Is Auto Slump a Boon for Car Buyers?

Of course, conventional wisdom says summer is the best time to strike when looking for bargains at the car lot. That's because dealers are trying to clean up older inventory to make way for the new models that come out in September. But this year, things are different. Auto makers have suffered through two months of devastatingly disappointing sales — a slump that could very well continue in this uncertain economic environment. That's bad news for car makers, but for car shoppers that means end-of-summer bargains could be sweetened — and they could last well after Labor Day.

"These particular couple of months have been beyond ordinary," says Phil Reed, consumer advice editor at auto web site Edmunds.com. In July alone, new car sales dropped 12% industrywide compared with the same month last year, according to Autodata Corp. Detroit suffered most: Chrysler sold 8% fewer cars, Ford Motor: 19%, and General Motors, a whopping 22%. Toyota and Honda sales dropped roughly 7%. Most notably, the Big Three lost their grip on the U.S. auto market as their market share fell below 50% for the first time in history.

As a result, GM recently joined Ford and Toyota in scaling back its industrywide sales forecast for the year. According to a Dow Jones Newswires report, GM echoed Ford's earlier predictions that the industry would sell some 16.5 million vehicles in 2007, down from nearly 17.1 million last year. The auto makers have blamed the slump on a soft housing market and higher gas prices.

Given all that, the question for savvy car shoppers is: Will the industry get worse before it gets better? Here are some factors to consider when heading to the car dealership over the next several months.

"As home prices decline, people feel less wealthy," explains Sophia Koropeckyj, an economist with Moody's Economy.com. "It's a vague type of feeling, but if they're feeling less wealthy, they're not going to be buying expensive cars so much."

It's more than a feeling for folks whose adjusted rate mortgage rates have or will be jacked up this year, or for those who have previously used the equity in their homes to purchase a car. In the current economic environment, these consumers likely won't have the cash for a new set of wheels any time soon.

All of this is quite a change from the past several years when consumers frequently bought new cars — not because they needed them, but because they wanted them. The average trade cycle for new cars — namely, the time between purchasing a car and selling it — dropped from roughly 63 months in 1995 to fewer than 50 in 2005, according to Deutsche Bank Securities research. In 2006 the trend reversed and the average trade cycle went up to 52 months. It's a trend that will likely continue this and next year, Koropeckyj says.

"Auto manufacturers have been very successful in accelerating the replacement cycle through new models and various incentives, but if push comes to shove, you can keep your car longer," says Koropeckyj. "And you'll do that if those other economic conditions are less favorable."

But while red-tag events and employee discounts may have brought buyers to the lots last summer, the strategy backfired this year. "People became addicted, but also impervious to those incentives," Gentile says. As incentives became a less-effective marketing tool to drive buyers to the dealerships, the manufacturers naturally tried to trim wide-scale promotions. This was yet another reason for the sales slump this summer.

Instead, the industry's new approach is more strategic: They are focusing on models that have fallen out of fashion with consumers, like gas-guzzling trucks, SUVs and larger sedans. "Now you'll see fewer rebates in terms of volume, but the rebate amounts could be higher," Gentile says.

Consider this: If you're looking to buy a Dodge Ram, GMC Yukon or Saab 9-7x this month, you could get as much as $6,000 cash back or 0% APR on 36-month loans, according to Edmunds.com. What's more, the manufacturers are so eager to sell the unpopular gas-guzzlers, they are offering as much as $4,000 cash incentives to their dealers as well. That's cash the dealers might be willing to pass on to customers, especially if you shop toward the end of the month when they're eager to meet their quotas. In August, for example, Ford is running $2,000 dealer cash offers on its Five Hundred and Freestyle SUVs, while GM offers up to $4,000 on Chevrolet Suburban and GMC Yukons. (For more offers, go to Edmunds.com's incentives and rebates section. Enter your zip code for local promotions.)

Obviously, that's great news if you're in the market for a truck. But if you're shopping for a smaller car, such as the fuel-efficient Toyota Corolla or Nissan Versa, consider yourself lucky to get a $500 rebate, at best. "There is a reason why there are huge incentives on vehicles," says Jesse Toprak, Edmunds.com's executive director of industry analysis. "Maybe they have too much supply or demand is low, or it's a combination of both."

Whether the manufacturers will revert to the more generous incentives of prior years is yet to be seen. But there is one encouraging sign for consumers already. Some 2008 car models now hitting the dealerships are coming in with incentives attached. "It used to be we wouldn't see incentives for new model years this early in the model year," Toprak notes.

GM, for example, offers $1,000 cash back or low APR on some 2008 Buick, Chevrolet and Pontiac models, as well as dealer incentives on Cadillac, Hummer and Saab vehicles. Ford has $500 cash back on many of its 2008 models, including the Escape hybrid. Nissan offers $1,000 back on the 2008 Altima, and Hyundai offers $500 back on the 2008 Sonata.

Which brings back the question du jour: Should you take advantage of these deals now or wait it out? "If you're looking purely for the best deal money-wise, then wait until the end of the year," Toprak says. But you do run a risk of having fewer choices at the dealership in terms of color, configuration and other extras. If you have your heart set on certain amenities or a certain model, waiting for a better deal might just leave you driving off the lot in your old set of wheels.

Then again, given the prognosis for the housing markets and its effect on consumer budgets, it might simply be wiser to wait. If you've had your car for five years or less, chances are it still has many healthy miles ahead.