Commentary-Housing Auto Market-Print

ECONOMIC & MARKET INSIGHTS

Housing Market Steps into the Spotlight Just as New Auto Sales Begin to Fade By Scott M. Colbert, CFA ®

As the Fed was cutting short-term interest rates to nearly zero in the early part of this decade, the cyclical parts of our consumer-led economy began to slowly recover. From 2000 to 2007 we sold nearly 17 million light vehicles annually in the United States. (Figure 1) But at the bottom of the Great Recession the annualized sales rate was only 9.4 million. The collapse in auto sales created pent-up demand propelling auto sales even higher than early decade norms. The recovery in auto production has helped boost the economy and is a key reason for our bullish outlook on growth of late. In 2015, the United States sold 17.4 million units, an all-time yearly high that we surpassed slightly in 2016. With gas prices up slightly, interest rates in the short part of the market higher, and some concern regarding “sub-prime” auto lending, we expect car sales will remain near-record levels, but it will be difficult to surpass the 2016 record. With car sales peaking, we will likely lose some of our cyclical momentum in this sector. We historically have been a “car-centric” nation, buying more cars per year than the entire European Union market, but China has surpassed both the United States and the European Union in terms of auto sales, and will likely purchase 24 to 26 million light vehicles this year. While the U.S. auto industry recovered fairly quickly in a typical cyclical pattern, the housing recovery had been much more subdued. From 2000 to 2008, homes were built much faster than households were forming, creating a dramatic oversupply. Since our housing market was overbuilt, it took a long time to work off this excess. But look around – just try to find a house in the U.S. market now in a major metropolitan area. Housing inventories have been reduced dramatically and pentup demand has accrued. With average home prices now back to their earlier cyclical peaks, and interest rates still very low relative to historical norms, we expect continued improvement in the housing sector that will more than make up for the slowdown in the auto space. (Figure 2) Recently, most new home starts were in the “multifamily” sector. Fortunately, now single-family home starts are accelerating and they contribute almost three times the positive impact to GDP relative to apartment construction.

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e Change e Change

TOTAL AUTO SALES 2002–2017 TOTAL AUTO SALES 2002–2017

25 25

KEY TAKEAWAYS   As vehicle production levels off in the United States, manufacturers are already giving dealers more latitude to move cars with rebate and incentive programs, and this will only increase in the future.  With the Fed likely to raise interest rates another quarter point in June, look for new car inventories to sit a while as lenders adjust their rates and buyers recalculate the cost of their big-ticket purchases.  Single-family housing inventories continue to shrink and average home prices will likely trend even higher.  Home lending rates are still very low relative to historical norms, so a Fed interest rate increase in June should not dampen home demand at this point.

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15 15

10 10

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Bloomberg

Figure 1 Figure 1

FIGURE 1

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TOTAL HOME SALES 2002–2017 TOTAL HOME SALES 2002–2017

1,000 1,000 1,500 1,500 2,000 2,000 2,500 2,500

Average new household formation 1.25 million per year Average new household formation 1.25 million per year

500 500

0 0

Bloomberg Bloomberg

Figure 2 Figure 2

FIGURE 2

Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of May 30, 2017. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company’s Financial Advisory Services Group. This material is not a recommendation of any particular security, is not based on any particular financial situation or needs, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk. Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situations. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. ast performance is no guarantee of future results, and the opinions and other information in the commentary are as of May 30, 2017. his summary is intended to provide general information only and is reflective of the opinions of The Commerce Trust Company. his material is not recommendation of any particular security, is not based o any particular fin cial situation or need, and is ot intended to replace th advice f a qualifi d ttorney, t x advisor or i vestm nt professional. Divers fication does not guarantee a rofit or protect against all risk. ommerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any roduct and specific financial situation. ata contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, ompleteness or reliability cannot be guaranteed. ast performance is no guarantee of future results, and the opinions and other informatio i the commentary ar as of May 30, 2017. his summary is intended to provide general information only and is reflective of the opinions of The Commerce Trust Company. his material is not recommendation of any par cula security, is n t bas d on any particular financial situation r eed, and is ot intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a rofit or protect against all risk. mmerce does not provide tax adv ce or legal advice to customers. Consult a tax specialist regarding tax implications related to any roduct and specific financial situatio . ata contained h rein from third-party p ovid rs is obtained from what are considered reliable sources. However, its accuracy, ompleteness or reliability cannot be guaranteed.

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ABOUT THE AUTHOR

Scott M. Colbert, CFA® Executive Vice President, Chief Economist and Director of Fixed Income

Scott is the chief economist and director of fixed income management with Commerce Trust Company. He joined Commerce in 1993 and has investment responsibilities for over $19 billion in fixed income assets. Scott directly manages the Commerce Short-Term Government and the flagship Commerce Bond strategies. Scott received his bachelor of science degree in nuclear engineering from the University of Cincinnati in 1986 and received his master of business administration from Xavier University in 1988. He has been both a director and president of the Chartered Financial Analyst Society of St. Louis.

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