A Record 25% Of Used Car Trade-Ins Are Underwater

We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, loosening underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield. 

Today, we find that Edmunds' "Q3 2016 Used Vehicle Market Report" reveals that many of the same problems also afflict the used auto market.  The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values continues to spike and currently stands at an all-time high 25%.  Moreover, the average balance of the negative equity also continues to rise and stood at $3,635 for Q3 2016, up from roughly $2,750 in Q3 2011.

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Meanwhile, the average used car price also continues to rise and stood at $19,200 as of Q3 2016.  This implies that, since most people simply roll their negative equity into their new loans (because, why not?), many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car. 

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But wait, there's more (think weekend CNBC infomercial).  Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011.  Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term.  While interest rates have certainly come down from Q3 2011, they haven't declined nearly enough to offset a $3,300 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.

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Of course, none of this is terribly surprising...just another ponzi scheme, courtesy of accommodative fed policies, which will all come crashing down at some point.  And while timing when bubbles will burst is always tricky, with terms already maxed out, treasury yields spiking and used car purchasers extremely sensitive to monthly payments we suspect the time could very well be near.

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