Carmageddon: Record Incentives And Financing Terms Fail To Stem The Auto Bleeding In June

Yesterday we noted that auto investors celebrated the fact that, while auto sales were down massively year-over-year (to the tune of nearly 6% for the Detroit 3), June figures were 'less bad' than expected, so 'good'.  All of which sparked even more 'irrational exuberance' among OEM equity owners and sent Ford/GM shares soaring. 

 

But, rather than focus on the headline numbers, perhaps those equity owners should spend a little more time analyzing the record incentives and deteriorating underwriting standards that have been required to generate those 'less bad' results.

Take, for example, incentive spending for the month of June.  As Automotive News points out, overall industry incentive spending soared nearly 10% YoY with brands like Hyundai and Honda slashing 42% and 20%, respectively, to move their bloated dealer inventories.

ALG reports automakers spent an average of $3,550 per new vehicle sold in June, up 9.7 percent from a year ago. The average discount is expected to account for 10.8 percent of the average transaction price of vehicles sold last month -- marking the 11th time in the past year that incentive spending has accounted for 10 percent or more of the sale price, according to industry forecasters.

 

Autodata Corp. says average incentive spending heading into June was up 15 percent to $3,516 per vehicle sold. Despite weakening demand for cars, incentive spending for light-duty truck increased 16 percent compared to 13 percent for light-duty passenger cars during the first five months of the year.

 

American automakers, which continue to offer the most cash on the hood, matched the industry average for incentive spending, up 14 percent through May, while average discounts at Asian brands increased 19 percent and deals at European automakers rose only 3.9 percent.

 

ALG reported Subaru, Hyundai and Kia experienced the largest increases in incentive spending in June compared with a year ago. Average discounts at Subaru -- the lowest spender in the industry -- increased 63 percent to $1,032; followed by Hyundai, rising 42 percent to $3,259; and Kia, with an increase of 25 percent to $3,384.

auto

 

Meanwhile, Edmunds notes that auto loan terms continue to get stretched out to record new highs each month all in an effort to continually lower monthly payments so that entitled Americans can buy cars they really can't afford.

Edmunds analysts found that the average loan term for new vehicles soared to a record high of 69.3 months in June, an increase of 1 percent from June 2016 and up 6.8 percent from five years ago. In addition, the average amount financed by new-car buyers jumped to $30,945, which is a 2.6 percent increase from this time last year and 17.2 percent more than five years ago. And the average monthly car payment is now $517: That's 2.1 percent more than in June 2016 and an 11.3 percent increase over five years.

 

"Stretching out loan terms to secure a monthly payment they're comfortable with is becoming buyers' go-to way to get the cars they want, equipped the way they want them," said Jessica Caldwell, executive director of industry analysis for Edmunds. "It's financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it's also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer."

And it's not just new car loans as used car terms are getting stretched out as well...a fact that we're sure will serve consumers well if Morgan Stanley's downside case for used car prices ever actually plays out (see "Morgan Stanley: Used Car Prices May Crash 50%").

Consumers in the market for a used vehicle are also willing to stretch their payments. An Edmunds analysis found that the average loan length for a used car is now 66.9 months, up 0.1 percent from June 2016 and up 6 percent than five years ago. The average amount financed has risen to $21,142, a 0.4 percent jump from last year and an increase of 9.9 percent over five years. And the average used-car payment in June was $383, which is 0.8 percent more than a year ago and up 3.5 percent from five years ago.

And don't even get us started on the record level of "channel stuffing" going on the industry...

 

...with GM being the biggest culprit with inventory days up a modest 46% YoY to an all new record high of 105 days.

 

Finally, as Stone McCarthy Research points out, Americans, flush with their $0 down, 0% interest for 84 month auto loans, continued to shun cars for much more expensive, and profitable, trucks and SUV's.  Another "positive" for the industry...if you manage to ignore those record incentives we mentioned above which are eroding away all that extra profit.

General Motors domestic car sales came in much lower than we expected, and declined nearly 34% from June 2016. Their domestic light truck sales were much stronger than we expected, and were up over 7% from last year.

 

Domestic car sales were weaker than expected for Ford as well, and fell 23% from last year. Ford domestic light truck sales also came in below our expectations, though were not weak as ford domestic car sales, and were only up about 6% from June 2016.

 

Chrysler domestic light car sales came in right where we expected, down 19% from last year. Domestic light truck sales for Chrysler were below our expectations though, and fell around 3% from last year.

Car sales:

 

Truck sales:

 

Of course, things like math and critical thought are way more complicated than quickly reacting to 'less bad' headlines.  That said, in the long run, math and logic tend to prevail.

 

Comments

Bigly Juggernaut x2 Tue, 07/04/2017 - 21:19 Permalink

We all must be separated at birth because i thought the exact same thing for same car. When they sell new, or very lo-mi range rovers for 25-30% discount off sticker...in the 55-60 range, i will perk up. Oh, and get that extended warranty if you plan on keeping it. The repair bills are horrendous.Fallback, a loaded Q7 with the faster engine

In reply to by Juggernaut x2

GUS100CORRINA Bigly Tue, 07/04/2017 - 21:40 Permalink

Observation: Since TESLA's market cap is bigger than GM and Ford, TESLA should be at the top on this list, correct?How many cars does TESLA produce and ship a month? What an absolute farce!!!!The market, the analysis, the honesty ... it's all a farce.Goldman Sachs has a SELL rating on TSLA and a price target for TSLA of $185-$187.As Jim Cramer would say ... SELL, SELL, SELL.

In reply to by Bigly

Hitlery_4_Dictator Tue, 07/04/2017 - 18:42 Permalink

That's cool, the Auto "Experts" say that sales may be down, however, they don't see any sign for a sales collapse.....I think some other "experts" said Lehman Brothers was contained. Meanwhile, Silver is about to be 15......Happy 4th. 

class of 68 greenskeeper carl Tue, 07/04/2017 - 22:13 Permalink

hey greens,i've been on this site far longer than you.i dare say i have more trading experience than you in futures, options stocks and metals.i've traded metals with bache since 1980, then with man, and now admis.  i'm more than aqualified person. if you know what that entails. i was asking a simple question to a newbie and wanted to learn about cryptos. you can jerk yourself off

In reply to by greenskeeper carl

Dsyno Crypto-World-Order (not verified) Tue, 07/04/2017 - 20:09 Permalink

"I use a trezor wallet to hold it offline."

How can you justify using a wallet someone else built, that could contain a backdoor. Or justify using a hardware wallet that could have a hardware failure.

It seems the best wallet is an offline wallet you create yourself, with a backup paper copy stored somewhere secure.

In reply to by Crypto-World-Order (not verified)

Crypto-World-Order (not verified) Dsyno Tue, 07/04/2017 - 20:34 Permalink

 Like I said, I like it, I also like paper wallets. I store various amounts on diff types of wallets. I have nevr had a problem with my trezors. You can argue this to the cows come home, wont change my mind. Im very comfortable with my money on it. 

In reply to by Dsyno

Dsyno Crypto-World-Order (not verified) Tue, 07/04/2017 - 21:10 Permalink

"I have nevr had a problem with my trezors. You can argue this to the cows come home"

When you give advice to crypto newbies, be sure you at least mention the details and risks.

I'd be highly skeptical to use any wallet someone else created, such as Trezor. That's as risky, or even riskier, than keeping your crypto with some established, well-known company that has a trusted, good name.

You're putting yourself out there as a crypto expert, yet you're giving poor advice.

And your story keeps changing...

"I use a Trezor wallet..."
"Actually I use many different wallets."

"Trezor has no backdoors."
You have no possible way to know that, and you're just blowing smoke. As an Internet Engineer, I can tell you that you have no idea what backdoor may be in your Trezor hardware or code. And saying "I've had no problems so far" means absolutely nothing and is just naive.

Newbies, beware of this guy. Do your own research... and a lot of it.

If you go to the trouble of an offline wallet for peace-of-mind and security, do it the right way and don't use some other persons code or hardware; that defeats the purpose.

In reply to by Crypto-World-Order (not verified)

j0nx Tue, 07/04/2017 - 18:47 Permalink

God enough with the carmageddon. Car prices have never been higher and dealers less willing to lower them. If there is a glut or a problem with selling them then someone forgot to tell the dealers.

az_patriot (not verified) Cordeezy (not verified) Tue, 07/04/2017 - 19:04 Permalink

That may be because some used car dealers (e.g. Carmax) are skimming the difference for themselves at the wholesale level and not passing it along.  Most individuals can't purchase used cars at wholesale -- it's either haggle with a dealer or take your chances with a private seller.  The only way I see used car prices declining at the retail level is if buyers start walking out of Carmax and not returning.

In reply to by Cordeezy (not verified)

az_patriot (not verified) Reichstag Fire Dept. Tue, 07/04/2017 - 19:50 Permalink

Agree.  it's a matter of time.  But I think the dealers are buying as much time as they can and pocketing the difference.  As Cordeezy pointed out, none of this is reflected in the actual market yet -- not really.  Carmax's "no haggle" prices for decent used cars are still at the stupid level.  No, I'm not going to pay $12,000 for a used car that's really only worth $10,000 at the very most.

In reply to by Reichstag Fire Dept.

Pernicious Gol… Cordeezy (not verified) Wed, 07/05/2017 - 01:10 Permalink

If you live near a big regional dealer's auction house, find one of the many little dealers who will bid for you for a flat fee. These guys do this rather than have lots full of inventory.The auction house auctions vehicles to dealers only, consigned by other dealers. Each auction normally will have many lots of 10+ near-identical vehicles, 2 model years old and under, most off-lease. They publish on their dealers-only Web site what they are about to sell, including detailed information about features and mileage. Your dealer lets you know when something you might want is about to be available, and he tells you the price history of this kind of vehicle. You will not have a chance to inspect the vehicle, and you will not have much chance to pick a color. Because most were leased, they at least had the oil changed a few times. You agree on a ceiling price. He goes to the auction. The first few go to a dealer who must have that model tonight, and the price drops for each. Your dealer buddy calls you with what he thinks is a realistic number, and you tell him GO. He calls you with a final price. Because he gets a flat fee he has no incentive to overpay. The next day you meet him at the auction house with a cashier's check made out to the auction house. They sign it over to him. You drive to his place of business. You pay him his fee. He does the paperwork transferring title to you and gives you a temporary license plate. You get a 1-2 year old vehicle with fairly low mileage for 40%-60% of the new price. I have been buying vehicles this way for 20 years. A while back I bought my mom a last-year's model SUV with 600 miles on it for 50% of the new price.

In reply to by Cordeezy (not verified)

ihatebarkingdogs Tue, 07/04/2017 - 18:48 Permalink

Bernanke should be strung from a lamp post. His ZIRP has distorted markets and buisness cycles for over 10 years. This madness needs to end. People will keep buying shit they can't affoard as long as they can finance it at terms they can affoard. Then default.Madness. 

animalspirit Bunga Bunga Tue, 07/04/2017 - 19:32 Permalink

From the horse's mouth, 599 and below is ~22%.

- http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-t…

Even 649 and below only brings it up to ~32%.

So that would seem to make it so your claim would be wrong. But then ...

> That said, some of this trend may be a result
> of the lowest-scoring consumers “dropping out”
> from traditional credit usage, and by extension
> no longer having valid FICO® Scores.

Which certainly would affect those percentages. But by how much?

> An estimated 19% of the population, or roughly 45 million adults, are considered to be "credit invisibles,"

- http://www.cnbc.com/2015/05/05/credit-invisible-26-million-have-no-cred…

So an adult with no score is essentially the same as a person with a score of 600 or less as far as purchasing a vehicle on some credit. There are ~230M adults, so if 45M have no score, that leaves 185M with a score.

So ~32% of those 185M have a score 649 or less, plus 45M without a score equals 104M (who have either no score or a score of 649 and less). That's still only 45% of the adult population but way higher than the takeaway one gets from looking at the FICO chart (where it looks like just a few are low scorers.)

So wow ... that was a pretty good call!

In reply to by Bunga Bunga

CJgipper Tue, 07/04/2017 - 18:51 Permalink

This collapse will never happen as long as interest rates are zero. People will just keep taking out longer terms to get nicer newer cars.  Until the free money is cut off from the finance companies, this charade will simply continue.

Crypto-World-Order (not verified) CJgipper Tue, 07/04/2017 - 18:56 Permalink

ZIRP forever, Janet meant that when she said we will never have another crisis. Just print trillions to keep stocks up and keep everyone and their dog in debt. Financing will be available for everyone, shitty credit, no credit it dont matter. Want a 2000.00 bed and cant afford it? No problem we have financing available for that. 

In reply to by CJgipper

CHoward Tue, 07/04/2017 - 19:21 Permalink

I must be stupid or just plain blind.  I see zero problems with any of this.  How does this affect me personally or let's say my children, grand children - my community, etc??  A much bigger problem is staring us in the face as I type - North Korea.  There I can see a potential problem for us all.