Is This The Sound Of The Bottom Falling Out Of The Auto Industry?

Tyler Durden's picture

Authored by Wolf Richter via WolfStreet.com,

Not quite, not yet, but it’s not good either.

Let’s hope that the problems piling up in the used vehicle market - and their impact on new vehicle sales, automakers, $1.1 trillion in auto loans, and auto lenders - is just a blip, something caused by what has been getting blamed by just about everyone now: the delayed tax refunds.

In its March report, the National Association of Auto Dealers (NADA) reported an anomaly: dropping used vehicle prices in February, which occurred only for the second time in the past 20 years. It was a big one: Its Used Car Guide’s seasonally adjusted used vehicle price index plunged 3.8% from January, “by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble.”

The index has now dropped eight months in a row and hit the lowest level since September 2010. The index is down 8% year over year, and down 13% from its peak in 2014.

The price decline spanned all segments, but it hit the two ends of the spectrum — subcompact cars and the luxury end — particularly hard. The list shows the change in wholesale prices from January to February in vehicles up to eight years old:

NADA blamed three factors:

  1. The surge in new vehicle incentive spending. Automakers, drowning in unsold inventories on dealer lots and desperate to move the iron and keep their plants running, increased incentive spending by 18% to the highest level in over a decade. This made new vehicle more competitive with late-model used vehicles. So this would be on the demand side.
  2. The growing flood of used vehicles going through auction. Over the first two months this year, volume of vehicles up to eight years old rose by about 5% year-over-year. Volume of late-model vehicles – the supply from rental car companies and lease turn-ins – jumped 10%. So that’s on the supply side.
  3. The IRS tax refund fiasco. Restaurants, retailers, and others are already blaming various February debacles on these delayed tax refunds. After the IRS was hit with millions of fake e-filed tax returns last year that claimed the Earned Income Tax Credit and the Additional Child Tax Credit, Congress required the agency to delay sending out refunds this year.

It’s big money. According to the IRS, refunds issued through February 10 plunged 69% from the same period a year ago. That’s $65 billion that didn’t make it into consumers’ bank accounts. But then the money was unleashed. In the week ending February 17, the IRS sent out a record $74 billion in refunds. By the week ending February 24, refunds were down only 10%, or $15 billion, year-over-year. So most of the problem was resolved by the end of February.

That might explain part of the problem on the demand side, at least at the lower end of the scale. But it’s hard to explain the plunge in prices at the luxury end. Also, these are wholesale prices. They don’t react instantly to a brief consumer cash crunch caused by tax-refund delays, now resolved. Something else appears to be going on.

The report, in attempting a forecast, cautioned:

February’s unusually soft showing makes pinpointing where used prices will go over the next few months a bit more challenging. However, given the slower than usual rollout of federal tax refunds, it’s assumed prices will be somewhat stronger in March and April than originally anticipated.

The Used Vehicle Index by Manheim, the world’s largest wholesale auto auction, didn’t pick up a massive drop in used vehicle prices over the past few months, though it too is showing some weakness. The index edged down 0.2% in February. The report pointed out that, “given a sharp decline in pricing in February of last year, the Manheim Index now shows a year-over-year gain of 1.1%.”

The index has dropped in six of the past seven months (chart), but in small increments, and as it says, “stability remains the watchword.” It too acknowledge headwinds for the market, including the “heavy new vehicle inventory and incentives,” and “a crazy tax refund season.”

Why are used vehicle wholesale prices important?

For one, they matter to lenders. Used vehicle wholesale prices determine the value of the collateral for $1.11 trillion in auto loans that have boomed on higher prices, higher unit sales, longer maturities (the average hit a new record of 66.5 months in Q4), and higher loan-to-value ratios (negative equity):

Dropping wholesale prices increase loan losses for lenders as recovery is lower. Declining wholesale values of lease turn-ins, if the trend persists, impacts how finance companies structure the lease terms, thus raising the costs for the customers and putting a damper on leasing activity.

All this puts pressure on new vehicle sales, further pushing automakers to pile on even larger incentives in order to move the units, grapple with inventories, and keep plants open. This works for a while – there’s nothing like big-fat incentives to bring out reluctant buyers. But incentives, when everyone is doing them, are front-loading sales. This is ultimately self-defeating and gets very costly even as sales begin to decline. It was a contributor in the collapse of the industry during the Financial Crisis.

And there are well-established patterns of customers switching between new vehicles and late-model used vehicles. Large incentives by automakers put pressure on late-model used vehicles. In turn, falling prices on the used vehicle side cannibalize sales from the new vehicle side. In other words, they compete with each other, often on the same dealer lot. Especially if demand is lackluster despite the incentives, these patterns can trigger a downward spiral that is difficult to get out of.

First oil & gas, then construction, then new vehicle sales. Read…  How Auto Sales Are Getting Crushed in Houston

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MagicHandPuppet's picture

Let the prices keep falling. Daddy needs a new sled... on the cheap!

NoDebt's picture

I'll sell you my 2016 Ford Fusion for $500.  Just be aware I'm reporting it stolen immediately afterwards, so be careful with it.

It's worth more to me as an insurance claim today than it will be as a trade-in a couple years from now.

 

Stuck on Zero's picture

I suggest that the government start another cash for clunkers program.  The government will buy your Ford Fusion for $5K if you go out and buy a 11 MPG Nissan Titan. They will then use people hired in the shovel-ready jobs program to bury the car in a landfill. That should spur somebody's economy.

Mano-A-Mano's picture
Mano-A-Mano (not verified) Stuck on Zero Mar 22, 2017 10:00 PM

Sounds like the US should become a land of impostors, like its monstrous child.

http://biblicisminstitute.wordpress.com/2016/01/08/eden-and-the-land-of-...

kavlar's picture
kavlar (not verified) Mano-A-Mano Mar 22, 2017 10:01 PM

Running an economy like that is setting it up for failure ahead.

Mano-A-Mano's picture
Mano-A-Mano (not verified) kavlar Mar 22, 2017 10:03 PM

Of course, but everybody has an angle that makes no economic sense whatsoever. In the long run, it'll inevitably crash.

cue in cue's picture
cue in cue (not verified) Mano-A-Mano Mar 23, 2017 1:38 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

83_vf_1100_c's picture

Do you even get any link clicks at this point after months of ceaseless spamming? Have you no honor? Go be a lawyer or hedge fund manager. Better money and if you are selling your self out might just as well make the big $$$.

lil dirtball's picture

Either they pay ZH to have this shit inserted in the conversation or ZH inserts it to disrupt - maybe for both reasons? Otherwise, why does this go on every day on every thread?

Offthebeach's picture

God forbd modest people can get a used utility sub compact.  Especially for cash, thus becoming enemies,  veritable terrorists of the credit /fiat/Fed Overlords( PBUThem)

kavlar's picture
kavlar (not verified) NoDebt Mar 22, 2017 9:59 PM

Sounds like you're ready to move on.

NoDebt's picture

Aparently so.  Somebody down-voted me.  I may never recover from that.  I'm a really sensitive guy, as you well know.

 

 

stocker84's picture

The fact that you posted that indicates that you are sensitive and slightly butt-hurt that you got a down vote. 

Your post is a feeble attempt at using reverse psychology in hopes to clarify that you don't care that you had a down vote. 

Let's keep it real... The truth hurts, but it shall set you freeeeeee

 

stocker84's picture

That's indecent and corrupt.Let me guess... You are against, "the man"...

Fuck off.

And the fact that you got so many up votes, fuck them too.

I hadn't realized there are dindus posting and voting on ZH.

 

 

dicksburnt's picture

Thats disheartening because Mike Rowe told us that the Fusion was going to hold its resale better than the Camry.   It is really tough to predict the future sometimes.  I always stick with the certainties:  We're so fucked it hurts!

Chauncey Gardener's picture

I just rode back from Seattle to Portland in a Camry. What a piece of shit. Poorly designed Nav System interface, shitty stereo with whoompy bass and headache inducing treble lots of wind noise, gutless, but it was a Hybrid so the owner is happy.

 Not for me...I'll stick to my 2005 Acura RL, despite what the automotvie review authority, Consumer Reports, thinks.

 

Uranium Mountain's picture

I spent all my extra cash on Gold and Silver.   Then when I needed a new used SUV I had them give me a rate at 2.54%.  I guess if I really need to, I can sell my PM's and pay off the SUV but not if I can help it.  What I do plan on doing is selling my house and putting that cash down on the SUV to pay it off and screw BoA out of future interest earnings.  Then with with no liabilities and gold and silver as assets.

SilverRoofer's picture

Maybe since most were built in Mexico the Mexicans can buy them or the south Americans

 

Offthebeach's picture

Since they steal cars, and take them to Mexico,  how's about taking the whole fambly, all 30-40 of them.

Proctologist's picture

Michigan will not be the place to be if auto sales crash.

But I still take Michigan over California !

Logan 5's picture
Logan 5 (not verified) Proctologist Mar 23, 2017 5:33 AM

My mom told me that if I didn't have anything nice to say then don't say it at all, & which is why I find myself banging on the keyboard for apparently no reason whatsoever, and, if the keystrokes just happen to form themselves into words, then it must be just another of of those (((weird mathematical impossibilities))).

BandGap's picture

Ha ha. Still think Michigan's economy is solely based on car production? The fastest growing counties in the US are on the other side of the state, near Lake Michigan.

California is a mess.

NoDebt's picture

When you have an economy caught in a monetary liquidity trap, all sorts of shit gets over-produced to the point of stupidity.  When you refuse to even acknowlege you are in a liquidity trap and assume everything is as it always was, it's even worse.

 

Quantum Bunk's picture

US dollar bulls. I've been screen shotting your recent calls. Already a good wall of shame accumulated.

 

Best horse in the glue factory huh huh. No.

buzzsaw99's picture

the euro is up four cents from the atl. :roll:

i am the great and powerful buzzsaw99. who are you? [/oz]

Tarzan's picture

Lets see the price of a new F150 come down another 10 grand, I might buy one

BabaLooey's picture

10?

Try fucking 30...for openers...

Price one lately?

Your ass bleeds ..............even if you aren't buying one.

Unless you're stupid...then ask for special financing...........

...........96 months...0 down....blowjobs weekly from the sales whores on staff out back..........

The car market has been whistling past the fucking graveyard since Iaccoca bit the dust.

Logan 5's picture
Logan 5 (not verified) BabaLooey Mar 23, 2017 5:41 AM

My 1991 F-150 Lariat XLT still runs fine... I bought it for $1800, 15 years ago. It has manual L & H 2x4 & 4x4 gears, & 2 gas tanks that'll hold around 33 gallons. X-tra long bed, no extended cab, so if Shiela wants a ride, she's gonna have to straddle the manual shift while I'm driving.

Tarzan's picture

I have priced them lately, and the price is ridiculous.  I want a full size truck that gets over 25mpg and still hauls a decent load, but I'm not paying 40 grand for a damn truck.  At those prices, I'll keep my Subaru Cross trek for the daily commute, and the beater truck to haul the boat.

 

CoastalCowboy's picture

You'll pry my 2006 F-150 out of my cold, dead fingers.  I get nosebleeds just driving by the car stealerships.

Logan 5's picture
Logan 5 (not verified) CoastalCowboy Mar 23, 2017 7:11 AM

Not knocking the Subaru, but a frontloader can dump 2 yards of mulch into my truck bed in no time flat & I can get mulch for $18 a yard at the local landfill for $18 a yard.

 

Now, price 2 yards of mulch into how many bags of the equivalent amount of mulch you'd have to buy (by the bag) at any garden center.

 

Depending on the areas you'd have to mulch on your property, it's quite a difference. (& I need 8-10 yards per year to do a complete job).

 

Anyway ~ that's just one reason for the truck.

OverTheHedge's picture

I put three pigs into the back of mine yesterday - the pigs were in 12 separate pieces, admittedly.....but it's all bacon from here on in.

Anyway ~ that's just another reason for the truck.

[Should I also mention that it is old, knackered, and not in the US, so no help to the conversation whatsoever?]

Antifaschistische's picture

I'll take the F250 Diesel for - $20k

silverer's picture

I don't want a new car. Or even a used car. The complexity is numbing. Repairs are very expensive, and if you look at a car as a tool to be productive and spread the cost over your income, the return on the expenditure is not looking good.

JamesBond's picture

It's a great tax write-off. Plaster an add on the hood and file as a full-time expense.

jb

hustler etiquette's picture

it's like a doomed arranged marriage

Dr. Engali's picture

It's time for another cash for clunkers program, coupled with new ten year financing at "low low rates".

NoDebt's picture

When you can get a car lease that's as long as the Brits leased Hong Kong from the Chinese, you know we will have arrived at Financial Nirvana.

 

BitchesBetterRecognize's picture

I have designed & upgraded many Auto Dealer facilities in the North East, and kept asking them how the fuck do they manage to keep afloat with the disastrous auto sales & leasing defaults popping up?  

answer:  the fucking free money at almost zero percent the car industry gets from the banks to buy back their stocks & their scam to hook new suckers with car loan programs at all costs, even if they don't qualify i.e. the subprime house morgage bust.  But in all fairness - some of the very successful dealers make the real money by prioritizing on "service & repair" while having sales and leasing as a separate branch.   

tnquake's picture

Talking to a neighbor the other day, his son bought a 2015 Dodge Ram 1500 crew cab with all the bells and whistles. The dealer gave him a 11% interest rate and told him when his credit was better they would automatically drop the rate to 4 or 5%. That was over a year ago and interest rate is still at 11%.

I just laughed!

Graph's picture

Aurhor's book "Testesterone pit"  - eloquent insight into car sales business.

shovelhead's picture

Who the fuck is stupid enough to let a dealer repair their car outside of warrentee work?

That's like asking a street hooker to hold your wallet while you take a leak.

BitchesBetterRecognize's picture

I know - even after all the work I've done for them, I never take my car to their dealeships not even for a car wash - they're a ripoff!!  BUT one of the dealer owners that I know have contracts with government companies who purchased several cars & there is package deal to repair & upgrade the vehicles when needed be- same as private companies purchasing 5 vehicles or more.  Bottom line- those guys are very clever & know how to get customers, even if they're broke, because -as I explained- ultimately is the banks cheap money injected to the buseness that keep them alive until the bubble burst. 

JuliaS's picture

Got fooled by my dealer few months ago. Seat occupancy sensor began to malfunction. Checked online and discovered there was a recall issued for the item just recently. The dealer assured me the warranty would cover everything. I arrange the fix. They do repairs and stick me with the bill anyway, saying the serial number of my vehicle didn't fall into the covered category. This is bullshit, because the first thing they did to determine eligibility was to scan the dash. Pretty sure I got scammed. Pieces of shit!

stormsailor's picture

maybe uncle smak will buy all the section 8'ers a new bmw,audi,mercedes,lincoln,cadillac ultimate luxury sedan.  oh, wait he already did.

Joyo Bliss's picture

An A to B'er is all you need (hic)

VWAndy's picture

 Nothing that cant be fixed with more debt/fiat. Hell if need be they could just dump the surplus into the ocean.

man from glad's picture

Looked at new trucks last fall. $30K for a basic full size pickup. Just not worth the coin. I will probably drive my 20 year old truck till I die at this point. At least I know what it needs as opposed to buying some "newer" used unknown. I know I am not alone in this thinking.

aurum4040's picture

You are not alone. I have a 17 year old Jeep GC that runs great, looks fine for me- certainly not the best but not the worst, and does everything I need it to. Love the Jeep, I have no intention of getting rid of it anytime soon. Why should I? To piss money away?