Used Car Price Plunge "Could Bring The Whole House Of Cards Down"

Tyler Durden's picture

When we first warned that something was breaking in the American auto market, the Phil-LeBeau-ians crawled out of the woodwork to explain how everything is still awesome (brushing the weakness in stocks) despite soaring inventories and shrinking credit. Then when used-car prices began to leak lower, a few paid attention and the recent weakness in new car sales has shocked most. Now, however, used-car-prices are plunging at a similar pace to 2008...

 

 

With only sports cars and pickups rising in price in the last 15 months...

 

And RBC's Joseph Spak wonders if declining used vehicle prices (biggest YoY since 2013)...

 

Is "the card that brings the whole house down."

The reason for concern is lower used vehicle prices have a potential spillover effect to many other industry factors.

 

If we think about volume, price, mix, credit – all have been incredibly positive and supportive of the recovery. All are also no doubt related, but that’s what makes it a bit scary.

  • Volume. Higher used vehicle values means higher trade-in value bringing incremental consumers to the new market.
  • Price/Mix. Higher trade-in values allow consumers to “buy” more vehicle. Low rates/term-extension help this too. On mix, greater affordability has pushed consumers into more profitable CUVs or trucks from passenger cars (especially amid low fuel). Putting it all together, it shouldn’t come as a surprise that industry ATPs are up ~15% since 2010.
  • Credit. High used values lead to lower monthly payments, but perhaps that credit wasn’t as “strong” as lead to believe. For the OEM's captive finance companies, if the vehicle is leased, that lease is written with a higher residual value thereby lowering the monthly payment. As such, we’ve seen leasing mix as a percent of retail sales rise dramatically during the recovery from 17% in 2010 to 29% in 2015. This is another example of letting the consumer get more vehicle than they otherwise can afford.

Now let’s think about the unwind.

 

Lower used vehicle values mean lower trade-in value which means lower vehicle affordability. Maybe the consumer is underwater (especially if bought on longer term loans). New volumes could decline if the consumer holds off (or looks to the secondary market). Mix worsens as the consumer affordability is lower. ATPs decline as OEMs incentivize to keep volume and/or mix going. Captive finance companies may write down lease portfolios. In general, monthly payments go higher which raises the credit risk which in turn means auto loan rates could increase which could then stymie demand/mix.

 

Used vehicle pricing is likely to continue to decline as off-lease volume should increase further from 3.1mm in 2016 to 3.6/4mm in 2017/18.

It should not surprise many then that US Auto Sales (SAAR), via WARD's Automative Group, tumbled 3.5% YoY to end March - the biggest YoY plunge since July 2009 (pre-Cash-for-Clunkers)...

 

And this price and sales weakness is occurring amid a mal-investment-driven excess inventory-to-sales at levels only seen once before in 24 years...

 

None of this should be a surprise to readers, as we noted previously, Tommy Behnke in Mises Daily predicted that auto prices will fall as the bubble bursts from the artificially created demand generated from excessive credit creation.

 Behnke pointed out that car production has increased a whopping 100 percent since 2009, but that apologists for government’s monetary stimulus programs see this fact as proof of the success of their Keynesian, aggregate demand hypothesis.

 

Behnke, on the other hand, took the Austrian perspective that the government has simply substituted a bubble in subprime auto loans for the bubble in subprime home loans. As defaults rise and automobile loan credit tightens, the result will be the same. Namely, a flood of used cars, and falling prices. The same happened with homes following the burst of the last bubble: a flood of “used” houses, and falling prices.

 

Surprisingly, the article attracted a number of reader comments predicting that used car prices would not fall, allegedly due to increases in complexity of cars or increases in the difficulty of repairing them. Another suggestion was that large dealers will dominate the used car market and simply raise prices at will.

 

While it’s certainly true that government interference - such as Cash for Clunkers - can raise the prices of cars, it is not true that private dealers (or any other private party) can simply raise the price. More complex and difficult-to-fix cars will not keep prices from falling in an environment in which the inventory of used cars is increasing. 

 

Used Car Dealer or Used Car Collector?

 

There is one thing that we can know a priori: that an increase in the supply of some good or a drop in its demand will cause its price to be lower than that which it otherwise would be. There is no other way to clear the market.

 

Mises explained that, eventually, even a monopolist would prefer any price to zero price. Maintaining a price above the market clearing price produces zero revenue. In a flooded used-car market, car dealers must reduce their prices in order to avoid bankruptcy. Otherwise, the used car dealer ceases to be a dealer and becomes a collector. The laws of supply and demand have not been rescinded, even in a world with very expensive-to-build and complex cars. As the automobile bubble bursts, quality used cars will flood the market, creating a buying opportunity for those with cash.

As with houses, it doesn’t matter how big or luxurious or complex you make new cars. When the credit bubble bursts, auto prices will not “always go up.”

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chicaboomboom's picture
chicaboomboom (not verified) Apr 11, 2016 10:18 PM

Folks, America is not gonna get better. This is why >>> http://wp.me/p4OZ4v-3z

The Merovingian's picture

I don't know what you are peddling, but go sell it someplace else. You don't belong here.

ihatediscus's picture

ahhhhhhhhhh.....yes ...........it's da JOOOOOOOOOOOOOOOOOOO's........da jOOOOOOOOOOOOOOOOOOOOOOO's are running the whole planet from tiny jOOOOOOOOOOOOOOOOOOOOOOOland while it's   surrounded by it's enemies ..........black ganster in chicago kills muzzie storeclerk ........it's da jOOOOOOOOOOOOOOOOOOOOOOOOOOO's fault......lol lol .....

........do yourself a  favor ..........bounce up outa here my man

Mintcoin's picture

Lower used car prices, means more people can afford to buy cars and spend money on other things like gas and be more economically productive.

Deflation is good!

glenlloyd's picture
"Could Bring The Whole House Of Cards Down"

We should be so lucky. Prices need to come down, the $500 car of two years ago is now $2000, and in no better condition.

fightapathy's picture

That's right. We had Cash for Clunkers. Now we got Arm & Leg for Clunkers.

daveO's picture

In cash for clunkers the gov. took perfectly running cars and destroyed the engines. They used our taxes to destroy good cars, to prop up the banksters and Government Motors. Now, it's been 7 years and the same banksters won't loan against such old cars. Another leg down.

arbwhore's picture

Excellent. My old clunker is nearly EOL. Time to take advantage of somebody who had more money than sense. (or no money and no sense in this case).

greenskeeper carl's picture

I'm driving my 03 z71 for a while. Why not? It still looks and runs great. Spent the weekend cleaning it, bet my paint is smoother than just about any new car. Unless the vehicle doesn't fit your needs anymore, there really isn't much reason to replace it. I've got 175k on it, and if the trans goes out, 2k gets me a new one. Less than 6 months of payments on a newer vehicle. I can afford to drive something newer if I wanted, but I am not trying to impress anyone. Already have a good woman and care nothing about impressing the neighbors.

As the other poster said, starve the beast.

GoldenGoosed's picture

I'm hooked on my 01 4Runner .... Cool dude who inspected it tried to buy it off me this year. Has 129,000

Yea the gov has a way of destroying industries and civilizations w their how u say it everyine do this every ine do thst shit stuff.... Amazing the industires etc obliterated along the way. Fadsters dumpsters bs mommy dearest fuck me over bad bs knows best the kiss of death on a road paved with those who know their good intentions only paved a road to hell!

Dolar in a vortex's picture

So my 14 year old Porsche Boxster S has no value?

Top down and 70 degrees ... yeah, sure.

the late idi armin's picture

just remember to fix the ims bearing.

Ace Ventura's picture

LOL can you change your own oil in that thing?   ;-)

 

TeraByte's picture

I am driving an 11 old Aussie Falcon Station Wagon with 100 K kms, when bought at 30% of a new ones price. Runs like new and one can expect 100K+ more of care free kms. Buy a new one and the moment for the first time to turn the ignition key, 20% of the value is going to be lost . Keeping up with appearances is a costly game and drains people, who are lured to to show up.

NumNutt's picture

'91 toyota corrolla, about 350,000 miles rebuilt the motor one time, drive it everyday. It just won't die, I will keep it running until it rust to nothing, I actually like driving it. In heavy traffic I just change lanes as I please, the tools driving their brand new cars and still making payments get out of the way real fast. I gave up the "keeping up with the Jones's" a long time ago, best thing I ever did. fuck'em.

Wolfbay's picture

Same situation as you. 2002 z71 Tahoe 180,000. Another plus is our local mechanic can work on it while the ones have to be serviced at dealer. We paid around 30,000 for it new. New z71 4wd now is in neighborhood of 60- 70,000 I think.

GIANTKILR's picture

I always buy used.....25 years or older. Avoid all the government bullshit! Start a new trend! Starve the beast!

 

geno-econ's picture

Average difference between "trade in" and "retail" price of used cars is $2,000--#3,000 .  If you see dealers parking lot is filled, offer $ 3,000 less in Cash   .Dealer needs space for new car inventory, lease returns this Spring and new trade ins.  He also needs cash to finance new car inventory.  Last month purchased two cars at deep discounts for 2014 models with low mileage.  Do the math and save big time

Vendetta's picture

they hate it when I pay cash .... that's why I love it and the freedom of no payments.... saved $33k on a perfectly good top of the line used jeep.   I'll probably put more miles on it than the person who bought it new with the few fixes needed evey now and then.

NoDebt's picture

Being a car guy with a penchant for old muscle cars, I went a step further with my "Mad Max" car.  Carburetor, points-style ignition (you know, for after the EMP blast fries all the electronics), no computer, no EFI, no "black boxes", no OnStar.  And yeah, it's got a blower on it.  Wouldn't be a Mad Max car without one.

So in the post-apocalyptic shit goes down I'll still have running wheels, a shot gun, my dingo and a couple cases of Dinki-Di dog food to eat.  I'll just need to scavenge for the juice.  The precious juice.

BandGap's picture

I have a mule, four chickens and two goats. I will give you their juice.

Rock On Roger's picture

Today I saw a guy harrowing the shit lumps in the pasture with a four mule team.

 

Mule On

maskone909's picture

If i steal a tesla, how much will the homies get at tue scrap yard? Gotta be a gang of copper gold and platinum in that bitch.

maskone909's picture

Got me thinking... Do teslashave intrinsic value?

UncleChopChop's picture

the batteries sure do. i know an electrician who is looking to salvage one to serve as a home battery to store his solar power. currently, tesla only sells their 6.4kWh battery for like $10k... the car batery is >50kWh. of course, you really need to know what you are doing, or as he says about playing with electricity - "it's easy to 'get dead'"

 

Amish Hacker's picture

No electronics for me either, NoDebt. All the best cars are pre-cupholder.

NoDebt's picture

You have a horse-drawn buggy, I assume, by your screen name.

Mr. Bones's picture

Blow through our draw through?

NoDebt's picture

Draw-through.  Little Weiand 142 roots blower with a home-built Rochester Quadrajet on top (383ci stroker small block Chevy built mostly from junkyard parts).  I know what you're thinking, but if you know what you're doing with that junk, it'll run pretty strong.  Mine goes high 11s on pump premium with drive-it-daily reliability and not-completely-awful fuel economy.

 

gladius17's picture
gladius17 (not verified) NoDebt Apr 12, 2016 1:56 PM

Nothing wrong with a Q-jet, other than the small fuel inlet and bowl. 

The Jackal's picture

Hope that's a dual-point setup and you've got extra points and condensors.  I use an HEI, but have an old dual setup in a box, just in case.

dot.dot's picture

What a puny plaaan.

 

(one of my favourite movies)

Northern Lights's picture

Oy Oy Oy Oy Oy.............it's just me and the snakes, playing majong, taking tea, thinking..............how we gonna get in there and get the gas............and then this trash arrived.............around around, attack attack, like angry ants mad with the smell of guzzoline !!!!!

NoDebt's picture

Ah, ah, ah.  You know, a man- a SMART man- might have a weapon under there.

fightapathy's picture

"Might hafta pin his head to the panel...!"

 

An' speak propa Ozzie. its WIPPPIN. E's goh a WIPPIN unna theh.

 

NumNutt's picture

best movie of all time, the new re-make sucks.

bluskyes's picture

I came to the same conclusion. I'm looking for my third 1981 chev truck. Nobody in my neighborhood complains about spare chev parts in the grass. It's expected.

nscholten's picture

I have a clothing line with a theme (Starve The Beast Series).  Working on the online store right now.

Should be selling clothing by next week.

www.finelineclothingcompany.net

 

 

 

Kirk2NCC1701's picture

Climate/Weather allowing, and depending on circumstances... use a Moped to "starve the beast".

If it's below a certain speed (20 mph?), you don't even need to Register it with DMV, you don't need Plates and you don't need a Driver's Licences.

Just FYI.

dchang0's picture

Too many others thinking like this already. Prices of >25 year old cars in good shape are surprisingly high. Junkers are still cheap, but they tend to be money pits.

gladius17's picture
gladius17 (not verified) dchang0 Apr 12, 2016 1:58 PM

I saw some chick trying to sell a busted up '89 Toyota for $650. Needs an axle and strut and one fender is all smashed up. She got real offended when somebody (...) suggested the price was way too high... 

I've been seeing perfectly good running and driving cars going for $400-$500 lately here in north AL. 

astroloungers's picture

Lower end new car loans seem to only require a mirror breath test at this point. Couple this with sudent loans, take into consideration that debt is money....we should be screwed in no time.

blown income's picture

I work for a used dealer in Lafayette La .....sales strong , but alot of in house finance to the smart oil workers who just have to have a jacked up f250  ... miss a payment , reppo , rinse , repeat...

cbxer55's picture

So, Brodozer's are popular down there in Louisianna?  Gee, who'da thunk it?

NoDebt's picture

I've got a semi-distant relative does exactly that but down in TX.  It's exactly like you describe.  In-house finance, miss that payment by just a few days they repo it and sell it to the next clown that walks on the lot.  Same car gets sold and repo'ed over and over again.