Is The Car Industry in for a Double Dip?

The aftereffects of the earthquake and tsunami in Japan are still a major cause for concern as the auto industry tries to pull itself up from recession, but that isn’t the only thing that is giving industry experts pause these days. Now the car business has been confronted with new data that is causing yet more concern: Home values are continuing to fall, and they hit new lows in March, tumbling even below the level we experienced in the depth of the Great Recession in 2008. While the recession is over by conventional definitions, the continuing slide in home values is a red flag for the auto industry, which would like to believe recovery will actually gain momentum in the second half of the year.

Here is what’s behind the industry’s latest crop of fears: The 2011 Standard & Poor’s/Case-Shiller index of housing prices in 20 metropolitan areas has declined for the sixth consecutive month. Worse yet, the most recent drop put the index at a mark below the previous recent low-water mark that came in April 2009. While the economy as a whole has not experienced a so-called “double-dip” recession, there is no doubt that home values have. The question is: Will the drop in values have a negative effect on new-car sales?

If the March values represented the bottom of the trough, experts might be relatively sanguine about the industry’s prospects going forward, but many analysts project continued erosion in home values, largely because falling prices scare some homebuyers from the market and prompt others to delay home purchases. Further, in a traditional recovery, home construction most often is one of the biggest engines of growth, but now residential construction is lagging manufacturing growth by a large margin. That begs the question: Can manufacturing continue to surge while home-building lags and home prices are in decline? The quick answer is likely “No,” since unemployment in May rose back over the 9-percent mark, another indicator of a weakening economy.

One important effect of declining home values is it makes consumers feel poorer, and when they feel poorer they are reluctant to puchase big-ticket items, like automobiles. Declining property values also affect car dealers, because the lessened value of their real estate holdings can make it more difficult and more expensive to borrow money. Even government is affected: State and local governments face lower property tax revenues as property values fall. This, in turn, could prompt state agencies to acquire fewer vehicles. While some analysts feel we have essentially reached the bottom for home values, others are not nearly as optimistic. That’s an important cause for concern through the balance of this year, because the fragile recovery of the auto industry and the economy as a whole can’t take much more bad news.