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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greenskeeper carl's picture

Go near a major military installation if you want to see vehicle stupidity. There must be some kind of rule for these guys that they have to spend all their tax free overseas pay on a giant diesel truck, it's insane. Id love to see the terms on those guys loans. I had to go to the ford dealership because I needed a part a couple months ago, parked next to a new one with the sticker on the window, 70-fucking- thousand dollars for a pickup truck. Sure was pretty, but you'd have to be a world class retard to finance a vehicle for 8 years.

But if there's one thing America has no shortage of, it's retards.

Dolar in a vortex's picture

Carl, let the military folks default on all the auto debt that they can.

Tomorrow they'll be shipped to some 3rd world hell hole in the name of freedom.

in4mayshun's picture

While I admit that it is extremely unwise to purchase something you cannot afford, it is another issue to finance something for 5,6,7 or even 8 years. Obviously, if you mow lawns for a living, you probably missed the "time-value-of-money" portion of economics class. If it is possible to use someone else's money for less than the potential profit to be earned by putting that money to work, then it is advantageous to do so. Why would I spend $60k cash on a work truck when I can put that money to work and finance the vehicle for 1.9% over 8 years? That means over 8 years I would pay approx $4,500 in interest. Do you know what kind of return I can get for $60 grand in advertising??? I could quadruple my investment.
So, what kind of world class retard would pay cash for a truck in my position?

BarkingCat's picture

you are a world class retard if you spend $60,000 on a work vehicle where a $25,000 one will do exactly the same job.

gladius17's picture
gladius17 (not verified) BarkingCat Apr 12, 2016 12:59 PM

Or even a $1,000 one...

Vendetta's picture

yeah... but does the $25k one have a leather ringed cup holder... that's what's important

pitz's picture

Time to replace my late 80s LeBaron I guess.  Think there will be another Cash for Clunkers?

Billy the Poet's picture

Did your LeBaron once belong to Jon Voight?

Babalooee's picture

But with an "h" dude. And it wasn't used either. Pre-owned, just like my girlfriend wasn't fucked before, merely pre-visited. 

pitz's picture

Lol.  But seriously I want to replace it with a pickup with a Detroit 453T in it.  Fuck the EPA. 

Northern Lights's picture

You buy that Lebaron from Tom Green?

OldPhart's picture

'48 Ford F-3 flatbed stills cranks and runs.  Blows a bit of smoke and leaks oil like a 95 year old man without depends.  And the wood bed has a tendency to leave chunks along the highway.

Only mod made to it was the addition of an ooga horn.

cowdiddly's picture

I got a Sunset Orange 71 C60 Chevy grain truck with 87k original miles complete with caved in passenger door from two fighting Hereford bulls in a shoving match, I bought it at a farm auction for the outrageous price of 2100 dollars about 10 years ago.

I can go to town to get groceries, 3 yards of tops soil, a pallet of plywood, 20' 2 x 6s and 4-5 pallets of shingles and still have room for the dogs.

I figure in a Tewokoni. everything I own of importance would fit in it and still be able to put Granny in her rocking chair on top of the load AKA the Beverly Hillbillies. Only thing that sucks is trying to park in these new fangled parking spaces with the lines painted so close that only an Aveo can use. That and one of the seat springs keeps wanting to give you a prostate exam.

Mike in GA's picture

"...groceries, 3 yards of tops soil, a pallet of plywood, 20' 2 x 6s and 4-5 pallets of shingles and still have room for the dogs."

And Sunset Orange to boot?  I'm green with envy!  

cowdiddly's picture

Plus the best part is a whole half gallon of Kentucky Deluxe will fit sideways in the glove box no problems.

jughead's picture

engine and wood bed are both easily fixable...and a much better investment than buying any junk newer than early 70s.  

duck dodgers's picture

This should be good for older used car prices though.

ChargingHandle's picture

Maserari  or Aston Martin...8 years financing....hmmmmr

Jack Oliver's picture

Long bicycle's and horses ! The 'Stock Market' started out trading STOCK and that's what it will likely return to !!!

buffed's picture

The new cars sold during the boom became used cars the moment they left the dealer lot.

Northern Lights's picture

Not surprised.  The whole car-culture that used to exist back in the 50's-70's doesn't exist anymore amongst the younger generation.  Sometime in the mid 80's insurance premiums went through the roof for teenagers.  Forget about getting that after school job at Mc Donalds and buying your first car for $1000 and driving to school and cruising on the weekends. I recall the insurance on a piece of shit was typically 5 times the value of the car.  Add gas, and maintenance and a typical teen would have to drop out of school and work that McJob fulltime to keep that car on the road. Heck, even the condos being built these days don't even have a parking garage.  The kids just can't afford these things. I go to carshows and the attendees are all geriatric patients.  I'm the youngest at 43 yearsold. When I run into another hotrodder on the road and look to have some fun and race, I look inside the car and it's a 50-60 year old behind the wheel. You get the occasional young face showing up with his girlfriend to look at these cars. I was having a discussion with a fellow hotrodder concerning mods on my car.  Kids stood around listening with blank expressions on their faces.  Had no idea WTF we were talking about. Mines a 6-speed stick shift.  I read a story in the paper who some punks gave up stealing a car because none of them knew how to drive standard.  So, here you have all these car companies pumping out cars for a market that's shrinking in a culture that's all about UBER, car-sharing programs, public transit, and college debt. It was only a matter of time that the cards would come down. I have a friend who's been waiting on it to crash over the past 3 years so that he could pick up a used Civic heavily discounted by dare I say, 40%?

Dolar in a vortex's picture

Come to CArs 'n Coffee in Dallas, you'll find plenty of 30/40's who speak gaps, points, cams, headers, short blocks and the rest.

kareninca's picture

Yes, but in the old days normal, regular guys talked about and dealt with those things.  Now it is a tiny in-group hobby activity.

Chauncey Gardener's picture

A used Civic heavily discounted by 40%? Ain't gonna happen. In the car biz, and we go to the auctions every week. A $2000 (wholesale) car will cost you $4000 wholesale, plus seller fees. Want a pickup? A used clean F-150 that should sell for $5000 will cost $8-9000 wholesale. The prices are going UP, not down. At least here in Portland, OR.

Abbie Normal's picture

And pumpkin futures will keep on going up right through October....

Vendetta's picture

I don't doubt the prices are going up in Portland, the house I had bought in 2000 there for $169k and sold a few years later to move went on the market for $740k this year.... makes sense right?  How's the homelss population doing by the way?

SmittyinLA's picture

Anybody thinks they're gonna get a repo deal is mistaken, most of these new vehicles are disposable, too expensive to repair with junk motors and paper thin bodies, none will survive the payment plan.

Auto durability peaked about 1995, since then everything has been "lightened by the state" to the point cars are disposable.

slyder wood's picture

The CVT transmissions being standard in nearly all new sedans and small SUVs is another indicator of lower quality. All my GM THMs went at least 200K, that was 700R4 and 4L60s. All new Hondas have CVTs. I don't think any car maker is giving over 60K warranty on drivetrain. I'm guessing even these newer CVT won't go much over 100K before they grenade.
Bought a new Civic in 2004, so tinny and cheap I got rid of it after only 4000 miles. Happened into an 07 Accord from a buddy moving, nice car, 5spd auto, built well but probably not as well as the 90s.

Kirk2NCC1701's picture

You could also use an electric bicycle (bike with motor-assist), and charge it at home. On or Off the grid, if you have solar panels.

Not for everyone, but perfect for some, rather than drive an old clunker.

Tom Green Swedish's picture

The auto industry is in the JOS A Bank phase.  Nobody buys unless they put on a deal.  And they always know the deal is coming.  Too much inventory.  They produce just to make cars and keep costs down and keep the union working. Last time I checked the union didn't even want to work.

Chauncey Gardener's picture

And, most dealers floor (finance) their inventories. "Free money" isn't free after a year, and all that inventory goes to the auction because the dealers can't make the flooring payments. 

Debugas's picture

cars for personal use are supposed to be bought with saved money and not consumer debt financed

if the sales were fueled by consumer credit then the time will inevitably come for prices to fall back down

Stalefarts's picture

15+ year old cars are a steal if you have some mechanical ability and a decent set of tools. Parts can be bought online from wholesalers like RockAuto for dirt cheap and other parts scavenged from pick n' pull junkyards. 

Def. invest in a good 18 inch, 1/2 drive breaker bar. Never use a ratchet to break torque on a tight/rusted fastener. Also get a can of Aerokroil pentrating oil. It melts rust. 

Vendetta's picture

4 ft cheater bar takes em off too... sometimes snaps the bolts, but hey, replace the bolt

blown income's picture

My Chevy 2500 rolling on 194k , truck is 16 years old and I take care of it ..plastic interior stuff was obviously not made to last...I woluld love a new truck but I just can't see paying for something for soooo long and for so much...figure when the 454 is in need of internal love (last year built 2000) I would either have it rebuilt or get a crate 502 ..had transmission done by Pizza Joe so it is good for life..

Herdee's picture

The dealers are picking up everything dirt cheap up in Canada and importing everthing to thir advantage.It undercuts American consumers and at the same time rips them off for 30-40 %.

ThePoliticalCom's picture

 

Great article and I linked to you here:

'Are 'Almost' Subprime Mortgages And Used Car Loans A Canary In The Coal Mine?'

https://www.linkedin.com/pulse/almost-subprime-mortgages-used-car-loans-...

Mike

Davidduke2000's picture

The lack of financing on used cars make them cheap as it eliminates 75% of the buyers.

For the last few years, the US was sending used trucks and cars to ISIS which ate most of the used cars  trucks on the market, now ISIS was defeated by Russia and the US is no longer emptying the used cars market.

Weisbrot's picture

if this is true then why is any car I am interested in priced 25-50% over NADA full retail and the dealers arent moving on the price?

SantaClaws's picture

Another benefit to keeping older cars going (like my '93 and '94 Toyota Camrys) is the lower local excise tax rates.  As the appraised value of the vehicle declines over time, the applicable excise tax typically also falls.  In my city, vehicles are taxed at a perverse $60 per thousand of valuation, and they are (equally perversely) assumed to be in perfect condition (NADA "clean retail") with no option to adjust that value if the vehicle is in poor condition.

 

Thus, my cars are so old that I pay almost nothing in taxes.  If I bought a new car, I would be in effect buying a second new car for the city and state.

Bemused Observer's picture

" In my city, vehicles are taxed at a perverse $60 per thousand of valuation, and they are (equally perversely) assumed to be in perfect condition (NADA "clean retail") with no option to adjust that value if the vehicle is in poor condition."

What you should do then is go over there and tell them you have a bit of a problem and need their help. The IRS has called you in for an audit, and one of the issues is that they are claiming you are overstating the value of your vehicle. In going over your paperwork, you can see that "You nice folks here in City Hall seem to agree with me" on that valuation, and you need a copy of that appraisal to bring with you so you can get it straightened out.

I would think that if you can show a significant difference in the appraised and actual value, with you suffering financial loss as result, you could demand it be re-done and the taxes be based on the car's true market value.

They do the same shit with property taxes..."Oh, your house is worth 3 million, pay up.", when in fact the comps show you'd be lucky to get 750 thousand for it. I think most people who have never challenged their appraisal are likely paying too much in taxes because of over-valuation by taxing authorities.

They're not just gonna decrease them because values have gone down. Everything is designed to create the illusion of high RE prices, and it's bad enough that you will never actually REALIZE those prices should you sell...you shouldn't be paying taxes or higher premiums on their illusions as well.

SantaClaws's picture

These are clever ideas.  I'll give them some thought.  Thanks.

theyjustcantstop's picture

yes buying good used trucks and or cars with sizeable discounts can be a financially rewarding decision, but, use your crony-capitalistic, government installed spying device, oh excuse me your computer, or cell-phone, and do your research.

there's a good reason used-car salesmen are always compared to politicians, think of that, because that's what your dealing with, there's a 99.9% chance you'll ever get any written guarantee on what they sell you, you'll have to buy it and drive it before you vote on how bad you've been screwed.

I tell all my friends and especially vulnerable relatives, find a trusted mechanic, pay him a fee to check-out the car for you.

 

Bemused Observer's picture

Hate new cars...and 'used' new cars too. Never again. I won't drive some computerized piece of crap...the damned dashboards are starting to look like the cockpits of commercial aircraft.

If I can't find the radio or manually roll the windows down/adjust the seat, then fuck that car.

Vendetta's picture

they might look like aircraft cockpits but they lack decent diagnostics like many aircraft.... they gotta feed the service shops

Captive_Okie's picture

It's tough getting old, ain't it

oldguyonBMXbike's picture

I've been riding a bicycle all year round for the past 3 years.  I don't miss having a car at all.