Common Tread

How interest rates could derail the rebound in motorcycle sales

Apr 05, 2017

Since the “Great Recession,” which ran from the fourth quarter of 2007 through the first quarter of 2009, motorcycle manufacturers and motorcyclists have been waiting for motorcycle sales to return to “normal.” However, rumblings from the vehicle loan industry could indicate that the motorcycle sales rebound, what there has been of it, might be at an end.

After suffering in the wake of the financial crisis, powersports sales, including motorcycles, have experienced a modest resurgence in recent years, although sales are still off the lofty levels seen during the housing bubble. According to industry data, including the Motorcycle Industry Council, 2015 motorcycle sales (of all types) in the United States came in at just over 500,000 units. Although this was well below the 2005 peak of just under 1.1 million, it was an improvement from the trough of just over 400,000 units in 2010. I would also point out that the 2010 trough was better than any year in the 1990s, save for 1999 (sales of just over 500,000). The sales recovery may have been too mild for the liking of some, but it was a recovery, nonetheless.

Now, the question is whether rising interest rates and tightening credit conditions will stop that recovery in its tracks.

Riskier loans

In my day job, I publish credit market strategy. As such, I discuss the asset-backed securities market. This includes auto loan receivables, of which motorcycle loans are a part. For the past two years, the quality of the loans securitized in the auto loan sectors has declined significantly. This usually means that the industry is running out of “qualified” applicants. Not too long ago, a long motorcycle loan was three years. Today, it is common to see loans of five or six years. When the average length of loans increases and leasing becomes more popular, it shows the industry is straining to keep payments low.

financing ads
Longer loan terms and financing options similar to a lease are some of the new alternatives being offered by manufacturers, as these Ducati and BMW ads show. It's all in the name of keeping the monthly payment low for buyers. BMW and Ducati ad images.
For the lender (which is ultimately the ABS investor), the lower the creditworthiness of the borrower and the longer the term of the loans, the greater the risk of default and/or payment delinquency. In recent months, investors have begun to push back against deteriorating loan quality by demanding higher coupons (interest rates) to invest in auto loans receivables.

Then there is the Fed. After keeping benchmark short-term interest rates near zero, for nearly eight years, the Fed has hiked the Fed Funds Rate 75 basis points in the last 15 months and 50 basis points in the last three. By itself, this may not be that big of a deal, but with longer-term interest rates more or less stuck in place, the yield curve has flattened. As most lenders acquire money on the very short end of the curve and lend farther out, a flatter yield curve makes lending less profitable. Lenders therefore tend to raise borrowing costs for consumers, which makes purchasing a motorcycle more expensive. As a result, manufacturers often increase incentives when interest rates rise. These are typical signs that a business cycle has moved past its peak. We saw more evidence of weakness this Monday when March auto sales figures were released and instead of the expected increase in sales, another drop was reported.

Consumers aren’t the only ones who face higher costs due to rising interest rates and tightening credit conditions. Dealers can also be negatively impacted. All of those nice shiny bikes on the dealer’s showroom floor are financed. The higher interest rates climb, the more it costs dealers to maintain an inventory. Meanwhile, Powersports Finance reports: “Some manufacturers are forcing too much inventory onto the dealers, which many dealers cannot sell in a timely fashion.”

This can place dealers under significant financial strain. Contrary to what many consumers believe, dealer profit margins are not very wide. Dealers often struggle to maintain margins of around 10 percent. This may seem like a lot to some consumers, but in the business world, margins such as that are considered fairly thin.

I also believe economics (including the cost of financing a motorcycle) is the driving force behind the spate of new affordable motorcycles introduced to the market in the past several years. Affordable, lightweight motorcycles could appeal to both younger buyers who are not yet earning very much and older riders who are nearing retirement, may not wish to spend a lot of money on a new bike and might want something that is easier on the knees and back. I was recently at a dealer when it seemed like a parade of over-60 riders came through the door looking to replace their heavy cruisers with lighter, middle-weight standards and ADV bikes.

dealer demo rides
Rising interest rates would put more pressure on dealers, as well as consumers. Indian Motorcycle of Mineola photo.

Leasing comes to the motorcycle world

To offset the rising cost of finance and rising motorcycle prices, a number of finance companies are introducing motorcycle leasing. Can’t afford a loan payment on a Harley-Davidson Road King or a BMW K 1600 GT? Why not lease one?

Leasing could be a boon to motorcycle manufacturers in the near term, but as automobile manufacturers are now discovering, when leased vehicles come off lease, the market is flooded with good, low-mileage vehicles. For consumers, these off-lease vehicles can be attractive alternatives to new vehicles.

What does this mean for consumers? It probably means that we could see more generous incentives from manufacturers. Buyers, particularly those who can pay cash or can afford significant down payments, could score some attractive deals, particularly after the spring buying season is over. Looking further out, if leasing gains traction, there could be a surfeit of good, low-mileage used bikes available in two or three years.

Of course nothing is written in stone. The global economy could slow, central banks could hold the line on interest rates and we could continue to muddle along with little change. That, however, is not my base case.

My bottom-line advice if you're considering buying a motorcycle: I think the smart move is to play it conservative, stay affordable now and go hunting for your dream bike in the used market a few years from now. You could find a real bargain.