Flood of repossessed cars about to hit the used car market – Mish Talk

Image of Wolf Street via the Tweet feed below

The auto loan bubble is about to burst

A pair of excellent Tweet threads explain what’s going on with car prices and pending foreclosures.

The worst time to buy in 30 years

  • There has never been a worse time in the last 30 years to buy a vehicle. In the space of 2 years, cars have gone from being the most depreciated asset we owned to doing better than most of our stock portfolios, and I’ll tell you exactly why.
  • To better understand the madness that is the auto market, let’s start with a number we all know: 9.1% (CPI for June). New and used cars account for a large part of this. New vehicles increased by 11% year-on-year and used cars by 7.3%.
  • But percentages don’t do a good job of painting the big picture, so here are the raw numbers: 2 years ago: Average new car: 38,000, Average used car: 20,000. So what about 2022? Average new car: 50k (+24%) Average used car: 31k (+35%)[Used Car Image from Sully Below]
  • Doesn’t look so hot, does it? We went from walking into a dealership, buying a new car with $5,000 in incentives, to dealers asking for 10,000 “market” adjustments on seemingly boring cars (Lookin at you RAV4 Hybrid). The guilty?
  • The shortage of supply combined with literally 0% rates caused many people to start buying any car that could “fit their budget”. Why responsibly buy a 30k car, when you can finance a sick 100k truck at 84 months with 0% interest? I mean it’s free money after all. (this is a 7 year loan).
  • Dealers saw this and started demanding higher and higher loan terms. Telling customers it’s “only $900 a month”. The average duration of loans at the moment? 72 months — an increase of approximately 33% since 2010 (48 months).
  • But the era of 0% lending was last year, when the Fed thought inflation was errrrr transient (lol), so what happens now? Same thing… which makes it even worse. Interest on auto loans has gone up quite significantly, meaning people are financing their cars at an insane APR.
  • Imagine paying 7-8% interest on a 7-year car loan, and that’s the scary part. People literally pay hundreds of dollars a month just in interest on their car.
  • And it’s the worst, when the car market starts to adapt. Normally most cars follow an inverse exponential curve, the vast majority if the car loses value in the first 1-3 years. This is no longer the case since 2020, and it seems that we have apparently forgotten. [Depreciation Chart From Sully Below]
  • Eventually cars will begin to depreciate again as they always have. And guess what happens? Those who bought a used vehicle with a premium of 40%? They are now significantly underwater on a car they financed for 7 YEARS.
  • Top it all off with healthy daily inflation, layoffs and a potential recession and you have a recipe for disaster in the auto market.
  • My bet is that we will see a significant amount of pensions and subsequent nukes in the auto market. So unless you ABSOLUTELY need a car, try to avoid it for now.
  • If you’ve made it this far, please read this thread! Feel free to drop all your questions. Also, if you absolutely need to buy a car, contact me! I will try to find something reasonable in this market.

Used car prices and depreciation

Images from Sully's thread above

Images from Sully’s thread above

Rise in automobile delinquencies

Graham Stephan Tweet Discussion

  • The collapse of the auto 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 have hovered between 2-3%. Today, that number is exploding with nearly 1 in 4 loans in default in Washington DC.
  • The main problem causing this is the way car loans are issued. Currently, Americans owe over $1.2 trillion in auto loans (the highest in US history and a 75% increase from 2009). Since more than 85% of cars are financed, we have a huge problem. [Lead chart from Wolf Street via Graham Stephan]
  • I did some research and found that over the past 10 years car dealerships have started making more profits from car financing rather than car sales themselves. Shifting from selling automobiles to selling loans has resulted in a poorly regulated gray market.
  • This was possible because dealerships 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 money without proper background checks.
  • A survey at the end of 2021 found that up to 50% of loans were given to customers who might not be able to pay them. Verification of income and employment took place only 4% of the time. All of this means that more and more customers are starting to default.
  • The best performing state is Utah with 4.5% of loans in default, while other regions perform much worse. California – 8.7%, Texas – 10%, Washington, DC – 23%. Once payment is more than 90 days overdue, 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.

The used car price crash is coming

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A crash in used car prices is coming.

And that doesn’t bode well for the new car market either, especially with the Fed hiking like crazy.

Finally, think of this in terms of retail sales as well as new car manufacturing.

Unleaded gasoline futures are down 26%, has inflation peaked in this business cycle?

Yesterday I asked unleaded gasoline futures to drop 26%, has inflation peaked in this business cycle?

It’s safe to add used car prices to the list of price crashes.

This post is from MishTalk.Com.

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