Fear of an impending car-price collapse grips auto industry
bloomberg.com
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Even before this subprime auto loans were a bubble starting to burst: https://wolfstreet.com/2020/02/11/subprime-auto-loans-explod...
I don't care what they're charging me for the financing. I just care about the final bottom-line price. They can make 50% or 0% on financing for all I care.
Ignore how they say they're arriving at their final number - just look at what the final number is.
If a bank would charge you 4%, then on a 5-year loan for a $30K car, 0% financing is worth on the order of $3,000.
I'd regard the interest rate as fictitious on its own, but it goes into your calculation to determine how good your deal is for comparison.
It doesn’t make any sense to think about it like this - the finance isn’t available without the car and if you want the car without the finance you will suddenly find the price of the car can be lower. They aren’t two separate things. It’s one price!
Even though the provided interest rate, the price of the car, and the trade-in value (if any) are fictitious numbers, they still go into your bottom line cost.
I could be paying 20% finance and be getting a better deal than you paying 0% finance.
Then you are making bad decisions by not considering the time value of money. And I think it's obvious that that's the case and then you can adjust your position to take that into account.
Consider. I have a car that I will sell to you for $100,000. Alternatively, I will offer you a financing arrangement where you get the car today and in 10 years you pay me $105,000.
Now, in this scenario, two things are immediately obvious. First, I'm really dumb for making this offer. I have little to gain and it's a super risky loan for me and it gets really bad over time. Second, you'd be dumb to accept the pay now option over the financing, despite the fact that the final bottom-line price is higher for financing. Even a ridiculously conservative, barely over inflation, adjustment of 4% per year gives you an extra ~$43,000 at the end of that 10 years by taking the financing.
> gives you an extra ~$43,000
So that's counted in your bottom-line price, isn't it?
All that matters is the price at the end, not how it was arrived at.
The finance price on its own gives no information.
Paying $1000 today is not the same as paying $1000 in six month's time - that's the time value of money that people have mentioned.
If you just add up total amounts without factoring in differences between how payments are distributed over time, your comparison can be incorrect, since the larger number in that case isn't necessarily the more expensive one.
To do a proper comparison, you need to calculate the net present value (NPV) or a similar measure that takes into account time value. See e.g. https://corporatefinanceinstitute.com/resources/knowledge/va...
Also, lots of comments in this thread not understanding the cost of the vehicle versus the cost of financing. You should always negotiate the cost of the vehicle separately (as low as possible, obviously, between different dealerships), before the financing to prevent being sold on a monthly payment versus total vehicle price. Otherwise, it becomes trivial for the dealership to inflate their margins on your transaction.
[1] https://www.khanacademy.org/economics-finance-domain/core-fi... (Khan Academy: Time value of money)
Which is essentially zero (or less than zero) return adjusted for risk and and discounted for inflation. All of which is especially hard to gauge at the moment. Maybe I'd take a 0% loan for something I'd otherwise put cash on the barrel for at the moment. But it wouldn't be for the purpose of putting the cash into an equities bet.
Remember the adage: If you aren't paying, you are the product.
84 months is also ridiculous for a car loan. That means you will very quickly owe more than the car is worth, a dangerous situation for a lender. They would only offer such a loan if they had alternative contingency plans such as massive penalties.
This is not to negate your point about "buy here pay here" subprime dealers/lenders, which are also part of the problem. But that is a distinctly separate arrangement to what's going on here with new car financing sponsored by the manufacturer.
TLDR Automakers pay to subsidize zero percent financing on new car sales to get the cars out of inventory during periods of weak sales volume.
Well duh that happens the second you drove the car off the lot. On day two of your ownership you still owe the full cost of a brand new car but can only sell someone a second hand car.
That’s just a truism of buying a new car. The length of the finance agreement is irrelevant.
You always want the cheapest money for the longest term. The only reason to go with a shorter term is if the interest rate is significantly lower. Being "underwater" has nothing to do with it.
Only recently have we started financing cars the way we financed houses in the 2000s, and mobile homes in the 1990s etc etc.
I see 0% financing as just an accounting trick to discount a car a few thousand $ without setting expectations for discounts or giving away the money up front.
There may be exceptions, but I've never had or been offered a car loan that had early repayment penalties, so as many other people have said in conversations like these, might as well go for the longest term that gets the lowest rate and pay it off whenever you feel like.
That is a great textbook approach, pick a car you can afford and demand the best deal, but things work differently at car dealerships. These very long loans are not about getting someone a better deal on a selected car. It is more often about taking a monthly payment that the customer can afford, then maximizing the amount of car that payment can finance. At the really shady end it is about getting someone into ANY car.
These 0% deals are the lending arms of the manufactures performing some financial wizardry to keep the metal moving, so to speak. These companies abso-fucking-lutely do not want a bunch of new buyers defaulting on their loans and flooding the market with cheap, lightly used cars.
This for two reasons. The first is obvious, a 1 year old used car is absolutely competition for a new car. The second is much more subtle, a glut of comparable used cars suppress prices below lease residuals. That second fact is critical because, depending on market, leases can make up to 70% of new car sales. The losses from leases can pile up quickly. Imagine selling 80,000 cars on lease and have the fair market value come in just $2,000 less than expected, that's a $160,000,000 loss in a single year. It's a lagging loss too, so you made the money from the sale when times were good, and now you have to pay the penalty for the mistake in three years when times are lean.
It's a balancing act for sure. They want to keep the cheap money flowing to get people in cars, but they know going too far over that line is a kiss of death. Mitsubishi crossed that line during the last recession and couldn't recover. Also, these lending arms act as a solid asset that can be disposed of when times get tough, so it's a good idea to keep them financially healthy.
This is not that. The person above you is referring to manufacturer financing deals. You're buying the financing and the car at the same time from the same parent company. You are paying. The part you pay for is the car. The financing is simply a loss leader.
> They would only offer such a loan if they had alternative contingency plans such as massive penalties.
Penalties aren't a good plan for recovering anything from a person who has defaulted. Nobody is paying the penalties on a car that was already repossessed.
Financiers who are worried about about the default risk on a loan typically do this by requiring down payments up front.
And like others have said - I have very little sympathy for car dealers. I helped mom buy a new CUV recently, and one dealer had it sewn up .. until they swapped the vehicle we had been talking about for a different one when we got to the "We're buying today - how much will you come down on price?" part.
Helped my parents buy a car recently and had a very similar experience. The guys at the first dealership we went to kept switching the car and trim they were talking about, then promising deals that magically disappeared a few minutes later. They really don't help themselves if they actually care about rehabilitating their reputation for being shady.
Shit rolls down hill, so when the the manufactures screw over the dealerships, the dealerships find ways to screw over the customers. It doesn't help that the owners of dealerships tend to be politically connected locally, which gives them a staggering amount of leverage to combat any consumer protection legislation.
Not sure what part of the country you're in, but in my area most rental cars are driven from the airport to a hotel and back and nothing more.
I personally owned a japanese econobox that came off Enterprise after 18 months and I drove it for 100,000 miles. So YMMV (pun intended) but rental cars are usually a great deal for the price. The companies get the car cheap to begin with, they're maintained on schedule, and usually sold off fairly early in their lifetime with low mileage to keep the flow from the factory coming.
I agree that most get driven like you said - from the airport to the hotel and back - i.e. sensibly. But I have known people to seriously abuse their rental car. One drove back to the rental lot in 2nd gear because he was mad they gave him a model he didn't like. Those are the ones I wouldn't want to end up with.
Sort of terrible, but also I've been hearing that we're in a vehicle financing bubble for several years now.
I've sold a few things that I've been trying to sell for over a year. E.g. inkjet printer cartridges. I guess a lot of people suddenly can't print at work anymore!
Make sure to have cash in hand or financing lined up, and that you're taking possession of title immediately (or in a way that you're not going to be left hung out to dry due to the repo process, if the sale is distressed). A branch of the institution that is the lienholder on the title is the ideal place to complete the transaction.
Just because car sales are down doesn't mean the people who aren't buying cars now are going to change their mind because of a slightly lower price. So I doubt it's in the interest of a savvy seller to change their asking price much.
If you're selling mundane utilitarian cars, then lowering your price isn't going to increase the number of essential workers who just got their car totaled and need to buy now.
And if you're selling sporty toys to people who are financially unaffected by current events, maybe you could increase sales a little with discounts, but maybe they are by definition buying anyway, so why bother?
That of course makes perfect sense now that I take a minute to think about it.
By Dale Pollak, Executive Vice President, Cox Automotive and Founder, vAuto
"Author’s note: We are in a crisis that challenges everyone in the automotive ecosystem. OEMs. Financial institutions. Dealers. Suppliers. We are all in uncharted waters where there are more questions than answers. In the weeks ahead, I’ll be writing and speaking about the challenges and opportunities the current crisis brings to all parts of the car business. This letter, however, focuses on the challenges and concerns franchise and independent dealers are facing as the crisis disrupts their businesses."
If they all go under because of this I’ll consider it a brilliant upside.
Though, it did make for a good scapegoat when used car prices spiked in the years following the recession. The popular narrative is that it was this massive scheme to crush perfectly good cars. When the reality is, the scheme was capped to just 700k cars, most of which were already barely operable. And while 700k sounds like a lot, there was something like a quarter of a billion registered vehicles in the USA at the time.
If you plot monthly car sales during that time, and you know what you're looking for, you can kind of see small bump, then subsequent dip of C4C. But what is plainly obvious is the fact that new car sales dropped from 15 million vehicles per year to around 8 the next.
It really depends on the vehicle. A lot of older used cars are worth more as parts than as barely operable.
Cash for clunkers helped take off the market the older used cars that weren't worth anything as parts either. They would've kept driving (barely), but the scrap value wasn't worth deregistering them.
Iunno, the delivery drivers using cars are using Corollas or Civics. They don't really die. And when they do, they become parts cars to keep the rest of the fleet up.
I am doing lots of volunteer work with my car - and a Prius hatchback seems to be an ideal vessel for deliveries and transporting goods. If you need to haul more, a minivan or cargo van could be the way to go.
Getting all the kids car seats out and back in is no fun though.
A used car price collapse will have big impacts on dealer franchises. I know they're not necessarily a sympathetic group but it will definitely have an impact on the economy in many ways. Tighter margins, consolidation of territory as dealerships go out of business, and so on, means those dealerships are spending less on contracts.
There will be some kind of auto dealer market in a year or two but, barring massive government intervention to keep everything right where it is, it's going to be different in ways that touch many parts of our economy.
The piece about auto sale vs. service as proportions of total revenue is a different data point.
Our economy is driven by consumer spending and from my non-expert point of view consumer spending will never come back to anywhere near old normals.
EDIT: the economist was Danielle DiMartino Booth who wrote the book “Fed Up: An Insider's Take on Why the Federal Reserve is Bad for America”
I also challenge the idea of owning large homes. My wife and I have not had a mortgage for over 25 years but we “just” have a small beautiful house while many friends with less assets have mega-homes.
I might be very wrong about this, but think more people will embrace a new style of frugality and re-evaluate what they are willing to sell their time to get.
I suspect what the parent comments are hinting at is you can then pocket the money you would have spent on a car anyway and put it in the bank or stocks and earn interest on that money.
The great thing about predatory lending schemes in car financing is that you get ot be the predator if you have the cash on hand.
As many people have said before me, if you get the maximum term you have flexibility if you lose your job or something.
I realize that if you live out in the countryside or in the suburbs, the car is your lifeline. But for city folk cars are a luxury. You can walk everywhere you need, you can use Instacart and Amazon to handle groceries and shopping, and, if you're lucky, you can work on distributed teams. You never need to get behind the wheel, and even then you're better off getting a Lyft.
$250/mo for a parking spot where random people can still scratch up, dent or break into your car. $100-200 for insurance, $x for gas, $300+ for financing or leasing a car, $y for repairs and maintenance, $z for tickets and parking meters.. This stuff adds up. If you only need the car occasionally, let's say a couple of times a month on the weekends, then this system is horribly inefficient.
Of course you end up paying more for living close to work in say.. downtown Seattle, NYC, SF, LA etc... but the tradeoff is to move to the burbs, shave off $1000 from your rent, and instead spend that same amount on your car, in addition to now having to sit in traffic jams for an hour or two every day? No, thanks.
I'm hoping networks of press-a-button-on-phone-receive-car systems like Zipcar keep expanding. Seems like their growth has been sub-linear at best this last few years.
The ZipCar model seemed like it was going to be a big deal at one point. But it seems to have been too much of a niche between Uber and occasional traditional rentals. (I know a couple of folks who use it and they find it a bit of a hassle.)
I'm hoping someone manages to make this as effortless as calling an Uber. Otherwise the alternative is that $10k/y expense on a rapidly depreciating asset you're not really using.
What more tends to happen in practice is that urban folk who decide not to own a car just minimize activities that require one unless they can can draft off friends.
$10k/y seems very high. Are parking fees $5k/year or something, or frequently buying a new car for some reason?
They're including new cars (20-30% value gone in the first year) and large vehicles like SUVs and trucks (Ford F series is the best selling vehicle in America) in those statistics, along with average mileage (13k/y) numbers for average fuel and maintenance costs, which would be much less for a minimal use vehicle.
At $10/work-day parking ($2,600/year), the remainder is under 13k miles at the IRS standard mileage rate, which is presumably a reasonable actual total expense rate.
You don't have to run out and buy a brand-new Tesla just to own a car.
Most people own nice reliable vehicles for half that price. I drive a 2013 Chevy Volt, on pure electricity most of the time, and my TCO is only ~$6k/yr (including gas, insurance, maintenance, registration, car payment + interest, electricity to charge it, fancy winter tires every two years, etc).
Frankly, even that expense was a bit of a luxury. If I hadn't been so obsessed with EV's, I probably could have easily shaved $1,000/yr off that price with zero effort.
I actually can get into the city for 9-5 fairly easily by rail. Just not door to door.
I think this is an extreme anecdote which I find hard to believe the RTD at fault for.
On the other hand, Lyft is now trying to get into the car rentals game...
i'm just waiting for someone in the on-demand transportation sector to realize that the killer app for self-driving is not 100% level 5 autonomous driving, but a service that can self-drive to you from a cheap parking lot/structure and return to it after a trip.
(to be fair, i think many do realize this and are working on it already.)
Cars aren't a luxury. Being a "city folk" at all is the luxury. Being able to afford a place, where you can outsource all of your errands to poor people, is the luxury. Being able to live in a place where "you can walk everywhere you need" is a luxury. (Not just in location and housing, but in job flexibility and leisure time, and in safety). Having the lifestyle flexibility to completely re-write your entire life around extreme high expense and very limited options, is the luxury.
> shave off $1000 from your rent, and instead spend that same amount on your car, in addition to now having to sit in traffic jams for an hour or two every day? No, thanks.
For a regular average American, it's more like "pay ~$400/month TCO to own a car, to save $1200/month off your rent". Generally speaking, no one actually spends money on a car, because unless you've made a terrible mistake (or are especially poor), a car earns you more money than it costs.
And that's before you get to all the other benefits -- (cheaper housing, larger housing, higher-quality housing, safer transportation, free personal distancing, disease-resistance) -- most of which are especially relevant now that we live in a never-ending-pandemic society.
Edit: would also like to point out that the billions that they spent to widen that freeway 10 years ago did not reduce congestion because more people built in sprawling suburbs 30 miles from Houston: http://cityobservatory.org/reducing-congestion-katy-didnt/
The thing I hate about doing zipcar / getaround / etc. is the amount of time and hassle I have to spend making sure the car isn't damaged and reporting it BEFORE I hop in and drive off.
In my early 20s, living in Cincinnati, I used to hate the stress of being tethered to car maintenance and ownership. So I moved into “The City” (Chicago, then SF) and got rid of my car. Well, that worked great in my able bodied youth days.
At some point in my early 30s, frustration with having complete dependence on someone else (MUNI/BART, Uber, Lyft) or worrying about having rentals available to get me from point A to point B became too much of a burden; too much of a time suck. At some point spending an hour a day total on transportation aggravation made the suburbs look appetizing. I told myself I would never settle for that commute again.
Staying in the city, I bought a car. I still hate maintaining cars, and EVs don’t require very much long term maintenance. Going EV simplified getting a car.
Renting in western San Francisco, everybody has a garage. It’s all suburbanesque mid century tract housing. Parking at home is not a problem.
What is? A 30 minute walk to Forest Hill station or :15 minute bus ride to Forest Hill station. By driving myself, In 15 minutes I could be in Civic Center without having somebody from Stockton get lost In SF In their rental Nissan Sentra with loud sales bro taking a conference call in a Uber Pool.
I can say the convenience of living in the city with a car is unparalleled. In (especially western) San Francisco, the transportation infrastructure is geared toward driving.
Hearing that BART stops at 9 PM now reinforces the practicality of my decision.
I currently do not own a car and don't really feel any desire to get one. I had to change my lifestyle slightly, cycling and PT is not a drop in replacement for a car but I feel the things I have let go are less important than the things I have gained.
I find that sitting in traffic is a huge negative on my mental health, working from home currently has made me much happier and if work tries to drag me back to the office I'll be looking for a new job.
I think you're taking for granted that everyone who lives and works in the general area of a city is commuting to the very center from a long way away. My reaction is "well, don't do that!"
I briefly worked in the DC area, and I still had a 10-15 minute commute as I am used to. That's because I was living a few miles from the center, in NOVA, and going outwards another mile or two in the morning.
Right now, I'm living just barely within the city limits of a smaller city, so technically you could say it's not a suburb, but practically it is, and again, my commute is (or was) about 10 minutes.
Any time you actually are living downtown in a significant urban area, it seems like a luxury to me, wouldn't you expect rents to be expensive when housing is competing with office space and fancy restaurants? I was able to afford that in Richmond, but in major, desirable cities, there's no way.
If you intend to own the car for a long time, it is less risky to buy a reliable brand new car than a used one of the same brand. Unless you know the owner.
These days, it is extremely easy to get maintenance data for many late model used vehicles. Many manufacturer websites will spit out all of their maintenance records as soon as you register an account on their "owners" portal and put in a VIN.
It doesn't tell you how hard the car was driven. But if you're like me, and mostly in the market for a hybrid, it probably wasn't driven that hard.
I also like to take a peek at the tire date codes, to make sure they corroborate with maintenance records: https://images.tirebuyer.com/visual-aids/pages/education/how...
The last car I bought had two original tires on it at 60k miles, and the service history showed the other two were replaced due to nails in the tread. I am confident the vehicle was not driven hard based on this.
I paid off that vehicle in 3 years and I still have it 18 years later. I know everything there is to know about it. I know what to expect, what's been neglected, how it's been treated and what the state of everything is. I've acquired tools necessary to do the bulk of both maintenance and repairs on it, and I know to whom I can turn for the stuff I shouldn't be touching. I have all that and I haven't had to make a car payment in 15 years. I estimate it's good for at least 5 and possibly 10 more years, at which point parts will become difficult to acquire and/or questionable in quality.
The narrow minded 'finance' view of the cost of a new vehicle misses the real value. I imagine the CR model will be the typical bonehead that jumps back on the new car debt treadmill about the time the second set of tires are needed, but we're not all that idiot.