Harvey puts brakes on auto sales, but boost in demand is ahead

Up to 1 million vehicles will need replacing

Headline Goes Here Scott Olson/Getty Images

Cars sit along the street at a Houstomn apartment complex in the wake of Tropical Storm Harvey. As many as 1 million cars may have been destroyed by floodwaters that inundated the city.

Tropical Storm Harvey took a toll on what was expected to be the best month for U.S. auto sales in 2017. But the disastrous floods in and around Houston, the nation's fourth largest city, will likely have the effect of increasing demand for new vehicles in the coming months.

Analysts anticipated sales of new cars and trucks to rise about 1 percent in August, which would have been the first monthly gain of the year. Instead, they were down nearly 2 percent from a year ago as Harvey brought one of the largest auto-buying markets in the country to a halt at a critical time for dealers.

According to industry forecaster LMC Automotive, more than 4 percent of total 2016 vehicle sales -- some 580,000 units -- were sold in the 11-day period leading up to Labor Day. Harvey cut August 2017 sales by 20,000 units, or 1.3 percent, according to LMC, and the effetcs are expected to linger: September sales are projected to be down another 16,000 before recovery begins.

Assessing loss

It could be weeks before the it's clear how many vehicles in the Houston area were destroyed by Harvey.

Estimates range from 300,000 to 500,000 by Cox Automotive, which includes Kelley Blue Book, to as many as 1 million, according to data firm Black Book. Both estimates are based on how many cars and trucks were destroyed by Superstorm Sandy in 2012 (250,000) and Hurricane Katrina in 2005 (200,000).

Jonathan Smoke, chief economist for Cox Automotive, said "it makes sense" that vehicle damages from Harvey would be significant greater.  A loss of a half-million cars and trucks is "clearly plausible," he said. Smoke predicts damages to licensed vehicles to total $2.7 billion to $4.9 billion.

"There is a more than 94 percent vehicle ownership rate [in Houston] -- one of the highest in the country," Smoke said. "If we’re correct, it would be the worst in terms of vehicle damage in history."

Looking ahead

Automakers are optimistic. 

Ford, which commands 18 percent of the Houston market, tops among automakers, reported that dealers lost fewer than 5,000 cars and trucks due to flooding, according to Automotive News. The company plans to increase its inventory of used vehicles in Houston, as well as add production of new vehicles to meet the demand for replacements.

In a conference call late last week, Ford's Erich Merkle said it could take time for sales to come back.

“Usually it takes a while, if you’re looking 60 days or maybe as much as 120 days out," he said. "A lot of it will depend on when things normalize in Houston and people get back to their everyday lives.”

LMC Automotive estimates that demand for replacements will be "slight" for the rest of the year, totaling about 15,000. By early 2018, however, they predict 250,000 new cars and trucks will be sold to replace vehicles damages by Harvey.

Mustafa Mohatarem, chief economist at GM, whose sales were up 7.5 percent in August, is optimistic, as well. While new-vehicle sales did take a hit from the storm, he said "with the U.S. economy strengthening, we anticipate retail sales will be strong for the foreseeable future.”