Millennials and Auto Buying: What Really Matters to CUs
There has been a lot of discussion of late on the subject of millennials, especially when it comes to attitudes regarding transportation choices, and specifically vehicle ownership. At the recent CUNA Lending Council Conference, there was an entire session devoted to millennials, with a panel of appropriately aged individuals providing anecdotal testimony to the findings being presented. In a recent webcast that I hosted on auto lending trends, I was asked about the effect that ride-sharing programs, such as Uber, might have on younger car buyers. The immediate hypothesis being, millennials don’t buy automobiles at the same rate as other generations, and therefore do not want to buy automobiles. Our response to this presumably should be, lenders need to adjust their lending strategies for a world with fewer auto loans.
The only problem with this hypothesis is that it is unproven, and there is a possibility that it could be wrong altogether. If it is, then lenders will miss the mark when it comes to the changes in strategy that need to be made. The conclusion drawn above is a common fallacy in the world of statistics, associating correlation with causation. A classic illustration of this fallacy is the example of how ice cream sales rise and fall at the same rate as burglaries in a community. Therefore, ice cream sales cause burglaries. The fact of the matter is that both the rise in burglaries and the rise in ice cream sales may be linked to the season. They are both correlated, but one does not cause the other. What is interesting is that, again anecdotally, the panelists in the presentation mentioned above all owned automobiles as do the five millennials who are in my family. Using this evidence, I could just as easily come to the conclusion that younger people are more likely to own an automobile today than similarly aged individuals when I was that age. That too would be a fallacy. Let’s take a look at some of the facts.
The first research I reviewed after the webcast was conducted by the University of Michigan, which related to the issuance of driver’s licenses by age group (University of Michigan Transportation Institute, 2016). The assumption of impact is that one must have a license before they can drive a car. Therefore, fewer licenses equal fewer cars. It is also important to note that this research was conducted over a 30-year period, not the last five years. Interestingly, it was found that teens and young adults may get licenses later than they used to, but in reality, the proportion of individuals in all age groups with licenses is falling. In other words, there is growing percentage of individuals in all age groups that are foregoing driver’s licenses and therefore are, presumably, choosing one of the various other transportation options available to them. But, does this even correlate to auto ownership?
In 1986, when I was a senior in high school, my family had four licensed drivers in the household. There were only two automobiles in the driveway. Today, there are four licensed drivers in my household and seven licensed drivers in my immediate family. Of those seven, each has at least one automobile available for their exclusive use. If you extend my family out one more generation, then the rate of vehicles per licensed drivers extends beyond a one-to-one ratio. I think we can all agree that our overall assumption today is that American families have more automobiles per family unit than they used to thirty and forty years ago. It would be a mistake, however, to state that fewer licensed drivers per capita increases automobile sales. They may correlate, but one does not necessarily cause the other.
What has proven more impactful than anything else in relation to vehicle ownership seems to be costs. Since 2009, the overall cost of owning a new car has risen 14% (Thompson, 2013). The Social Security Administration estimates that the average wage has increased 15% during the same period of time, but the number of workers has only grown about 7% (SSA). Unemployment and underemployment are affecting the amount of income individuals can use to purchase an automobile from a baseline perspective. However, when one adds in the rising cost of student debt, this puts younger buyers at a distinct disadvantage (Thompson, 2013). The share of students with student loans has doubled since 1995, and has even grown as much as 6% since 2009. These younger buyers are leaving school with, on average, $6,600 in student debt (Berchisky, 2016). With vehicle pricing rising at the same rate as average wages, college graduates are immediately financially upside down when they enter the marketplace.
Some surmise that ride-sharing programs are the answer for these young adults. But, this is hardly the case. Today, it would actually cost an average individual in a city like Chicago, 25% more to replace an automobile with ride-sharing. Only 15% of the American population says that they have used a ride-sharing program and, of those, the majority are college educated and are located within urban areas (Berchisky, 2016). While ride-sharing programs like Uber and Lyft have disrupted the way commuters arrange for temporary transportation, these programs are a long way away from disrupting consumer attitudes toward household transportation in this country. They may say otherwise, but data shows that as young people form families, they begin to behave more like average Americans in the ways they view home and car ownership (Buckley, 2015).
Finally, on the subject of ride-sharing, one must realize that while both Uber and Lyft have acquired tremendous market share in this newly discovered transportation category, their current business models have yet to be profitable. While it is likely that the model can be profitable, there are a number of considerations that consumers will ultimately need to make before giving up on the “Family Truckster:”
- Ride-sharing programs are not yet fully regulated. As a result, is it possible that future regulation for the safety of passengers and communities at large will make it cost prohibitive for this type of service to be offered in the majority of the country?
- Uber and Lyft have been able to capitalize on an underemployed workforce for cheap labor and equipment costs. In a growing economy, will it be as easy to attract the same number of drivers willing to work for the same low rate as other, higher growth, income opportunities arise?
- Many of these drivers may be violating current agreements with their insurers and lenders in order to provide transportation at a fee to their riders. What happens when car owners can no longer afford to repair vehicles that are operated in a way they were never intended? Or, will the operation costs increase as insurers and lenders invoke new rules to protect themselves from losses?
These are the unanswered questions of ride-sharing programs that prevent the final jump from car ownership to full-time hitchhiker. So, as lenders, what do we really need to know about millennials, vehicle ownership, and recent trends in transportation?
First, younger adults will find it more difficult to afford a vehicle today, due to rising student debt and lower entry level wages. What can we do as lenders to help young buyers afford a vehicle as they begin to build a life on their own? Second, individuals in urban areas are more likely to not own a vehicle than someone in more rural areas of the country. We probably knew that already, but do ride-sharing programs offer opportunities or risks in these urban areas that did not exist for lenders previously? Finally, while the population has become more “educated,” financial literacy is more important today than it was ten years ago, as young adults grapple with a debt burden that preceding generations did not experience.