Mortgage Mess Hits Auto Industry

The subprime mortgage fiasco is like a pebble thrown into a pond. It's rippling out into the auto industry, as well, where uncertainty about the housing market is causing consumers to delay making new auto purchases.

The experienced car sales manager will always tell you that business is booming-even in a down economy. He knows that consumers are driven by a herd mentality. If they think other people are buying, they won't be hesitant to purchase a new car.

Unfortunately for those salesmen, their optimism isn't working. Thanks to the slowdown in the housing industry, the herd isn't stampeding to the showroom floor these days, and the result is slumping sales for automakers.

Putting on the brakes

Recent consumer jitters can be attributed to the nationwide housing slump. Home values have decreased, crippling the subprime mortgage market. Foreclosures have jumped, which has prompted lenders to tighten their belts.

The double-whammy of rising interest rates and lowering home values have slowed down an economy where consumers have been throwing caution (and sometimes money) to the wind. Without the guarantee that a homeowner can rely on his home equity as a source of cash, he's reluctant to make big purchases-particularly for a new car.

Jump-starting sales

It's easy, although not much fun, for consumers to delay the purchase of a new vehicle. Unless your car is a rust bucket or a public health hazard, it can still be relied upon to get you from point A to point B. For most consumers, this means that buying a shiny new car is a want, not a need. Many are delaying their purchases until the economy rebounds. In fact, surveys are indicating that the uncertain housing market is the number one reason why people aren't buying new cars.

Like those eternally optimistic sales managers, automakers are reluctant to point out that the housing market has taken its toll on sales. But they're beginning to take noticeable steps to combat the slowdown, such as offering new cash-back deals and rebates. General Motors has led the surge, and it's likely that other automakers will soon follow.

The Federal Reserve may also do their part to reverse the trend. Rumors are swirling in the financial market that Chairman Ben Bernanke and company are poised to make some interest rate cuts in the future. Often, just the rumor of the Fed taking action can breathe some life back into the economy.

If the housing market can rebound and home values begin to climb, consumers may lose their case of the jitters. Analysts are skeptical, however, and say that the auto industry could feel the pain for a long time to come. In the coming months, it will become clear whether a car sales manager's tale of booming sales is fact or fiction. The herd will decide whether to head to the showroom floor, or stretch the old jalopy for as many miles as possible.