Pickup truck sales are no longer tied so closely to housing market

Pickup truck sales are surging. Full-size pickups from the Detroit Three, Nissan and Toyota have piled on 22.6 percent in sales through July, outpacing industry growth to account for 12.1 percent of all new vehicles sold this year. Given that pickups tend to sell well in the final months of the year, we could see full-size pickups break into the 13 percent range by year's end. That would mark the first time since 2007 that full-size pickups accounted for such a high percentage of new vehicles.

Conventional wisdom suggests the housing industry drives just about all of that. At a conference in January, Citi Investment chief analyst Itay Michaeli told reporters that pickups and the housing market have a 95 percent correlation. It makes sense: After all, pickups sell heavily to contractors and other small-business owners — and in June, CNW Market Research said contractors accounted for more than 50 percent of all pickup sales for the first time since the 1980s.

But it's not that simple. The relationship, once hand-in-hand, has shifted, and a number of other factors have driven pickups to their current height.

Kenn Bakowski, marketing manager for the GMC Sierra and Canyon, said things began to shift nearly a decade ago, in 2005.

"The dynamics of the housing market changed," Bakowski said last month at a Sierra event near Chicago. The housing market became volatile, he said, and pickups didn't keep pace.

'Signs of Trouble'

Erich Merkle, a sales analyst at Ford, chronicled the break.

"We saw housing first start to show signs of trouble back in the middle of 2006," Merkle said. "It started to drop off, and certainly in the second half of 2006, you could see that there was some real trouble there. And pickup trucks at that time wanted to go lower, but the automakers, because of the [production] capacity at the time, wanted to keep up, to support pickup trucks. And they did that through ever-increasing incentives."

New-home construction went into free-fall after 2005, and automakers propped up pickup market share for another two years, but demand eventually fell beyond what incentives could support:

"Pickups trucks did drop off dramatically, along with housing," Merkle said. "When we got into late 2008, certainly 2009, pickups seem to have fully capitulated."

Gas prices accelerated the slide. At the outset of 2006, a gallon of regular unleaded ran $2.24, according to the Energy Information Administration. In January 2008, it was $3.11; that was sobering math to anyone shopping for a 15 mpg, V-8 truck.

Realignment in Store?

A realignment has just begun to appear. In 2013's seven-month average of seasonally adjusted housing starts, the market has climbed 16.8 percent over 2012. Trucks are on a similar up slope, up 22.6 percent in sales through July.

Still, the housing recovery has been uneven. For starters, Merkle noted, it's hardly an accurate portrait in a still-shaky economy of demand for new homes.

"When you look at the data, it shows that there was a point, and that was in, oh, early in 2010, shall we say, when we saw housing starts recover," he said. "But [that was] because of what the government was doing with home-buyer tax credits and programs that the government had in place at that time."

Energy Boom, Lifestyle Return

Enter Joe Langley, a principal analyst at research firm IHS. Langley said that in places like North Dakota — where oil fracking helped the economy grow in 2012 at five times the national rate — the energy boom fueled pickup sales long before the housing recovery gained speed. So did an agriculture boom: U.S. farmers earned a record $109 billion in 2011; from 2009 to 2012, farm-equipment manufacturer John Deere piled on 60 percent in overall revenue.

"Pickup trucks boomed before housing even came back," Langley said. "Housing's only become a story in the past six months, nine months or so. What really helped the pickup sales in the early part of the recession recovery, from late 2009 to 2010 and 2011, was the energy sector, energy and agriculture. Those two sectors of the economy were really beginning to boom, and they also rely heavily on pickup trucks."

Now that housing has caught up, the tailwind for pickups has reached gale force. And businesses aren't the only ones driving it. Bob Hegbloom, who directs Chrysler's Ram brand, noted that industry sales to small businesses have increased just 15 percent in 2013. That's well below full-size pickups' 22.6 percent gain.

"The small-business side of it is very important, obviously," Hegbloom said. "You get into heavy-duty trucks, you get into what they use these vehicles for, [and] it's very important. But it's not driving everything. Here you can see there's another 8 percent lift in the overall truck segment."

Who's picking up the slack? The so-called "lifestyle" buyer.

GMC's Bakowski noted that "maybe a disproportionately high" chunk of the 2.5 million lost pickup sales from the segment's halcyon years came from lifestyle shoppers who left the segment. But they're still around. After all, a quarter of all light-duty pickup owners never tow a thing, he said.

Even if you do, Ford's Merkle added, you may still be a lifestyle buyer.

"A lot of those folks are not necessarily as big a part of this segment as they may have been, say, eight years ago," Merkle said. But "there is still a purpose for the truck nowadays. You might be pulling a powerboat or a trailer, but I would argue that that's a lifestyle. You're not going to pull it with a car. You're going to need a truck."

More Features, Higher Prices

And a nice truck at that. Sixteen percent of Ram 1500s are well-equipped Laramie or Laramie Longhorn editions, and 22 percent of Ram HDs are Longhorns, Chrysler's Hegbloom said. "If you take a 3500 Laramie Longhorn with the diesel and the dual [rear] wheels, that's a $65,000-plus truck, and they're flying off the shelves," he added.

Well-equipped trims are sprouting like spring poppies, from Ford's King Ranch and Ram's Laramie Longhorn to Toyota's 1794 Edition and Chevrolet's High Country.

Automakers love it. IHS' Langley noted that profit margins on optioned-out pickups are enormous. How big? Try as much as $10,000, which is what The New York Times, citing analysts, said in 2012 that automakers can make off a single pickup sale.

It's no wonder that with improving truck sales come improving profits. Ford and Chrysler turned in higher second-quarter profits this year, and even GM, whose profits fell from the year-ago quarter, posted its 14th straight quarter in the black.

Housing Still Matters

At the heart of the pickup recovery, experts agree that housing will be the lasting driver, and a warming recovery gives reason for optimism.

As "the housing market continues to grow, it will continue to fuel the economy," Ram's Hegbloom said.