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.N)(GMGMQ.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.

The size of the U.S. auto market is a pressing question. GM is restructuring to break-even at annual industry sales of 10 million vehicles, while Chrysler has to wait 18 months for small cars from Italy's Fiat SpA (FIA.MI) to reach the market. A restructured Chrysler will be owned by Fiat, the U.S. and Canadian governments and the United Auto Workers union.


The economic boom drove auto sales to a peak of 17 million vehicles in 2005, but the market crash has pushed sales to their lowest in decades and they are expected to hit 10 million in 2009 -- nearly 42 percent below the peak.

May U.S. auto sales supported by high incentives were the strongest so far in 2009, giving the beleaguered industry some hope the environment is at least not getting worse.

Still, sales were down nearly 34 percent from a year earlier and were down 36.5 percent through the first five months of 2009, with no signs of a recovery.

The credit bubble distorted the market and sales were much higher than they should have been, said independent auto analyst Erich Merkle. Sales simply couldn't be sustained at those levels.

But Merkle believes that, while the U.S. car market is going to be smaller, the long-term sales trend will be for around 15 million vehicles annually -- around 12 percent below the peak.

It may take a while, but the U.S. market will come back, he said. There is a lot of pent-up demand out there.

Professor Morici estimates long-term demand in the 12 million to 13 million range.

We have more cars on the road than registered drivers, he said. We're just not going to sell that many any more.

Mirko Mikelic, an analyst at Fifth Third Bank, said that while he also sees pent-up demand for cars, he expects 13 million to 14 million units annually will be the new normal.

The market was juiced up on easy credit, he said. With the deleveraging of the U.S. consumer, the market will be flat to depressed for years.

Another factor is that the baby boomer generation is heading into retirement, which means they will buy fewer cars.

I don't see how the demographics are going to help, said David Rosenberg, chief economist at wealth management company Gluskin Sheff.


Rosenberg said that, deprived of the credit that made buying cars so easy, Americans will hold onto vehicles longer and will opt for cheaper, more fuel-efficient models. There will also be fewer cars per household.

I don't know if Americans will ever go to being one-car families, Rosenberg said. But they are going to dial back and we may see three-car households going to owning two cars.

Auto analyst Merkle expects a gradual shift toward small cars, but added Americans will most likely settle somewhere in the middle.

I think the market will downsize, but only to a certain extent, Merkle said. Midsize cars are probably going to be the sweet spot for automakers. But the large sports-utility vehicles just aren't coming back.

In this altered reality, there will also be more room for electric cars and other fuel-efficient vehicles, especially if oil prices pick up.

Eventually, oil will go to $150 a barrel, said Professor Morici. That will create more demand for electric cars and I'm not sure that automakers in Detroit or Tokyo are the best placed to meet that demand. That will create opportunities for new automakers.

And tighter credit standards could pave the way for the Chinese to enter the car market at last with cheaper models to match the reduced spending power of Americans.

The Chinese are working on improving the quality of their cars, said Fifth Third Bank's Mikelic. Particularly if they have a strong focus on gas mileage and come with a cheaper product, this could finally be their chance.