Pent-Up Demand? What Pent-Up Demand?

With annual U.S. sales running nearly 5 million units below pre-economic-crash peaks and the average age of vehicles on the road at 11 years, surely there are a lot of buyers champing at the bit to get back in the market at the first real sign this latest recession is over for good.

At least that’s the theory most auto makers are working under, as they keep a close eye on the bottom line while waiting for the boom to begin.

But the much anticipated release of pent-up demand that will drive buyers back to showrooms in droves may be more a matter of if then when, says a market analyst with CITI Investment Research.

“The biggest issue,” Itay Michaeli tells a recent gathering of the Society of Automotive Analysts in Southfield, MI, is the U.S.-market recovery “is not as easy as some people might make it out to be.”

The good news, he says, is the hard part is done, pointing to the industry’s 40% reduction in fixed costs since 2005. Auto makers and suppliers need sales to reach only the 14 million- to 15 million-unit range for “prosperity,” he points out, not match the market’s 17 million-plus highs.

“This is a new industry,” he declares.

But the question is whether those sidelined buyers will return at all.

Michaeli points to vehicle-density data indicating 2 million cars and light trucks have vanished from U.S. roads since 2008. That means households are getting by with fewer vehicles in the driveway and some people are deciding to live without any wheels at all.

“If the same number of licensed drivers bought cars as in the 1982 recovery, we would already be at a 14 to 15 million (seasonally adjusted annual rate),” he says.

But unlike past economic rebounds, there’s no guarantee these holdout buyers will return to the market, Michaeli points out, citing a consumer survey by CITI that suggests “America does not want to go back to mid-1990s vehicle-density levels.

“The question is whether the younger generation – the 35- to 55-year olds, will own as many vehicles as their parents’ generation,” he adds.

“If vehicle density stabilizes, we’ll be selling 15 million vehicles overnight. If we don’t go back to where we were in the mid-1990s, we’ll be at 12 to 13 million (annual sales) for years. That would be difficult for the industry to prosper.”

Michaeli says it’s unclear if the credit-crisis-led economic meltdown has permanently changed buying habits or whether the decline in the number of vehicles per licensed driver is just a temporary blip.

Either way, CITI expects the trend to continue for the next couple of years unless something is done to pull reluctant consumers, skittish about their own economic futures, back into the market.

Michaeli’s recommendation? Duplicate Hyundai’s pioneering incentive program from 2009 that promised to repurchase vehicles if buyers lost their jobs in the first 12 months of ownership.

“I think a job-assurance stimulus would solve much of this problem overnight,” he says.

Such a program “doesn’t corrupt vehicle prices,” Michaeli notes. “Consumers will buy as much vehicle as they can, and the incentive doesn’t cost (the auto maker) anything at the time of sale.

“We’re bullish on the industry, but it needs 14- to 15 million SAARs to truly prosper,” he says. “The biggest threat is complacency that pent-up demand (will solve everything).”