Business & Real Estate

Is ‘gas mileage be damned’ the mantra fueling new car sales?

FILE - In this March 14, 2017 file photo Volkswagen cars are lifted inside a delivery tower of the company in Wolfsburg, Germany. Volkswagen will report first-quarter and hold analyst and investor conference call on Wednesday, May 3, 2017.
FILE - In this March 14, 2017 file photo Volkswagen cars are lifted inside a delivery tower of the company in Wolfsburg, Germany. Volkswagen will report first-quarter and hold analyst and investor conference call on Wednesday, May 3, 2017. AP

Auto dealers will have a busy Memorial Day weekend, as drivers in the Golden State continue to pick up new cars and trucks at a feverish pace.

Sales during the long holiday weekend – a favorite time to shop – should remain fairly strong, according to Santa Monica-based car buying website Edmunds.com. Low interest rates, deep discounting by manufacturers and new technology in vehicles are some of the factors driving the prolonged boom in sales.

During the Great Recession, drivers held onto cars as long as possible, spooked by job losses and overall uncertainty in the economy. New car sales plummeted by roughly 35 percent in 2009 with 10.4 million units nationally, compared to a historical average of 16 million. While last year set a record with 17.5 million vehicles sold, analysts expect 2017 to remain relatively stable, albeit slightly less than 2016.

“Most will focus on the fact that sales are down from last year. But 2016 was a record for new car sales, and it’s hard to compete with that,” said Jessica Caldwell, a senior analyst with Edmunds.com.

Rick Niello, president of the Sacramento-based Niello Company, described the current market as “thriving,” noting that his business has seen more sales in 2017 compared with the same period last year. The Niello Company owns several dealerships throughout the region, including the Acura, Audi, Volkswagen and BMW brands.

“Cheap money is a huge factor that people have taken for granted,” Niello said last week.

The dynamics of the industry, he said, have changed remarkably over the last five years as dealers and manufacturers climbed out of the recession. In 2012, gas prices were much higher, and the federal government had just enacted new fuel efficiency standards.

Fast forward to 2017 where gas prices are hovering in the mid-$2 range – courtesy of a domestic oil boom in the form of shale rock reserves – Americans don’t particularly care about miles per gallon as they look for extra space and other features. The result: sports-utility vehicles and trucks are more popular than their hybrid and sedan brethren.

“Gas mileage be dammed, people are buying cars that are not efficient,” said Niello, whose dealerships collectively sell 12,000 used and new cars annually.

Californians appears to be slightly exceeding the expectations of analysts who predicted a nationwide slowdown in new car sales this year. For the first quarter of 2017, the state saw 506,745 new-car sales in the period from January to March, according to a report released this month by the California New Car Dealers Association. That was up less than 1 percent from 503,463 in same period of 2016. Nationwide, sales saw a year-over-year decline of nearly 1.5 percent in the first quarter.

“Our economy, relative to the national economy, is a little bit stronger,” said Brian Maas, CNCDA president. “Car sales are a pretty good reflection of that.”

The Sacramento-based trade association is projecting 2.08 million new-car registrations for all of 2017, nearly matching 2.09 million reported in 2016. Both fall just short of the all-time record of 2.15 million set in 2005. During the depths of the recession, in 2009, statewide registrations totaled only 1.04 million.

The auto boom won’t last forever, analysts and industry insiders say. Caldwell of Edmunds.com explained that the number of possible car buyers is dwindling, since most people have already purchased one.

“You run out of that pent-up demand,” said Caldwell, adding that the market has reached “peak saturation.”

Still, many consumers are jumping on the incredible deals, with several manufacturers offering 0 percent interest financing this weekend, including Chevrolet, Dodge, Ford, Hyundai, Kia, Mazda, Nissan, Subaru and Toyota.

But future economic forces such as high interest rates and fuel prices may eventually cool demand. The Niello Company is buying down the interest rate to 0 percent for up to $30,000 this month as part of an annual promotion to generate more sales. Niello acknowledged that the event would be changed when interest rates are hiked substantially.

“To subsidize 11 to 12 percent would be prohibitive,” Niello said.

Richard Chang: 916-321-1018, @RichardYChang

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