Hurricane Harvey Likely To Destroy More Cars Than Katrina: "This Is Bad; Real Bad"

Tyler Durden's picture

Hurricane Harvey's historic flooding in Texas is set to wreak havoc on the auto industry and its insurers with analysts now predicting the storm could damage more vehicles than Hurricane Katrina.  In August 2005, Katrina wiped out some 500,000-600,000 vehicles but William Armstrong of CL King warns that Houston has about 5x more people than New Orleans did at the time.

Hurricane Harvey could damage more vehicles than Hurricane Katrina, driving business to the salvage auctions operated by Copart and KAR Auction Services, CL King analyst William Armstrong wrote in a note.

 

Katrina damaged 500,000-600,000 vehicles in August 2005, and the greater Houston MSA is five times as populous as pre-Katrina New Orleans.

 

The cost of dealing with catastrophes can be higher than normal given vehicle extraction, towing and temporary storage and auction locations, though both companies have grown their physical presence in Texas over the last year, which should lower the need for temporary locations.

 

It may be 2-3 months or longer until damaged vehicles are sold at auction.

Cars

 

Of course, storms of this magnitude bring not only millions in salvage-related charge offs for the auto industry but a loss of critical "selling days" for one of the biggest markets in the country.  As CNBC points out this morning, Citi analyst Itay Michaeli figures Hurricane Harvey could knock about 500,000 units off the August auto SAAR to be reported later this week.

Given the widespread flooding that will swamp dealerships and kill potential sales, analysts are bringing down estimates for the August new vehicle sales in the U.S.

 

Citi analyst Itay Michaeli has cut his estimate for the rate of monthly auto sales in August, which are reported on Friday. He estimates Harvey will affect some 125 counties in Texas and about 60 percent of the state's auto sales.

 

Before Harvey, Michaeli estimated the August sales pace for the country was going to be in the mid-$16 million range. As the storm lingers over the area, Michaeli has dropped his estimate.

 

"Our analysis suggests that Hurricane Harvey could push this down to the low-$16 million unit range," Michaeli wrote in a note to clients.

In terms of the publicly traded used car dealers, Stephens analyst Rick Nelson notes that Group 1 Automotive has the heaviest exposure to Hurricane Harvey, with ~37% of revenues from Texas, followed by Sonic (~25%) and AutoNation (~21%).  Meanwhile, Autonation CEO Marc Cannon appeared on CNBC this morning to discuss the devastation:

"This is bad; real bad," said Marc Cannon, an AutoNation executive vice president. "Right now, we are focused on making sure all of our employees are safe and taken care of. At the same time, we're focusing on getting all of our stores up and running."

 

AutoNation's 18 dealerships in the Houston area are shut down. Widespread flooding has not only swamped thousands of buildings in the Houston area, it's likely damaged hundreds, perhaps thousands of new cars and trucks parked on dealership lots.

 

"We're holding calls with our staff every three hours," Cannon said. "We have reopened our stores in Corpus Christi and Austin, but some of the Houston stores may take some time."

Then, for the 'less reputable' used car dealers, no good crisis can be allowed to go to waste.  As carfax points out, if previous hurricanes are any example, roughly half of the cars flooded by Hurricane Harvey will eventually be sold with no flood label to unsuspecting consumers.

 

Of course, when the auto OEMs report abysmal sales this Friday they will undoubtedly also tell you how Hurricane Harvey is great for long-term sales because of all the salvaged cars that have to be replaced.

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svayambhu108's picture

And this is the mighty spillway

https://goo.gl/VxKGPr

who knew

It is not a joke, looking at that, that dam has big chances to fail

SilverRhino's picture

This will blow the remaining guts out of the used car industry.   

 

GUS100CORRINA's picture

Observation: Well that should take care of the AUTOMOBILE inventory problem.

The only problem is that there will be a HUGE DELAY before things are settled. Houston will be cleaning up for YEARS.

HARVEY may become America's BLACK SWAN event trigger. I believe there is a high probability that GDP may go negative over this event in the short run.

DeadFred's picture

Harvey is just the first hit. Like labor pains this will keep on coming. Insurance companies will be toast. And I'm an optimist

Shitonya Serfs's picture

Insurance companies will be bailed out, then raise everyone's rates (whether they live near Houston or not).

Son of Loki's picture

Funny the Democrat Mayor of Houston refused to evacuate law-abiding citizens of Houstons but the prison system evacuates criminals.

 

Nearly 6,000 Inmates Evacuated From Texas Prisons

 

http://www.msn.com/en-us/news/us/nearly-6000-inmates-evacuated-from-texa...

Creepy_Azz_Crackaah's picture

What do they do with the thousands of water logged new cars? If I can get one at ten cents on the dollar - maybe a nice new Tundra 4x4, double cab - I'll be happy to drain it and vacuum the alligators out of it.

Pool Shark's picture

Are you kidding? This is GREAT news for the Auto Industry.

All the excess inventory just went down the drain!

BULLISH!!!

 

NoDebt's picture

They'll be dried out and headed for resale at a used car lot or auction near you very soon!

 

ModernMusket's picture

And on ebay. THe industry calls it curbstone sales. Dealers pretending to be private sellers to avoid liabilities,etc.

DWD-MOVIE's picture

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turnoffthewater's picture

Yeah send them all to Kalifornia

Creative_Destruct's picture

BAD NEWS for used car buyers and consumers on three fronts:

1) Lots of unidentified flood damaged vehicles sold.

2) Major inventory and supply reduction; prices likely to increase.

3) And then there's the boost to everyones insurance rates likely to follow.

Stuck on Zero's picture

Harvey will inspire Congress to move past the debt ceiling and pass another trillion or two in emergency spending. It will inspire the Fed to commence QE again. It will make Americans rush to their malls to buy Armani flotation devices.

BullionBlast's picture

You might want to rethink that idea about buying a flood car on the cheap. I went thru Hurricane Ivan in 2004 and there were lots of cars selling cheap. Even the insurance companies were selling them. You think you got a great deal and finally 'beat the crooked dealers' and 9 months later you are driving along at a nice 60 mph when the air bag deploys.  And then your mechanic says he needs to replace all the electronics for $11K because "there must have been a little salt in that bayou water because everything is corroded." ......

Ajax-1's picture

Yep. It's never a good idea to buy a vehicle that has been in a flood.

ACES FULL's picture

Agree. I buy salvage cars for parts and I VERY rarely will touch one even as a parts car. My advice to everyone here, take it or leave it, is to steer clear of flood cars.

11b40's picture

Serious question for someone in the indudtry.  6-12 months from now, how wil anyone be able to learn if a used car they are considering was in a flood?

ACES FULL's picture

Freshwater damage can be hard to spot if someone has purposely tried to hide it. Run a Carfax, may show flood history or at least alert you that the car was registered in the affected areas during the time of the flooding. Other than that, just clues like mildew smell, sand underneath carpet or seats, obvious electrical glitches or just a sense about a deal too good to be true from someone you dont know well. Also, inspect bottom of trunk and lower areas in engine compartment well for sand, leaves, any signs of water damage. I buy thousands of autos each year and I get bit from time to time but I can absorb those thru sheer volume. Just hate to see someone spend thousands, sometimes tens of thousands of dollars on a flooded lemon. Stick with someone you know well or a reputable dealer or auction. Avoid fly-by-nights{always}, Craigslist or any internet, newspaper autos for quite a while unless you live at least 1000 miles from TX, LA and any other affected areas. Hope this helps.

11b40's picture

Thanks for the hints, Aces.  Good info from an insiders perspective.

Creepy_Azz_Crackaah's picture

Ah.  Good point.  I guess if they weren't so computer/electronic driven they would be a little easier to get running well after a flood.

jme540's picture

Insurance companies are themselves insured. A lot of money will now come to the USA from Europe, Japan etc. The storm is a good news for US economy.

VIS MAIOR's picture

its good for eu and japan , not good for usa.  just another debt, on debt 

sessinpo's picture

In a world of TBTF, every big financial industry is insured. It's called the tax payer.

jme540's picture

Insurance companies are themselves insured. A lot of money will now come to the USA from Europe, Japan etc. The storm is a good news for US economy.

Doom and Dust's picture

Yes, many reinsurers and their insurers are European, and a few could end up in a very precarious financial position once Harvey has fully played out, because damage in the hundreds of billions will instantly burn their reserves.

Then again you'd have to be a special kind of stupid to be the last line insurer of a city like Houston in a country like the US. I do wonder how much of it will be covered as most standard policies don't cover flood damage.

azusgm's picture

No standard policy covers flood.

Read that 1/6 of flood-damaged structures in Houston are insured.

HungryPorkChop's picture

Very few people in TX have flood insurance.  Usually the only ones that do have flood insurance is because the lending banks required flood insurance to finance.  So people that live by rivers and dry creeks which are prone to flood every 10 or 15 years are the bulk of those which have flood insurance.  Everyone else its very doubtful they would have this add-on policy. 

Bet a lot of people will walk away from their homes.  They will soon be underwater in more ways than one.  Sad but true..

Son of Loki's picture

Isn't Buffet part of one of the biggest re-insurers?

azusgm's picture

He was bigly into General Re at one time. Don't know about now.

Agent P's picture

Keep in mind, this is the third year in a row Houston has literally been underwater.  In 2015 they had the "100 year flood", in 2016 they had the "500 year flood", and now comes Harvey with the rest of the story.  As tragic as it is, it's nothing new down on the bayou.  That being said, I have no idea what's happened with flood insurance in the area as a result of the previous two years' flood events. 

azusgm's picture

Nationwide quit selling through their agents in Houston. Probably got out altogether.

Ajax-1's picture

So what your saying is that Houston is paid up and the next 600+ years of weather should be nice.

11b40's picture

It is sad & true, but take this further and think about all the businesses that will close.  Many smaller owners simply will not have the ability to re-build, and even with govt backed loans, this will have wiped out many and destroyed their will to start over.  Many of the older owners will not want to take on debt at any cost.  This adds up to huge numbers of jobs lost.  Oh well, I guess that 47 year old office worker can find a good construction job.

Chauncey Gardener's picture

Call me cynical, but, I can't wait for some insurance sleazeball rejecting claims for "Act of God." 

MrSteve's picture

Tuning up the band for top things you don't want to hear:

That's an act of God, not covered.

Force Majeure, we can't pay on account of the flood.

You pulled out of the Paris Accords, we're pulling out of paying for Houston.

Your contract is a complete forgery, we have no record of this policy.

We're BK, we can't pay.

Write it off on your taxes!

 

LightBulb18's picture

May be time to arrest the dictators of the European union. They are human rights violators, so exporting democracy can be A justification.

tonyw's picture

There's also a special kind of stupid that knows for days a big storm is coming and doesn't move the cars to higher ground, after all they can easily be driven.

Then again I remember seeing lots of school buses left to flood with Katrina.

It's depressing when people don't learn simple things :-(

 

Chauncey Gardener's picture

Where's hgher ground, Dallas?

lester1's picture

Where will the bailout money come from ??

Shitonya Serfs's picture

It will come from in the form of a 1 page demand, asking that the insurers in Houston be provided the capital it needs to payout claims for all the great Texans who have suffered losses.

There will be some discussion for a week. The insurance companies stocks will dump. Uncle Warren (tugging on the front of his pleated pants) will step in, and insist that he too will help bail the insurance agencies out, if GOV will.

Creepy_Azz_Crackaah's picture

So short insurance companies. Who is the biggest insurer in Houston?

Doom and Dust's picture

The biggest insurer of real estate will probably be the USG since no one else touches flood plain insurance anymore.

Overall you're better off researching reinsurers, but you're too late for the best shorts. Munich Re and Swiss Re already got huge hits the last couple of days.

azusgm's picture

There will be great Democratic howling and gnashing of teeth in the Texas legislature for the Economic Stabilization Fund (aka, the Rainy Day Fund) to be emptied into Houston and Harris County. Sylvester Turner spent the last couple of decades in the state house representing a Houston district. He'll put the touch on Pseudo-Republican House Speaker Joe Straus who will find a way to extract at least a couple billion. The fund was put in place to tide over the state during market downturns in O&G which is so essential to the Texas economy and the tax till. Straus will stick his finger into the air to determine how much to send to Houston and Harris County to mitigate their property taxable base losses. That will be the source of a great deal of the money that will rebuild municipal infrastructure so the cities and counties won't have to. Straus has a powerful and professional political machine. He'll find the price point that will maximize the popularity/electability of his loyal candidates. Straus might even get his pet Pseudo-Republican house member Chris Paddie to introduce the bill. Why not? He got Chris, from a mostly rural district, to introduce the Uber bill and thereby take the heat off his politicians in the big cities.

A more reasonable/less dangerous way to use the Rainy Day Fund would be to segregate a designated portion of the monetary value and use that to guarantee new bonds to be issued for rebuilding and upgrading some of the Houston infrastructure. That would mean a AAA rating. However, Houston has such bad debt problems already that they likely could not afford the debt service. They are going to want, and probably get, a direct grant.

TheRideNeverEnds's picture

Same place all money comes from; thin air.

sessinpo's picture

Squeeze it out of your dry sleleton bones. And if that ain't enough, squeeze it out of the bones of any family members and friends.

Hope Copy's picture

The stock market 'correction' has cometh

JRobby's picture

This car is a steal! No combustion chamber corrosion (as far as you know) a bit musty smelling and a Perch under the seat but like I said, "a steal!"