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.
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.
???? GM's inventory has officially hit a 10-year high. 980,454 units in stock (a 105-day supply) as of June 30, the most since June 2007.— Nick Bunkley (@nickbunkley) July 3, 2017
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.
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.