A flood of repossessed cars about to hit the used car market - Mish Talk

Image of Wolf Street via the Tweet thread below

Auto loan bubble about to burst

A couple of great tweet threads explain what’s going on with car prices and outstanding liens.

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 span of 2 years, automobiles went from being the biggest depreciating asset to outperforming most of our stock portfolios, and I’ll explain exactly why.
To better understand the insanity that is the auto 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 that. New vehicles were up 11% year-on-year and used ones 7.3%.
But percentages don’t do a good job of painting the whole picture, so here are the raw numbers: 2 years ago: Avg New Car: 38k, Avg Used Car: 20k. So what about 2022? Average New Car: 50k (+24%) Average Used Car: 31k (+35%)[Used Car Image from Sully Below]
It doesn’t look that hot, does it? We went from walking into a dealership, buying a new car with $5000 in incentives, to dealerships asking for 10k “market” adjustments on seemingly boring cars (looking at you RAV4 Hybrid). Guilty?
The scarcity of supply combined with literally 0% rates caused many people to start buying whatever car they could “fit their budget”. Why responsibly buy a 30k car, when you can finance a sick 100k truck at 84 months at 0% rate? I mean it’s free money after all. (this is a 7 year loan by the way).
Dealers saw this and began pushing higher and higher loan terms. Tell customers it’s “only $900 a month.” The average term of the loan at this time? 72 months: an increase of about 33% from 2010 (48 months).
But the era of 0% lending was last year, when the Fed thought inflation was errrrr transient (lol), so what’s going on now? The same… which makes it even worse. Auto loan interest has increased significantly, which means that people are financing their car with an incredible annual percentage rate.
Imagine paying 7-8% interest on a 7 year car loan, and that’s the scary part. People are literally paying hundreds of dollars a month just in interest on their car.
And this is the ugly part, when the car market begins to adjust. Typically, most cars follow an inverse exponential curve, with the vast majority losing their value in the first 1-3 years. That hasn’t been the case since 2020, and it seems we’ve seemingly forgotten about it. [Depreciation Chart From Sully Below]
Eventually, cars will once again begin to depreciate as they always have. And guess what happens? Those who bought a USED vehicle with a 40% premium? They are now significantly under water in a car they financed for 7 YEARS.
Top it off with good 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 repos and the subsequent nuke of the auto market. So please, unless you ABSOLUTELY need a car, try to avoid it for a while.
If you’ve made it this far, thanks for reading this thread! Feel free to drop any questions you have. Also, if you absolutely must buy a car, send me a private message! I will try to find something that is reasonable in this market.

Used Car Prices and Depreciation

Images from Sully’s Tweet thread above

Increase in auto delinquencies

Graham Stephan tweet thread

The collapse of the auto industry has just begun and this would be one of the worst times to buy a vehicle. In a normal market (before 2020), auto loan delinquencies hovered around 2-3%. Today that number is exploding with nearly 1 in 4 loans in default in Washington DC
The key issue that caused this is how auto loans are issued. Americans currently owe more than $1.2 trillion in auto loans (the highest in US history and a 75% increase since 2009). Given the fact that more than 85% of cars are financed, we are faced with a huge problem. [Lead chart from Wolf Street via Graham Stephan]
I did some research and found that in the last 10 years, car dealers have started to make more profit from car financing than from car sales themselves. Going from car sales to the business of selling loans has resulted in an unregulated gray market.
This was possible because dealers successfully lobbied for less oversight, meaning no federal oversight with auto loans unlike mortgages, student loans, and credit cards. Reduced oversight allowed them to lend money without proper background checks.
An investigation in late 2021 found that up to 50% of loans were made to customers who may not be able to repay them. Income and employment verification only happened 4 percent of the time. All of this means that more and more customers are beginning to default.
The best performing state is Utah with 4.5% delinquent loans while other areas are much worse. California – 8.7%, Texas – 10%, Washington, DC – 23%. Once the 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.

Crash in used car prices is coming

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A crash in used car prices is coming.

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

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

Unleaded Gasoline Futures Down 26 Percent, Has Inflation Peaked This Business Cycle?

I asked him yesterday Unleaded Gasoline Futures Down 26 Percent, Has Inflation Peaked This Business Cycle?

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

This post originated from MishTalk.Com.

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

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