DISPATCH FROM THE 'REAL ECONOMY'
A Nightmare for Sales of Dream Cars
Tuesday, October 7, 2008
Robert Bassam, used-car magnate, isn't driving his $415,000 Lamborghini these days, or his Porsche, and he has even warehoused his usual get-around-town car, a BMW 750. Instead, he's puttering along in a four-cylinder Hyundai Accent hatchback. It's more politically correct, he says. And economically correct: He doesn't feel like riding in luxury when the economy is tanking.
"Don't you feel it? I feel it in the air -- the negativity!" he says as he walks across the lot of Easterns Select, his dealership near Tysons Corner.
The air is actually rather crisp and sparkling, but in his showroom, and in dealerships across the nation, the mood is gloomy and getting gloomier. The figures for U.S. auto sales in September were stomach-churning. Bassam, a former pizza deliveryman who built Easterns Automotive Group into a regional powerhouse, has been forced to mark his 20th anniversary in the business by closing two of his 16 branches and laying off 60 employees.
Wall Street's problems are being shipped express delivery to Leesburg Pike and every other Main Street in America. It's like a contagion, and it comes in the form of credit, or the lack of it.
Until just a few weeks ago, the crisis had been felt primarily in the boardrooms of Wall Street, that realm of derivatives, credit-default swaps and exotic mortgage-backed securities. Then major banks and investment houses failed, and surviving banks began to become skittish about lending to one another. Now the pain is being felt in the so-called "real economy," the land of jobs, goods, services -- and people buying and selling cars.
New unemployment claims are at a seven-year high, and factory orders are sharply down. State governments are running out of money. Small businesses can't get financing.
Robert Litan, an economist and senior fellow at the Brookings Institution, borrowed a metaphor from investor Warren Buffett and compared the economy to a patient on an operating table.
"Basically, the blood in the person is money -- it's money and credit. You need money and credit to flow, otherwise the patient dies," Litan said.
The clotting of credit hasn't been uniform across the economy from one industry to another, or even among different auto companies and the different makes and models they're trying to sell. It's still quite possible to get a car loan, even with less-than-perfect credit. But the most favorable terms are likely to be associated with the less desirable vehicles. Dealerships are still offering interest-free financing, for example, on certain sport-utility vehicles that haven't budged from car lots since gasoline prices spiked. Leases, meanwhile, have become costlier; in August, Chrysler stopped writing them for new cars.
The availability and terms of a given loan, whether for a house, a car or a credit card, depend on the customer's credit rating. Two years ago, a person with a credit score of 580, on a scale of 350 to 850, could qualify for a conventional 30-year fixed-rate mortgage at 6 percent interest, according to John Ulzheimer, president of consumer education for Credit.com. About 83 percent of consumers with credit scores have a 580 or better, he said.
Now, he said, a person may need a 780, a standard met by only 17 percent of people with credit scores.
Bassam, whose business is famous for TV ads with the slogan "Where your job's your credit," specializes in selling to people with "subprime" and "near-prime" credit scores. In good times, by working the phones with the second-chance credit companies, he could arrange a high-interest loan for someone with a score as low as 450, he said. That's now impossible, no matter how much he and his sales people lobby for their customer. Worse, Bassam said, even customers with good credit scores, well into the "prime-risk" category, are getting turned down by lenders.