For U.S. auto sales, a long hangover awaits

By Nick Carey - Analysis

DETROIT (Reuters) - The U.S. automobile industry had quite a party during the recent credit-infused economic boom, but the hangover could last for years to come.

The party was made possible by easy access to cheap credit and skyrocketing housing prices that allowed Americans to use homes like cash machines and buy new cars that, ultimately like their homes in many cases, they could not really afford.

But the financial crisis -- particularly in the wake of the game-changing collapse of Lehman Brothers Holdings Inc (LEHMQ.PK) last September -- and the U.S. recession have pushed U.S. auto sales to their lowest in decades, forcing automakers Chrysler LLC and General Motors Corp GM.NGMGMQ.PK into bankruptcy.

The world into which a restructured Chrysler and GM emerge will likely see a smaller auto market in the United States, even after an economic recovery, largely because easy credit is a thing of the past.

"The party is over," said Peter Schiff, president of Euro Pacific Capital, who warned publicly in 2006 that the subprime housing crisis would thrash the financial markets. "We bought too many cars and now we're broke. The idea that we're going to have a big domestic auto market over the next five, 10 years is just not realistic."

Just how much smaller the market will be is open to debate, as is the kind of cars Americans are going to buy. Some economists and analysts argue families will make do with fewer cars and consumers will opt for cheaper, smaller fuel-efficient vehicles.

Others see that new reality as an opening for new competitors, including Chinese automakers.

"We're going to have a much smaller Detroit Big Three and we're likely to see new players," said University of Maryland economics professor Peter Morici.