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FEDmiiLXi RESERVE BAXK OF FHIT.APET.PHTA A P R I L 1 U S E D CA RS: S e c o n d -H a n d S ire n s C o n fid en ce, T e m p e re d with Caution, R u les Our H ousing M a rk e t 9 5 9 It’s spring when fancies turn to, among other things, thoughts o f automobiles. This year, with both foreign and domestic small cars on our minds will we still be as susceptible to the lures o f ... SECOND-HAND SIRENS “ She’s a beauty.” “ She’s got plenty of class.” and yearly change came to new cars. Only then Ever notice how men often think of automobiles did owners have reason to sell their old cars as females? Maybe it’s because, like women, cars before they wore out. have an irresistible attraction. Or maybe it’s be cause both demand attention and tender care. At any rate, if cars are like women, the used- In the present market buyers, sellers, product, and price all are hallmarked by variety and change. The 10 million or so people who buy car business is like a room full of women— noisy, used cars each year are as varied as a cross- bustling, mysterious, often misunderstood, full section slice of our population. Sellers range of variety, and ceaseless change. These last two from the dealer with a multi-acre lot to the pro traits, variety and ceaseless change, are partic verbial little old lady who drove only on Sunday ularly appropriate to the used-car business. They created it in the first place and they characterize afternoons. Each day an automotive potpourri from cur its existence to this day. rent editions of Detroit’s “ dreamboats” to small The business was born when model variety 2 foreign cars to road-scarred old veterans is sold b u sin e ss re v ie w in the used-car market. Free of factory control, In the early 1920’s competition stiffened among the price of each fluctuates according to the forces the manufacturers. Mass production had nar of supply and demand. rowed the virgin market and buyers were harder Change is chronic in the used-car market. Its to find. Competitors couldn’t out-produce or structure mutates as its existing institutions de under-price the old Model-T so they emphasized cline and others rise to take their places, as the the two things that Ford didn’t— model variety various groups of buyers and sellers shift in importance. and yearly change. Henry Ford could have fought To see what the business was like without vari back by producing another car but he stuck with the Model-T. ety and change is to understand their importance. The motoring public wanted something differ Let’s go back in history to the car that changed ent and what’s more was willing to pay for it. America but never changed itself. ONE M AN'S DISCARD IS ANOTHER M AN'S DELIGHT Not even Old Henry could thwart a combination like this forever. Model-T sales declined as people switched to other makes which afforded a wider choice of regularly restyled models. One of the most vivid memories of the Model-T So strong was the lure of novelty and differ Ford is the manufacturer’s offer: “ You can have ence that a growing number of people purchased any color you want so long as it’s black.” While before their cars wore out and a stream of used the Model-T was the first automobile to be mass- cars came on the market as trade-ins. Procedures produced and it did much to make us a “ nation on wheels,” it is best remembered as a one-color, and institutions were formalized to speed these trade-ins to new owners and the used-car business one-shape car. It also was a one-owner car. The blossomed. same person usually drove it from showroom to junkyard. Why not? Why replace an old “ Tin Old before their prime Lizzie” while it still ran if its replacement looked The manufacturers’ policy of offering variety and almost the same. change has continued to this day. It now goes There was not much of a used-car business under the impressive name of dynamic obsoles from 1908 until after World War I while the cence. And it’s now getting some knocks. The Model-T made up the bulk of our automobile fashion is to criticize dynamic obsolescence and population. Occasional sales were made between to poke fun at its finny, chrome-crusted manifes individuals, and scattered dealers handled used tations. True, dynamic obsolescence sometimes cars; but for all intents and purposes, the auto misfires— due, perhaps, to the three-year lag be mobile market was confined to new cars. tween drawing board layout and customer pay In addition to Ford’s frozen styling, other out— but many still staunchly defend the policy. factors worked against the development of a used- They say it increases the economic growth of our car business in those early years. Most buyers country and brings transportation to millions who were first-time owners and relatively few sales in could not otherwise afford it. Here’s how dynamic volved trade-ins. Furthermore, lacking an organ obsolescence, working with its inseparable part ized market in which to dispose of them, dealers ner, the used-car market, is supposed to accom often were reluctant to accept used cars in trade. plish these things. 3 b u sin e ss re v ie w Today the typical new-car buyer replaces his usually sells for about one-third of its original automobile every three to five years. He does so price. Variety and change accelerate obsoles in spite of the fact that, for normal purposes, his cence. This may reduce the value of a new-car car is capable of running almost 12 years. He buyer’s investment more quickly but it also brings therefore rebuys several times more often than serviceable used cars within the reach of millions if he drove each car to junking age and, it is said, automobile production has been increased of lower-income families. At least three out of five car owners today have never bought anything but accordingly with tremendous impact on the eco nomic growth of our country. used cars. In order to rebuy every three to five years, the Critics claim that if the manufacturers con centrated on serviceability rather than style— in typical new-car owner must dispose of a car with other words, made modern Model-Ts — prices more than half its life left. Because yearly model could be reduced enough for niost people to changes make a car look older than it actually is, afford new cars. Yet the debate is only academic. mechanically speaking, the price drops faster than Dynamic obsolescence and its creation, the used- the remaining mileage potential. A car four years car business, are the fact and seem to be here old with roughly two-thirds of its active life left to stay in spite of the changes and problems that the new “ small” cars may bring. (More about DARLING, YOU ARE G ROW IN G OLD these expected arrivals in a later section.) ACTUAL. The black line shows what a typical auto It is a complicated though fascinating market mobile, selling new for $3000, will be worth each year of its life— assuming present depreciation rates continue. Depreciation was figured from actual retail values as given in various price lits. that changes used cars from castoffs to prized THEORETICAL. The green line shows what the same auto would be worth if its value were based only on remaining driving potential and scrappage price. (No allowance was made for increasing repair costs.) Both computations assume a 12 year life and a $50 scrap value. DOLLARS possessions. The next section introduces the peo ple who go selling and shopping in this market place. TO MARKET. TO MARKET There are about 55 million used cars. Almost any one of them could be sold any time, any place. All that is needed to make a market is a seller with a title and a buyer with money or credit. But we need more than that to make an analysis of that market. We need a plan of organization. First, we shall discuss major categories of retail sellers, then retail buyers, and lastly, the whole saling institutions. RETAIL SELLERS The polyglot mass of retail used-car sellers can be divided into three groups. They are, in inverse order of their importance, individuals, nonfranchised dealers, and franchised or new-car dealers. 4 b u sin e ss r e v ie w The "curb" market though it should— and sometimes does— contain A substantial number of individuals retail their a potbellied stove. used cars directly to other individuals. Some of Most non-franchised dealers offer a selection these sales are made to friends and neighbors; of ages, makes, and models ranging from year- others to relatives. The largest proportion of old “ cream puffs” to aged, economy jobs. Some individual sales, however, is made to total dealers, however, specialize in particular types of strangers. Contact between sellers and buyers fre vehicles that sell well in their neighborhoods. quently occurs in makeshift ways. You’ve prob In California and Florida there are lots which ably seen some of them yourself: “ 4 Sale” signs stock nothing but used convertibles and in Texas, on windshields, thumbtacked notices on company one can find dealers who sell only second-hand bulletin boards or in gas stations, and column Cadillacs. In the poorer sections of almost every after column of classified ads in newspapers. city, there are specialists who handle “ junkers” (Some of these ads, however, are placed by deal which are too old to be worth much as trans ers masquerading as individuals.) portation and too young to be antique. The individual market is big, sprawling, and Non-franchised dealers are a product of World unorganized. How big? Nobody really knows, War II and the period immediately following it. for it operates beyond the light of regularly col Some existed in the 1930’s and earlier but they lected statistics. Only scraps of indication are did not really flourish until the wartime shortage available. Some estimates— perhaps guesstimates of new cars drove used-car prices to record peaks. would be a better word— place the size of the individual market near a million sales a year. In 1939, there were about 6,000 of these dealers A small but growing section of the individual market deals exclusively in antique cars. Collect ing old Stanley Steamers, Bearcats, Pierce Ar rows, and other vintage models has become a popular hobby. Business is brisk and prices are high with some models bringing more now than when they were new. It is a clubby, compart mentalized market since collectors already have cornered most of the existing supply and buy and sell mostly among themselves. and some estimates place the postwar total as high as 70,000. Most of these were fair-weather flowers and soon left the business when conditions again turned competitive. At the present time there are about 20,000 and turnover remains rapid. Several sources of supply are open to nonfranchised dealers. The traditional one is the new-car dealer with a surplus of trade-ins. Impor tant among the other sources are trade-ins on the non-franchised dealers’ own sales. In 1957, for example, about 60 per cent of all used-car buyers traded in an older car. Other non-franchised Non-franchised dealers dealers with slow-moving stocks and individuals Non-franchised dealers are independents who sell with greater need for cash than car are other nothing but used cars. They come close to fitting sources. In addition, some dealers have agree the popular conception of the used-car dealer. ments with banks and finance companies to sell Although there are many large-scale lots, the repossessions. typical operation is small with 20 to 40 cars There are no published figures on the number sardined around a one-room office that looks as of cars sold by non-franchised dealers. We have 5 b u sin e ss re v ie w made estimates using Department of Commerce dollar sales figures and ratios and averages from other sources. The peak sales year appears to be THE DIVISION OF DEALER BUSINESS Estimated used-car sales MILLIONS OF UNITS 1955, with a sales total approaching 4 million cars. Since then sales have decreased steadily to NON-FRANCHISED DEALERS below 3 million units in 1958. Non-franchised dealers now account for less than 30 per cent of all used-car sales made by dealers. Their share of the market has been shrinking lately for they have a very powerful competitor, one who generally has a better stand FRANCHISED DEALERS ing with consumers, better service facilities, and better sources of supply. The big competitor is . . . The franchised dealer Dealers who hold a franchise to sell new cars from the factory are in the used-car business to 0| ------- -----1 —— 1953 1954 1 — ----- 1------:------ 1------------ 1 1955 Source: N a tiona l A u to m o b ile estimates. 1956 1957 Dealers A sso cia tio n 1958 and our own the hilt. They sell 1.8 used cars for every new one. At first this seems like an impossible figure. allowance that the dealer grants is purchasing Where do all those used cars come from? It power for the new-car buyer the higher the al works like this. A used car is traded in on about lowance, the more likely the sale. When a dealer 85 per cent of all new-car sales. These trade-ins is under pressure to move new cars, he is tempted are reconditioned and moved to the dealer’s used- to over-allow on trades. If he does this, he may car department— maybe next door, maybe on an have to turn around and sell the trade-in at a loss other street. On each used-car sale, the chances in the used-car market. This loss sometimes wipes are almost two-to-one that an even older car will out the profit on the new-car sale. be traded in. When this car in turn is sold, per Their used-car businesses have helped many haps still another trade-in will be received. This franchised dealers through difficult times. When pyramid of trades enables franchised dealers to new cars are selling poorly or when a strike cur sell almost two used cars for each new one and tails their supply, franchised dealers switch em still have used cars left to wholesale to non- phasis to their used-car operations. This is what franchised dealers. has been happening during the past year or two. Used cars can make big profits for the fran With the recession and other factors slowing new chised dealer but they also can make big prob sales, dealers have been relying more and more lems. When prices are firm, it is not unusual to on their used-car lots. earn a gross profit of $200 on a car that sells for There are about 35,000 franchised dealers to $800 or $900. This is a better percentage margin day. In 1958, franchised dealers disposed of over than new cars have been bringing recently. But 8 million used cars which gave them a lion’s used-car operations can be risky. Since the trade-in share, 70 per cent of the total dealer business. 6 b u sin e ss re v ie w THE BUYERS Income is a factor here, too. One reason why Since businesses and other fleet owners stick Easterners bought relatively fewer used cars was pretty much to new cars, most retail buyers of that with higher average incomes, they could used cars are individuals. Individuals mean vari afford more new cars. The regional ratios of used ety: the high school boy who uses summertime earnings to buy a fox-tailed jalopy, the junior executive who goes for the prestige car with a price made palatable by several years’ deprecia tion, the suburbanite who needs a second driveto-the-station car, and millions of others who just want cheap, dependable transportation. Yet pat terns can be found in all the diversity. As might be expected, the size of their income is the most important characteristic of used-car buyers. The typical buyer is not well-to-do. The median or middlemost income of all spending units purchasing used cars in 1957 was about $4600.1 This compares with a median income of approximately $7000 for new car buyers. Used-car buyers also are likely to be young. Almost half are under 35 years of age, compared to only about 30 per cent of new-car buyers. It’s income again, rather than something inherent in youth, that causes this pattern. Younger people are apt to have less earning power and a greater desire for an automobile than their elders. They find in the used-car market a way of tailoring their transportation to their take-home pay. A regional pattern is evident among used-car buyers. In the West, an average 18 per cent to new sales bear this out. But income is not the whole story by any means. Driving habits are a big factor, too. The West and South are less crowded, the weather is milder, public transpor tation is not so good and an automobile is more of a necessity. A greater percentage of the popu lation owns automobiles in these areas, and sales per capita of both new and used cars are there fore higher. The majority of people who buy used cars do so because they can’t afford anything else. There seems to be, however, a substantial group who switch back and forth from new cars to used cars. These are people who can afford the new but sometimes prefer to buy the used. Their choice at any one time depends on a number of dynamic factors: the price spread between latemodel used and new cars, credit terms available on used cars relative to new cars, and the appeal of new-car styling, to mention a few. Evidence of this shifting section of the market UPS AND DOWNS IN USED-CAR POPULARITY The ratio of used-car purchases to new-car purchases, as computed from the Survey of Consumer Finances. Purchases from all sources are included. of all spending units bought a used car in the period from 1954 to 1957. The figure for the Northeast section of the country was only 12.5 per cent of all spending units. The North Central region and the South fell in between with 16.5 per cent and 17 per cent, respectively. 1 A sp e n d in g unit is m a d e up of related p e op le who live toge th e r and pool their incom es. The inform ation in this section is b a se d la rge ly on the Survey of C o n su m e r Finances conducted by the Federal Reserve Board in coo p e ration with the Survey Research C e nter of the U niversity o f M ic h ig a n . 7 b usin e ss re v ie w can be found in the ratio of used to new purchases lot costs the dealer about $3 a day. Time alone compiled in the Survey of Consumer Finances. can easily turn profit into loss. Just because a The ratio swings back and forth in tWo-to-three car doesn’t sell on one lot, however, doesn’t mean year cycles. The years 1950, 1953, and 1955 saw that it won’t sell on another in a different neigh the ratio at troughs which indicates relatively borhood, city, or even state. strong new-car buying. The ratio emphasized To get it there? an active wholesale market has used-car buying in 1952,1954, and again in 1957. developed in which dealers buy and sell amongst USED-CAR PURCHASING PATTERNS 1954-1957 Weighted Averages Compiled from Surveys of Consumer Finances Used-car Purchasers as % of Spending Units 6 15 20 18 13 All spending units BY A G E : Age of Head of Spending Unit 18-24 25-34 35-44 45-54 55-64 65 and over There are dealers who operate almost exclu sively in the wholesale market. Some of the larger carry extensive inventories and maintain show rooms or showlot facilities where cars are dis played for dealer inspection. Smaller wholesalers, 10 often working from rented space in the back of a 16 garage, scout around trying to find one or two Used-car Purchasers as % of Spending Units 31 21 17 14 9 5 16 retail dealer. This type is still active in the Phila delphia area. The large wholesalers, once preva lent, have now all but disappeared here. They have been replaced by a new institution— the au tomobile auction. Step lively, or we’ll miss the first sale. A t the auction “ This car is clean. It has music and heat. Come BY REGIO N : All spending units it is a matter of phoning around to make a deal. bargain cars at a time which they resell to some All spending units Census Region Northeast North Central South West of institutional arrangements. Franchised dealers make informal agreements with non-franchised dealers. When one wants to buy or another to sell, BY IN CO M E: Income Group Under $ 1,000 $ 1,000-2,999 $ 3,000-4,999 $ 5,000-7,499 $ 7,500-9,999 $ 10,000 and over themselves. Sales are facilitated by several types Used-car Purchasers as % of Spending Units 13 16 on, boys, what am I b id ?” The auctioneer beats the table with a twofoot length of rubber hose to punctuate his chant: “ I’ve got seven hundred, I’ll take a quarter, who’ll 17 18 give seven and a quarter? seven and a quarter? 76 this is a one-owner car, boys, seven and a quarter?” THE WHOLESALE MARKET “ Sold!” Wham goes the hose and another car There is a rule-of-thumb in the used-car business moves on the block. Its hood and trunk are which goes, if a car doesn’t sell within 30 days— raised for inspection and dealers crowd around. wholesale it. It is said that each unsold car on his The auctioneer starts again. 8 b u sin e ss re v ie w “ Now, here’s a real beauty. Who’ll give . . Auto auctions have grown rapidly into a big To the first-time visitor, the auto auction seems nation-wide business. Ten years ago there was half-carnival, half-confusion: the milling crowds only a handful, now there are over 150. Then, of dealers, the blue, tobacco-exhaust haze lurking yearly sales totaled about $6 million, now they in the rafters, the auctioneer’s feverish decibels, top $1 billion. Only a small part of this growth the concessionaires on the sidelines is due to our larger automobile hawking the trappings of the population. Auctions have used-car trade— blank title, important advantages. applications, license-plate holders, Convenience and and stacks of pasteboard F lexib ility. A u c signs all proclaiming t i on s gather t o “ Best deal in town.” gether great quanti If the visitor stays to get acquainted, to observe closely and ask questions, ties of supply and demand in one place. Here dealers can quickly and easily adjust their used-car in he’ll find that auto auctions are well-organized, ventory positions. Excess stocks and models that highly efficient market places that bring hundreds don’t move can be disposed of or shortages can of buyers and sellers together under one roof. be filled from a wide selection. This means more Here’s how a typical one works. flexibility and can reduce the required investment Let’s say a dealer wants to sell a car. He pays in inventories. a $10 registration fee and parks his car with others of the same age on a large black-topped other only to determine a price. Thereafter they lot. When the car’s turn on the block comes, the deal directly with the auction. The auction, by dealer-seller stands next to the auctioneer. When guaranteeing payments and titles, interposes its Confidence. Buyers and sellers deal with each the bidding gets as high as the auctioneer thinks own reputation for integrity between sellers and is likely, he turns to the seller who may accept or reject the offered price. If he nods O.K., the buyers, removing a common stumbling block to sales among dealers. car is sold. Before the seller leaves for the day, Higher Prices. Cars sell at auctions for up to he will have the auction’s check for the purchase $100 more than they would bring through the old price in his pocket. The auction, in turn, collects dealer-to-dealer wholesale setup. At auctions with from the actual buyer. several hundred buyers from a widely scattered Most cars are sold “ with a drive” which means that the buyer gets a chance to test his car after the sale is made. If the car is not as the seller area bidding competitively, something near the top possible price is likely to be offered. Of course, buyers complain that auctions have represented, the deal is off. The buyer also gets a raised the prices they must pay. This complaint, guaranteed title (for a small fee) which protects however, seems to be outweighed by the auction him against stolen cars and prior liens. Because attributes of convenience, flexibility, and confi the auctions guarantee both title and payment, dence. In addition, auctions have tended to sta they usually restrict participation to approved bilize prices and have helped stabilize the used- dealers. car business itself. A list of representative sale 9 b u sin e ss r e v ie w prices for most makes and models is circulated back in the fall to pick up “ junkers” for agri after each auction so that dealers have a better cultural workers flush with harvest-time payoffs. idea of prevailing prices. This helps establish equitable, more uniform trade-in values and re duces the dealer’s risk on resale. Local auctions are booming DOLLARS, DEMAND, AND DETROIT We’ve discussed the sellers and buyers of used cars— both are numerous and varied. Neither is made up of groups cohesive enough to exert We have a thriving auction business in the Third any appreciable influence on the national market. Federal Reserve District. One of the largest auc Since nobody can effectively control, everybody tions in the nation is located near Lancaster, and six or seven other major ones operate in our fluctuate with changes in both supply and demand. three-state area. Even as this article was being prepared, another auction opened and still more are planned. Local auctions seem to do primarily an intra- must compete and as a result, used-car prices This situation contrasts with the new-car mar ket where a few companies account for all of the output. This domination gives the factories a sig nificant influence over prices. They set their sell regional business. One auction estimates that 75 ing prices and when demand slumps, often cut to 80 per cent of its registered dealers are from production rather than prices. Of course, manu Pennsylvania and contiguous states. Within this facturers’ rebates to dealers and dealers’ dis region, there is a pronounced city-to-country counts to consumers give new-car prices a saw flow. The large metropolitan areas usually gen toothed seasonality, but, in general, they don’t erate a surplus of used cars — due to higher fluctuate nearly so widely as used-car prices. average incomes which mean more new-car pur These two different markets are inseparably chasers. City dealers tend to “ export” their sur integrated. As we have said, a large part of the pluses to rural areas and smaller towns where lower incomes mean relatively more used-car buyers. At one recent auction, for example, there were 150 sellers but less than 50 buyers from PRICES: IN THE SHOW ROOM AND ON THE LOT Representative retail prices based on the consumer price index. Philadelphia. Yet our auction business is not confined en tirely to nearby areas. The location of local auc tions at the gateway to the big supply of used cars in the high-income, industrial Northeast regularly brings a scattering of Southern dealers. They usually seek the older-model used cars which are in particular demand down Dixie way. Twice a year, the Southern visitors appear in force. In April when the Florida resort season ends, fleets of rental cars come on the market. Dealers bring them North for sale in order not to deluge the local market. The Southerners flock 10 INDEX (JAN. 1953 = 100) b u sin e ss re v ie w used supply comes from trade-ins on new sales. Franchised dealers who operate in both markets at the same time strengthen the connection. In addition, new and used cars often compete di rectly for the same buyers. SALES ARE SENSITIVE TO PRICE When used cars are plentiful, down come prices and then bargains bring out the buyers. The chart shows used-car sales by franchised dealers and the average retail price of used-cars SALES— MILLIONS OF UNITS PRICES (IN DOLLARS) These close ties produce an interesting inter action between the two markets. We’ll explain 1320 with an example. Say new car sales begin to in crease— perhaps the result of a lucky stroke of 1200 styling. Franchised dealers quickly sense the pub lic interest and step up their selling efforts. Fac I0 S 0 tories increase production and sales continue to climb— but so do dealers’ inventories of trade-ins. 900 The trade-ins sell slowly, for dealer emphasis and buyer interest are focused on the “ hotter” 040 new-car market. Before long, the top-heavy sup ply of trade-ins depresses used-car prices, reduc ing the allowances dealers can give to new-car 1950 1 95 2 1954 1956 Source: N a tio n a l A u t o m o b ile Dealers A sso cia tio n . 1958 buyers. About this time dealers shift some of isn’t always noticeable. There are times when their selling efforts to their used-car lots to move other more powerful factors obliterate the effects their bloated inventory. As a result of both these factors new-car sales begin to slow. of used-car prices on the sales of factory-fresh automobiles. Used-car prices don’t fall indefinitely. Three For example, new-car sales soared in 1955, forces come into operation to reverse their direc tion almost automatically. First, diminished new- while used-car prices were actually on the down car sales reduce the supply of used trade-ins. when price packing, discounting, and fast-easing Second, lower used-car prices tend to increase credit terms more than offset the influence of trend. But 1955 was the year of the blitz sale scrappage which also reduces the supply of used used-car prices. The deluge of trade-ins nonethe cars. Third, lower used-car prices attract a seg less drove used-car prices sharply downward in ment of buyers away from the new-car market. late 1955 and this undoubtedly was a partial With supply now down and demand up, used cause of the subsequent slump in new-car sales. prices begin to climb. As prices rise, dealers Let’s look at 1958. Used-car prices rose are able to sweeten trade-in allowances which, throughout most of the year but without notice in turn, increase new-car sales and the whole able effect on new-car sales— which, in fact, cycle starts again. tumbled to new lows. Here the recession plus Perhaps the most important conclusion to be rising new-car prices outweighed the effect of drawn from this market interaction is that used- better trade-in allowances. Yet the continuing car prices are a significant, though often over strength of the used-car market in 1959 cannot looked, factor in determining the demand for new be ignored as a factor in the recent improvement cars. Of course, this is only a tendency and it in new-car sales. 11 b usin e ss re v ie w TODAY AND TOMORROW cline and how long before the inevitable upturn Obsolescence hasn’t been so dynamic in the last starts. Nobody can tell those things at the present few years. Model changes have been made on time. There are, however, new strengths to be schedule but they haven’t captivated the buying reckoned with in the demand for used cars. public as in years gone by. New cars don’t seem The continuing migration to the suburbs plus so new and desirable, therefore, old cars don’t rising personal incomes will widen the second- seem so dowdy and out-of-date. Many owners say car market. Used cars with their low purchase to themselves, “ Guess I’ll keep ‘the old gal’ a price and low yearly depreciation make natural while longer.” For the same reason many buyers have chosen late-model used cars instead of the “ seconds.” Then there is the coming tidal wave of teen new offerings from Detroit. The used-car market agers. When they begin to reach driving age, lately has been short on supply, long on demand used-car sales will soar. If automobiles are a and, as a result, prices have been high. Prices are status symbol for grownups, they are ten times expected to remain that way through the spring that for teenagers. Highschoolers all over the and summer. country will be saving up and maybe, with some Dynamic obsolescence is scheduled for a come back next fall and winter. The “ Big Three” manu help from dad will find their heart’s desire on some used-car lot. facturers are expected to market their all-new As the teenagers grow into young adults, they “ small” cars then. These are cars designed to will upgrade their automobile purchase but the drive “ the old gal” out of the driveway. And what used-car market still will be their principal source is more, they are likely to make their debut at a of supply. Oddly enough, by purchasing they will price comparable to many of the later used be helping to keep prices up, therefore making it models. Prices in the used-car market are apt to easier for their parents to buy new cars. Like a decline. How seriously this hurts next year’s new- woman, the used-car business can be a curious, car sales depends partly on how much prices de contradictory thing. 12 CONFIDENCE, TEMPERED WITH CAUTION, RULES OUR HOUSING MARKET “ You want to know how we in the business feel about this year’s housing market in the Philadel about this year’s housing market? Well, here is phia Federal Reserve District. the way it looks to us right at the moment. The spring season seems to have started a little late; but things are picking up now. There is enough mortgage money to go around and it is available at reasonable prices. Sales of new houses have Adequate financing improves sales prospects for this year Mortgage money is plentiful for all current needs. But it is not so plentiful as last summer, when increased, although at this point the market for potential borrowers discovered an exceptionally existing houses looks even better. That’s prob easy market in which they could shop for favor ably because there are more old houses to choose able terms. Most brokers and some lenders see from. You see, no builders carried much of an the possibility of a somewhat tighter market inventory of finished houses over the winter. And as the season progresses. And there are some who in our business that is a healthy situation. More think the cost of borrowing may increase in com over, all of us hope it will stay that way. So, to ing months. Rates on conventional mortgages sum it all up for you, let us say builders are have fluctuated within narrow limits since last optimistic, but still cautious. Therefore, they may fall. With a one-third down payment, this money continue testing the market for a while before is generally available at 5*4 per cent on new unshelving some of the projects scheduled for construction, and at 5V2 to 5 % per cent on exist 1959.” This monologue represents a fair cross section ing houses, depending on their age and location. of the replies we received from builders, lenders, manded a small premium in some places, range and realtors when we telephoned them to ask from par to only a small discount of one or two F.H.A. mortgages, which last summer com 13 b u sin e ss r e v ie w points at the most. They are being used more $13,500. Almost nothing in this lower bracket extensively on existing houses since terms were seems to have been carried over the winter. liberalized last year on properties selling up to The market for old houses also is improving $13,500. F.H.A. mortgages are still very popular although they are getting some competition from the 90 per cent conventional loans which Federal savings and loan associations are permitted to make in some cases. VA mortgages are available only at a substan tial discount that few builders are willing to pay. These charges have increased to a range of 6 to 8 points in recent months and even at these dis counts not much money is available. Lenders tell us that housing legislation now before Congress, which includes a provision for raising the YA interest rate closer to market levels, has made them reluctant to make these loans at the cur rent rate. They also say that passage of this legislation could easily reverse the VA mortgage situation— almost overnight. Realtors tell us that in many cases sales activity in existing houses is running ahead of the newhouse market. This is particularly true of prop erties less than 10 years old in the more desirable locations. About the only evidence of stickiness in this market is found in the older neighbor hoods where zoning regulations are being relaxed and in properties priced above today’s market. More old houses are being offered for sale than at this time last year. One explanation for this, to be sure, may be the continuing trend into the suburban areas near our larger metropolitan cen ters. Another possibility might very well be some re-alignment of the labor force; that is, people seeking employment where better opportunities are offered. And to some extent this increase in people wanting to move may also reflect transfers Demand for new houses has increased— in a few cases more than seasonally of management or professional personnel of large With little new construction remaining unsold over the winter, our builders generally are in a Vacancy rates continue low in rental properties strong position. Moreover, the pace of sales has The rental situation remains about as tight as it quickened considerably in recent weeks and some has been at any time in the recent past. Listings builders have no present inventory of finished of houses for rent are short and there seems to houses. Increased activity, however, has not been be little available in the way of small apartments the uniform experience of our builders. Those in convenient locations. With this market con corporations to branch offices in other areas. operating in parts of Delaware and southern New tinuing so restricted in the way of offerings, the Jersey report the greatest improvement in buy trend of rents has been moving slowly but none ing interest, while in some areas of Pennsylvania theless steadily upward. Over the past year, how there are operations that remain on the sticky ever, rents have risen somewhat less than in some side. Over-all, the current sales picture is bright other postwar years since the removal of con est for houses in the medium-price range— trols. According to Bureau of Labor Statistics $15,000 to $18,000. This is largely because the figures, rents in Philadelphia advanced about 2 bulk of present offerings is in this category. Most per cent during 1958, compared with an increase builders appear convinced that this year’s best of 3.8 per cent in the preceding year. There can prospects are in houses built to sell for up to be little doubt that this shortage in rental prop 14 b u sin e ss re v ie w tinued to stimulate sales of both new and existing Builders" plans suggest confidence, tempered with caution houses. Most of our builders are expressing considerable Construction costs are still rising confidence in their 1959 housing market. But erties and the rising trend of rents have con Builders tell us that advances in prices of build ing materials this year seem likely to supply less lift to construction costs than ever-increasing wages. Nevertheless, a hike in steel prices after mid-year is anticipated by builders and no one cares to rule out the possibility of higher lumber prices during the season. Earlier this year the price of cement was raised in some areas, but their actual operations so far are indicative of considerable caution. As was the case over most of last year, project size is being held to a rela tively few units. The plan is much the same everywhere— put up a sample house, sell a few from that, then start a few more, being ever mindful of the unsold inventory. With construc tion costs what they are, and land values at peak there now seems to be a fairly good prospect for levels, it has been very difficult for anyone to stability in this important item. As for the wage put up attractive houses to sell in the lowest price component of building costs, increases not only brackets. Nevertheless, this year it appears that are implicit in existing long-term agreements, but some builders are going to concentrate on small builders see them as a distinct possibility in what houses that will sell for about $12,000. That is ever contracts come up for negotiation this year. where they believe the mass market lies. On the Thus, the building industry, like so many others, basis of our interviews with local builders, it is faces the problem of increasing productivity if it in that market where more of them intend to hopes to offset increases in construction costs. make their bid for volume sales this year. 15 FO R TH E R E C O R D . . . billions $ M E M B E R B A N K S 3 R D F. R. D. B A N K IN G i lEPO SITS f V rr^vv \/Jp\j\ t pW ^ i V % # 1 / \ T f w ( (20 CITIES) i DANS 4 3 T i ^ V E ST M E N T S 2 YE AR AC ? 0 2 YEA RS AGO Third Federal Reserve District U nited States Per cent ch ang e Per cent ch ange SU M M ARY Feb. 1959 from mo. ago year ago 2 mos. 1959 from year ago Feb. 1959 from year ago mo. ago Factory* 2 mos. 1959 from year ago LO CA L CH A N G ES M a n u fac tu rin g prod u c tion . C onstruction contracts .. . C o a l m ining .................. + i — 7 — 9 + 2 +47 + 5 0 +24 + b + 3 — 1 + 1 + n + 18 + 3 + 9 + 15 0 Payrolls Per cent ch ang e Feb. 1959 from Per cent ch ange Feb. 1959 from + 0 2 — 2 + b — 2 + 3 — 1 1 + 17 + 2 + 11 0 + 0 1 year ago 1 1 + 12 + 3 + 9 B A N K IN G (A ll m em ber banks) Dep osits ........................ Loans ............................ Investm ents .................... U.S. G o v t, secu ritie s...... O th e r ........................... C h e ck paym ents ............ - 1 + 1 — 2 - 2 0 -I0 f + + + + 8 5 14 16 10 8f 1 0 — 2 - 3 + U 0 + + + 9 + 9f 8 + b + 13 + 15 + - + — 12 + + + + 7 b 13 13 12 8 + 0 1 0 + + + + + + 8 b 15 16 13 + 6 PR IC ES W h o le sa le ..................... C o n su m e r ...................... 0 ot + •A djusted for seasonal variation. U |20 C itie s + 0 1 fP h ila d e lp h ia mo. ago year ago Per cent ch ang e Feb. 1959 from mo. ago year ago Per cent ch ang e Feb. 1959 from mo. ago year ago + b - 2 -ii + 3 — 2 + 8 + b — 12 + 15 1 + 3 + 3 + 14 — 7 + 4 6 0 - 1 + 1 + Lancaster .. .. Philade lphia + — year ago Per cent ch ang e Feb 1959 from C h e ck Paym ents Stocks 1 — 6 + + . TRADE* Dep artm ent store sales ... Dep artm ent store stocks .. mo. ago Sales Lehigh V alle y . + EMPLOYMENT A N D IN C O M E Factory em p loym ent (Total) .......................... Factory w a ge in c o m e ...... D e p a rtm e nt Store E m p lo y ment mo. ago OUTPUT FEB. 1959 7 -1 0 0 + 16 + 5 9 — 9 + 15 0 + 1 - 9 + 10 3 0 — II ...... 0 + 3 - 1 + 17 - 2 +28 - Scranton ...... + 1 - 3 + 2 + 1 - 3 +25 — 6 — 6 - Trenton + 1 — 4 + 1 + 5 + 3 + 15 — 8 + 10 - 1 2 + 10 5 + 5 + 10 — 2 — 1 -1 7 + 1 — 9 + b -1 8 + 3 0 + 3 -2 3 — 6 R e a d in g ........ W ilke s-B a rre . + 2 — W ilm in g to n .. 7 — 8 — 6 + York ............ - 0 - 1 + 1 — 2 + 1 + 3 — 8 +20 4 + H + 15 + 2 3 + 12 * N o t restricted to co rp o ra te lim its of cities but covers areas o f one o r m ore counties.
@FedFRASER