The federal government cash for clunkers program is over, and as the pessimists predicted, the program merely borrowed sales from the future rather than generated sustainable growth.
September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.
After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976.
"Many people regard February as the darkest month of the recession, but even then the SAAR was higher, at 9.1 million units," Edmunds.com senior statistician Zhenwei Zhou said in a statement.
The lessons we take away from this experience are dark for the housing market.
The housing market is currently being propped up by several government programs, several of which are about to expire.
- The Federal Reserve is currently buying about $105 Billion worth of Mortgage-Backed Securities each week. If that continues they will max out there self-imposed $1.25 Trillion limit in four months. This program is designed to hold down mortgage rates.
- The Treasury currently gives an $8,000 tax credit to first-time home buyers. This is set to expire at the end of November, but in reality it expires at the end of this month because people applying for this must have all their paperwork in before the deadline. The tax credit created about 350,000 homes sales that would not have otherwise happened.
- The Federal Reserve's Treasury Buyback program will soon exhaust itself. It only has $15 Billion of capacity left. To give an idea of just how important this program is, it was involved in 50% of Q2 Treasury purchases. This program is designed to hold down interest rates.
- State mandated foreclosure delay laws are temporary. For instance, California currently has a 90-day foreclosure moratorium in place, but about to expire. Other states have also used foreclosure moratoriums.
One or more of these programs will probably be extended. But if the cash for clunkers law will teach us anything, these programs do not create sustainable demand. They borrow from the future. So when these programs end, and they will all eventually end, demand will be that much lower than it would normally be. The only difference is a whole bunch of taxpayer money will have been spent in an effort to delay the pain.