sutliff, "They're forcing the market to buy cars, when, if it had a choice, it might not buy. They're buying sales from tomorrow. What'll happen next? That's a tricky question,"

Can tomorrow follow today's record sales and affordability?

A 1997 fourth-quarter National Automobile Dealers Association survey conducted shows an increase in the number of dealers expecting sales to deteriorate. And the NADA Optimism Index hit its lowest point since the first quarter of 1996.

At least for now, with affordability holding steady, dealers can hold off on developing new financing plans. They say that's good. Most dealers shudder at the thought of extending loan terms even longer.

"Elsewhere, they're talking about financing for 70 to 84 months. That's very dangerous to take someone out of the market that long," says Larry Cruise, president of Fowler Buick-GMC in Jackson, Miss.

Mr. Hutton adds, "We're here to sell cars. We're not here to finance. You have just about every conceivable option already out there. We'll just have to adapt to whatever comes down the road. I'm just going to worry about my customers who come in the door."

Brian Corbett is an assistant editor for Ward Automotive Reports.

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