FEBRUARY 2004

The Replacement Demand for Motor Vehicles

Readers who are involved in financing the purchase of motor vehicles will be interested in a recent publication: The Replacement Demand for Motor Vehicles. The authors are Ana Aizcorbe (Federal Reserve Board of Governors); Martha Starr (American University); and James T. Hickman (Carnegie Mellon University). We quote from the abstract: The motor vehicle industry has undergone important changes in recent years, including a shift in production from autos to light trucks and growth of vehicle leasing. This paper uses household- level data from the Federal Reserve’s Survey of Consumer Finances [SCF] to document changes in households’ acquisition and financing of motor vehicles from 1989 to 2001. We examine what types of vehicles households had, what types of financing arrangements were used to acquire them, and how vehicle holdings vary with such household characteristics such as income, age, wealth, and credit worthiness. The data provide useful insights into the determinants of replacement demand and the use of alternative financing arrangements such as leasing.

We provide a few excerpts of their data to show the wealth and depth of the data in the study. Over the period from 1989 to 2001:

• The portion of households owning or leasing a vehicle rose from 84.3 percent to 86.6 percent.
• The average number of vehicles among households having vehicles remained constant at 1.9.
• The portion of households leasing a vehicle for personal use rose from 2.5 percent to 5.8 percent.
• In 2001, among households where the head was under 35 years of age, 7.3 percent had leased their vehicle.
• After years of high production and sales, the average age of the stock of motor vehicles has declined. In turn, this "modernization" increases the flow of transportation services and diminishes the demand for replacement of motor vehicles in the years ahead. For those in the business of selling and financing new motor vehicles, this is a rather sobering conclusion.

You can download the entire 20-page study at the SSRN Electronic Library.