The Auto Bubble Continues To Expand (gas price, Congress, wage, racist)
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I bought a CRV brand new, paid 35K cash for it in 2020. I then took a job overseas so it sat for most of the time, so very low mileage. Anyway, I recently sold it in March 2022 for more than I originally paid 2 years ago.
Cars are not supposed to appreciate, they are supposed to depreciate (collector’s cars excluded).
That example right there should tell everyone how screwed up the auto industry is right now.
It’s sad that cars are being repo’d, but if it corrects this market, then it is necessary.
I bought a CRV brand new, paid 35K cash for it in 2020. I then took a job overseas so it sat for most of the time, so very low mileage. Anyway, I recently sold it in March 2022 for more than I originally paid 2 years ago.
Cars are not supposed to appreciate, they are supposed to depreciate (collector’s cars excluded).
That example right there should tell everyone how screwed up the auto industry is right now.
It’s sad that cars are being repo’d, but if it corrects this market, then it is necessary.
It isn't just the auto industry. People are selling, all kinds of luxury items at a profit. ATV's, SxS's, Snowmobiles, Race cars, RV's, Motorcycles, Boats, etc.....the list goes on.
It isn't just the auto industry. People are selling, all kinds of luxury items at a profit. ATV's, SxS's, Snowmobiles, Race cars, RV's, Motorcycles, Boats, etc.....the list goes on.
I bought a CRV brand new, paid 35K cash for it in 2020. I then took a job overseas so it sat for most of the time, so very low mileage. Anyway, I recently sold it in March 2022 for more than I originally paid 2 years ago.
Cars are not supposed to appreciate, they are supposed to depreciate (collector’s cars excluded).
That example right there should tell everyone how screwed up the auto industry is right now.
It’s sad that cars are being repo’d, but if it corrects this market, then it is necessary.
In the past, the reason most people have bought newly used cars instead of new cars is because of the depreciation value... especially if the factory warranty is still in play. That's usually what I do. Now things are turned upside down.
Your last sentence was interesting because I thought of the 2008 mortgage crisis. That came about because of Glass Stegall repeal, and the environment was to give loans to anybody and not discriminate against low income minority lenders, and loans were sold often between banks - but many loans weren't paid, because they lenders were low income. So the government bailed out the banks - which really you could say the government bailed out the people making the bad loans.
With the cars today, I am not aware of any government interaction directly with loans and cars like there was with houses 14 years ago. But because of other economic pressures - mainly inflation - people aren't paying back loans and it turns the auto economy upside down.
Same with student loans... people aren't paying back college loans because they couldn't get a job out of college with enough income to support themselves and make the loan payments. Who is giving out loans to everybody? The government
So there are three examples in certain areas of the economy where things are upside down. What are the common denominators?
Prices are inflated
Too many people are defaulting on loans
Government interaction that alters the normal seller/customer economic environment
Banks making loans to people that shouldn't have a loan
If I had to boil it down to one sentence - these bubbles occur because there is too much money in an economy (or economy sector) that can be supported financially by the consumers.
So repo-ing cars can help get things back to normal. Ultimately - people have to stop buying things they can't afford - even if banks and government and endless commercials and media coverage dangle the carrot and tell you buy something.
Lucky Lopez is a car dealer who has been in the business for about 20 years. In recent meetings with bankers, where he bids on repossessed vehicles before they go to auction, he has noticed some common characteristics of the defaulted loans.
..
Part of the problem is that some consumers’ incomes were temporarily high as the pandemic brought about debt forbearance, pandemic stimulus checks, enhanced unemployment benefits, and, in some cases, forgiven loans from the Paycheck Protection Program. Lopez says he recently bought a Bentley, McLaren and two Aston Martins—all purchased by buyers using PPP money as down payments, and all repossessed after few or no monthly payments. Another recent acquisition: a Silverado repossessed from a borrower with a solid 700 credit score who made two payments.
Banks’ auto lending standards, meanwhile, went out the window, and then lenders jumped on the bandwagon of overpaying for cars, Lopez says. “Everybody thought the free gravy train would never end,” Lopez says.
...
Consider data from car-shopping app CoPilot, which monitors daily online inventory across dealers nationwide to track what they say is the difference between a car’s listed price and what it would be worth if not for extraordinary pandemic dynamics. In June, used-car prices were up 43%, or $10,046 above projected “normal” levels, the company says.
Repos on subprime car loans and prime car loans have doubled according to the article.
I just paid off my used car loan recently, and I am getting random offers in the mail to sell <whomever the letter is from> my car at $5K over the Kelley Blue Book value... so they can sell it at $10K over the KBB value.
The used car market is ridiculous right now. People have to exercise discipline and stop buying things they can't afford. The article mentions that people who are making $2500/mo have $1000 car payments. There's no way that should be happening.
Sub prime auto loans have been around for serious decades.
Such loans are typically sold and back asset backed securities.
The credit rating agencies appropriately grade sub prime private labor asset- backed securities. Generally speaking, they are not assigned an investment grade. As such, the most conservative institutional investors ( public and private pension plans, insurance companies etc cannot buy asset- backed securities backed by sub prime auto loans.
This is a very different situation from private label mortgage- backed securities backed with sub prime mortgages that were mistakenly graded as investment grade. The result back then, was that the most conservative institutional investors were the source of funding sub prime mortgages.
US people have never been particularly good savers compared to the rest of the developed world. It’s all about the lifestyle and living large. No shortage of expensive cars in neighborhoods where it is common for households to rely on free lunches for children during the summer school break. Can’t feed your kids while driving a Mercedes make no sense to me.
Last edited by middle-aged mom; 07-14-2022 at 08:02 AM..
Sub prime auto loans have been around for serious decades.
Such loans are typically sold and back asset backed securities.
The credit rating agencies appropriately grade sub prime private labor asset- backed securities. Generally speaking, they are not assigned an investment grade. As such, the most conservative institutional investors ( public and private pension plans, insurance companies etc cannot buy asset- backed securities backed by sub prime auto loans.
This is a very different situation from private label mortgage- backed securities backed with sub prime mortgages that were mistakenly graded as investment grade. The result back then, was that the most conservative institutional investors were the source of funding sub prime mortgages.
The common denominator is people buying cars they can't afford... people buying houses they can't afford... people buying a college education that they can't afford.
Banks and governments are allowing too many loans to be made that people can't support. From the example in my OP - who allows a loan with a $1000/mo payment to someone making $2500/mo? Do they really expect people to make that loan payment over the long term?
The common denominator is people buying cars they can't afford... people buying houses they can't afford... people buying a college education that they can't afford.
Banks and governments are allowing too many loans to be made that people can't support. From the example in my OP - who allows a loan with a $1000/mo payment to someone making $2500/mo? Do they really expect people to make that loan payment over the long term?
This is the majority of our society today. My wife and I are guilty of it. After over 20 years living in a "starter" home, that we could afford ( should have been paid off) with one minimum wage income, we decided to move in 2019 to a semi rural area. While we probably could afford it on one income, we also would have to cut a lot of the other things we have. So, it does require us both to be working, although we do save/invest probably 30-35% of our combined income a month.
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