Auto loan bubble about to burst
A pair of great Tweet threads explain what’s going on with car prices and pending repossessions.
Worst time to buy in 30 years
- There has never been a worse time in the last 30 years to buy a vehicle. Within a span of 2 years, cars went from being the largest depreciating asset owned, to outperforming most of our stock portfolios, and I’ll explain exactly why.
- To better understand the madness that is the car market, let’s start with a number we’re all familiar with: 9.1% (CPI for June). New and used cars are a big part of this. New vehicles increased by 11% in annual terms and used cars by 7.3%.
- But percentages don’t do a good job of painting the whole picture, so here are the raw numbers: 2 years ago: Average new car: 38k, Average used car: 20k. So what about 2022? Average new car: 50 thousand (+24%) Average used car: 31 thousand (+35%)[Used Car Image from Sully Below]
- Doesn’t it look so hot? We went from walking into a dealership, buying a brand new car with $5,000 in incentives, to salespeople asking for 10k “aftermarket” tune-ups on seemingly boring cars (Look at the RAV4 hybrid). The culprit?
- The short supply combined with literally 0% fees caused many people to start buying any car that could “fit in their budget”. Why responsibly buy a 30k car when you can finance a sick truck 100k in 84 months at 0% rate? I mean it’s free money after all. (this is a 7 year loan btw).
- The representatives saw this and began to push for higher and higher loan terms. Telling customers “only $900 a month”. Average loan term now? 72 months — an increase of about 33% since 2010 (48 months).
- But the era of 0% loans was last year, when the Fed thought inflation was errrrr transitory (lol), so what’s happening now? Same thing… which makes it even worse. Car loan interest has risen quite significantly, which means people are financing their car in April Madness.
- Imagine paying 7-8% interest on a 7-year car loan, and that’s the scary part. People are paying literally hundreds of dollars a month just in interest on their car.
- And this is the ugly part, when the car market starts to adjust. Normally, most cars follow an inverse exponential curve, with the vast majority if the car depreciating in the first 1-3 years. This hasn’t happened since 2020, and it seems like we forgot about it. [Depreciation Chart From Sully Below]
- Eventually, cars will begin to depreciate as they always have. And guess what happens? Those who bought a used vehicle at a 40% premium? They are now visibly underwater on a car they financed for 7 YEARS.
- Top that off with decent daily inflation, layoffs and possible recession, and you’ve got a recipe for disaster within the auto market.
- My bet is that we will see a significant amount of stock and nuclear aftermarket cars. So pls unless you ABSOLUTELY need a car, try to avoid it for a while.
- If you’ve made it this far, I appreciate you reading this thread! Feel free to drop by for any questions you may have. Also if you need to buy a car dm me! I will try to find something that is reasonable in this market.
Used car prices and depreciation
Images from the start of Sully’s Tweet above
Auto delinquencies on the rise
Graham Stephan Tweet Thread
- The collapse of the automobile industry has just begun and this would be one of the worst times for you to buy a vehicle. In a normal market (before 2020), Auto Loan delinquencies stood at 2 to 3%. Today that number is exploding with nearly 1 in every 4 bad loans in Washington DC
- The main issue that caused this is the way Auto Loans are issued. Currently, Americans owe more than $1.2 trillion in car loans (the highest in US history and a 75% increase from 2009). Given the fact that more than 85% of cars are financed, we are looking at a massive problem. [Lead chart from Wolf Street via Graham Stephan]
- I did some digging and found that over the past 10 years, car dealers have started to make more profit from financing cars than from selling cars themselves. The shift from selling cars to the lending business has resulted in a loosely regulated gray market.
- This was possible because the sellers successfully lobbied for less oversight — meaning there is no federal oversight with auto loans, unlike mortgages, student loans and credit cards. Reduced oversight allowed them to lend without proper background checks.
- An investigation in late 2021 found that up to 50% of loans were made to customers who might not be able to afford them. Verification of income and employment occurred only in 4 percent of cases. All this means that more and more customers are starting to default.
- The best performing state is Utah with 4.5% of delinquent loans, while other areas are much worse. California – 8.7%, Texas – 10%, Washington, DC – 23%. Once payment is more than 90 days late, the lender can repossess your car.
Now let’s look at a Tweet Thread from Doug DeMuro. He makes car videos on YouTube and runs @CarsAndBids.
Delinquency rates
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The used car price crash is coming
A used car price crash is coming.
And that won’t bode well for the new car market either, especially with the Fed running amok.
Finally, think about it in terms of retail sales as well as new car manufacturing.
Unleaded gasoline futures fell 26 percent, has inflation peaked this economic cycle?
Yesterday I asked unleaded gasoline futures down 26 percent, has inflation peaked this economic cycle?
It is safe to add used car prices to the price collapse list.
This post originated on MishTalk.Com.
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