Carvana’s success rides on used-car loans
wsj.com
wsj.com
If people are actually taking those loans, there seems to be a decent amount of excess risk at play. I'm assuming Carvana eventually does pull your credit but I doubt they're lowering rates after doing so.
The housing market in the US though is on a different level. $8-9 trillion, so I don't think any one player is going to even make the smallest of differences unless they are focusing in specific markets and maybe manipulating just that area.
It’s not guaranteed that these companies will start intentionally misinforming people for profit, but that’s very much the risk.
But that’s not the inventory that is being traded at any point of time.
The vast majority of housing in the US sits in a single family without switching hands for probably decades. So the actual market is probably 20-30 times smaller, and so a single major player is far more capable of having an influence on pricing.
Besides, housing is not a national market. A buyer does not usually decide that they want to own a house and then scour the entire country to find houses they could live in.
They usually decide a place they want to live in, and then look at a much smaller market within that area. So even if a single entity cannot impact the national market, they could definitely impact local markets.
A discussion around this probably deserves its own entire page, but as I am currently looking for a home as a first-time buyer, seeing “Zillow owned home” labels all over the area in which I’m looking (as if it’s some sort of positive thing) has been infuriating. All they do is use their scale and data science to push me out of the market several times over!
I present no evidence, to prove this, but from what I can tell, this is what they seem to do:
First, they use scale and data science to find what they consider under-priced homes and buy them for cash. If I happen to find the same home for sale at the same time, what seller is going to go with a traditional loan over a full cash offer who could easily offer more if needed? I can’t compete with that.
Secondly, they don’t do anything to the house (aside from clean it up and taking nice pictures—no value added) and then resell it for multiple tens of thousands more than what they just paid. If this house was originally at the high end of my budget, bought by Zillow, then re-listed for more, I can no longer afford it.
Third, if that house DOES sell for more to someone else, it just drives up the rest of the prices in the neighborhood. A lose-lose all around for me and my family. I don’t see how Zillow being able to flip houses is good for anyone. And by flip, I don’t mean fix up—-I have yet to find a Zillow-owned home that has anything of substantial value added to it—-and saving 1% of closing costs or whatever their incentive is by owning a Zillow house is not enough value add.
FWIW, I’ve spent a LOT of time of the past few years trying to get a hold of reliable MLS market data to do my own sort of analysis to try and find affordable enclaves or diamonds in the rough or whatever and that data is damn near impossible to get free access to. So the fact that Zillow has this data and also has unlimited pockets and FTEs who work on this stuff all day…it doesn’t feel right to me.
And it’s not like they’re driving up prices of arbitrary goods or services—these are single family homes (in probably the most popular price range) they’re inflating when we’re already in the middle of a national housing crisis!
/rant
Edit: spelling/clarification
Is it better for people who are trying to break into the housing market now? No. Is it better for people who are trying to sell and move out in a low-demand area? Probably not, except it might speed up the process.
The zillow owned homes have been sitting on the market for a while despite being fair prices IMO. I think its turning agents away since zillow really wants the buyers to also use zillow.
I think they’re welcome as a market participant and, if they’re particularly good at pricing properties, they might be able to make some money by exploiting inefficiencies in the market.
I think it’s far more likely that they’ll be a net donor to most markets from their algorithmic operations (in trading terms, I doubt they’ll exhibit positive alpha from purely algorithmic buying).
How is this different from hedge funds who do the same thing with equities, and outperform the retail investor as a result?
The advice to retail investors is "buy and hold", and I think the same applies here.
Equities are not a necessity of life.
Sounds great... but I can tell you that having a cash offer didn't mean anything if you weren't the top offer. I lost out on many homes because I didn't come out on top. Lost against those with conventional loans too. People will wait an extra 2/3 weeks if it means an extra $10K in the home price.
Cash offers distort the market because they drag up prices beyond what income driven mortgage offers would.
Also, "income driven mortgage" is really "salary from large employer driven mortgage". For everybody else it either underestimates, breaks down badly, or both. Especially business owners. "I sign my own payroll check" is not what a banker wants to hear.
(To some extent, I get it. I’m an arms-length buyer. I’m willing to pay $X. That’s strong evidence that that’s the arms-length market price.)
—-
As for the Zillow topic:
Zillow is fantastic for sellers. I was offered well above market for my house, paid at least 5% less in fees, I could do everything remotely, and I could close in 14 days.
Fuck traditional realtors. Our buying experience sucked. Zillow made selling a breeze and I would recommend it to anyone looking to sell right now.
Regarding the comments on appraisals below... so I work across a state line. In one market, the majority of appraisals don't have a problem unless the accepted price is really something ridiculous (and I'd argue the listing agent should have done a better job coaching their sellers to avoid that situation). In the other state though, we have a serious problem with appraisals. There aren't enough appraisers in the area, so they are coming from 2+ hours away and really don't know our market. This is compounded by many of them not being able to pull comparables from just across the state line. It's seriously messing with our market, for both buyers and sellers. Looking for a career post-technology? Become an appraiser or an inspector, we don't have enough of either.
How much does access cost? You're making a massive purchase. If that data is going to help you save a substantial amount by finding a diamond (or even some lesser precious gem) in the rough, it seems like it would be worth a few $hundred to save much more than that.
There are distinct differences in these approaches. Zillow’s data lags 3-4 weeks while HouseCanary’s is about as real time as you can get. MLS can be weird and is typically market-specific. With all of that said, you can’t just login to a website and have this available. There is legwork required.
It looks like Zillow offers an API [0] though I'm not sure of the extent of its capabilities. Could be you don't need to go the scrape/captcha route though?
Loan offerings compete with all cash offering by offering more than what the cash offer is offering. The idea that you bid over asking and the cash offer will find out what you bid and meet your offer in cash is just not true. It’s not like an auction house where you each bid until one of each persons max has been reached. Seller agents just opt for the max for each offer from the start.
>>>> Secondly, they don’t do anything to the house (aside from clean it up and taking nice pictures—no value added) and then resell it for multiple tens of thousands more than what they just paid. If this house was originally at the high end of my budget, bought by Zillow, then re-listed for more, I can no longer afford it.
It costs tens of thousands in fees and cost to transfer ownership. I have a hard time believing they buy a home, clean and take pictures, then relist. Houses that are relisted in less than a year raise serious eyebrows in the industry as well.
As to your third point. The homes are worth only what a buyer is willing to pay. Period. All too often I’ve seen homes sell for less against a similar home right next door sell for less from the exact same builder with same features and sq footage within weeks.
This post is mostly for others looking to buy because you have in my professional opinion, unrealistic expectations and understandings of how the housing market works .
In my market, I can absolutely tell you where those diamonds are, because I'm in the market daily. That might not be the answer you want, but finding a skilled Realtor you like / trust who can get you into opportunities is the fastest path.
Although the sleazier part might be people shopping homes on Zillow, which can then promote its own listings above those not owner by Zillow.
That said, The folks I worked with were all really great people. There's just a lot of interesting history. Fun fact, DriveTime used to be Ugly Duckling Car Sales.
https://www.reviewjournal.com/local/local-las-vegas/ugly-duc...
This is precisely [edit: precise is to strong. "analogous to"] what happened in the financial crisis almost 15 years ago: https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans#Sub...
"When Countrywide finances mortgage loans, they usually packaged them for sale to large investors as mortgage-backed securities. Fannie Mae or Freddie Mac can only buy loans which conform to the standards of government-sponsored enterprises. Non-conforming mortgages securities must be sold in the private, secondary market to alternative investors."
I don't know auto loan based securities (size, participants) but this should be a huge red flag to anyone with any sense of history.
If I loan someone $100 with 10% interest, and immediately sell the loan to someone else for $102, why should I care about anything other than $2 profit?
But the seller ends up I trouble if they can’t sell the security because they are relying on the cash flow to finance the rest of the business.
It all works fine as long as the pipeline flows.
Even a highly rated vehicle note is still based on the fact that the asset will fully depreciate somewhat in line with the outstanding debt.
So the business process has an incentive to just write loans, period. It sounds like in this cases there is a compromised relationship with the lender as well.
That's the point, right? Securitization serves individual short-term interest, at the cost of stability of the system. We saw that in 2008, and even then the politically connected players made out like bandits.
No one is expecting cars to hold or appreciate value, even if some have in the past year.
And no one buying used car debt has any delusions about the potential rate of defaults. Not to mention that default recovery is much cheaper and easier than mortgage foreclosures.
- There is no expectation that a car should increase in value over time (except for collectibles), whereas there was and still is an expectation that houses should increase in value over time.
- Because of that, there is no such thing as interest-only, negative-amortization, or option ARM car loans. Those products were the worst-performing mortgage loans from the financial crisis.
- For a lot of Americans the biggest component of their net worth is the equity in their house, so a house price crash wiped out most of their net worth. Most Americans have little to no equity in their cars, so a car price crash would help more Americans that it hurt.
Will a lot of these loans default if there's an economic downturn? Of course, but as long as there isn't a "repo man moratorium", investors will still recover most of their principal.
Now, if Goldman Sachs is selling derivatives on these car loans, that's a whole different story.
X can be anything. When the income stream for the financial product becomes large in comparison to the income stream for underlying purchase, it doesn't bode well.
I have commented more than enough, so just going to tack this on, but people may forget that loan ownership and "zombie debt" was a big problem in 2008. It is not a great sign that Carvana was banned from selling cars in a mid-market due to title delivery issues: https://www.cbs17.com/news/local-news/wake-county-news/ncdmv...
My girlfriend bought from Shift. They didn't get anything to the DOL for nearly 4 months from purchase.
At one point, with expiry of temporary tags, Shift put her in a rental car for _a month_ while they "dealt with it".
Apparently not uncommon.
The financiers I worked with was MANDATED to send repoed cars to auction houses. I'm not sure how someone would get an exemption from that.
With the past year, most cars appreciated in value on paper, only because of supply and demand and money inflation - that's it.
There is also very much a housing crisis and a huge population that do not have a house, and need to juggle the rent payment, the car payment, the insurance payment and well it seems unsustainable.
tl;dr you assume that the price of the asset is the same when repo'd, that is not true, very much the asset itself can be worthless if there's default across because it means there's no demand or need for cars.
Except for the last 18 months.
You’d be foolish to factor this into any business model however.
Also, there were "NINJA" mortgages before the 08 recession (No Income No Job/Assets).
It's a small red flag and not at all concerning as a macro risk. In the scale of the US economy and US household finances (including disposable income vs debt service payments), Carvana & pals could hardly be more meaningless. Overall the subprime car loan industry is a modest rounding error sized problem (ie it can't cause even a small fraction of the damage the housing implosion did, that you're referring to re sense of history). For the auto industry subprime is around 7% of new vehicles and a quarter of used vehicles (both figures have decreased over the past year as the employment picture has improved). In a very bad outcome scenario, only a minority share of those subprime loans will go bad. The subprime sector risk is, realistically, measured in the tens of billions of dollars, not trillions (as the housing market risk was). Tens of billions of dollars is as close to meaningless as non-trivial things get against $137 trillion in US household assets and the US income figures.
People get overly paranoid up as a matter of routine, looking for the next financial crisis. Every year there are typically a few items that the financial media will run headlines with in terms of clickbait doom, blaring about how x y z is the next impending financial crisis doom-cause agent. Subprime auto loans are not a big threat to the US economy.
If you want to be worried about something, there are only two primary financial categories domestically to pay serious attention to: housing and the stock market. Nothing else much matters by comparison, those are the two giants, by a very dramatic margin (subprime auto loans, student loans and credit card debt are each trivial compared to housing & stocks, in terms of risk to the US economy).
How do you sell a loan but keep it on your books? That makes no sense.
I agree but there are far less pesky regulations surrounding the repo and sales of cars than of houses so that does a lot to cap the downside. You also can't generally be in debt for a few times your annual gross income on a car.
(A bank that originated the loan and sold a CDO may have bought essentially an ETF of CDOs which contained its own original loan. When the individual stopped paying, nobody know who was on the hook for the car property or who to ask about)
Having better lending standards, ownership data and less leverage allows this to flourish to much greater heights
It just does not make sense to throw thousands of dollars away to save a couple hours at a dealership.
Yup, any car buying right now is going to cost extra - but even in that context Carvana overcharges (and offers laughable financing). IMO - I spent the past 3 months researching this topic for my own purchase, limited mostly to sedans and cross-overs.
Who are the used car buyers that are paying 20% more and getting bad financing terms? Are they selling a lot of cars to subprime buyers?
That's it - same old processes, but they have the UX to make it "nice."
And people are paying a premium for that.
Same model, year, trim and pretty close mileage are on Caravana, listed at $19k and $21k. So a 50% premium.
I, value 50% of the car's price and don't mind spending 3-6 hours to save $10,000~ but many people, simply have an old car, the mechanic says it needs a new engine, they have a shift working minimum wage-esque and go with the first option of visibility thinking it's a good deal.
Financially poor, financially ignorant and time poor.
The perfect American customer.
A. Lower interest rates than the local credit union or the banks, and
B. Better prices on the vehicle I wanted than anyone else in the area.
An exception might be if you live in a rust belt area where they salt the roads in the winter. Then you might need to go to a dealer who sources southern cars.
Probably the best way to get used trucks, if you are an astute buyer, is to go to estate auctions, but that's obviously much less convenient than FB marketplace or what have you.
I wound up with a new Tesla, partially because used car prices were so high. The amount of time and attention buying cars still commands, in most cases, is ridiculous, and the efforts of Carvana to lower both, however imperfect, is commendable.
That's just the market we're in right now. I recently sold my car on a trade-in for 2x the price it was worth 2 years ago when I've looked at things.
Fill in a web form, get a number (higher than the other guys), set a meeting and their person comes out, does paper work and trades you a check for the keys and title. (Later someone comes to get the car.)
So I’d say at least part of their success is developing a really nice input side.
And yet, the whole experience with dealerships and Carvana-likes is utter dogshit. It is a 1000% ripe market for any small shop who wants to own the entire experience Amazon-world-domination style.
And it will happen. There's too much free capital in the world right now.
Mechanically, in the 7 years/~35K miles we drove it, it needed brake pads once each axle, oil changes, wiper blades, one glow plug, tie rod ends, and one tire plug. That's not quite EV level of low maintenance, but it's pretty solid.
Best thing about the German car reputation is that some people are afraid to own them past the warranty and many are afraid past the 8-10 year mark. It makes them (911s aside) reasonably priced to buy used.
Just in case anybody is wondering how "easy" a new car purchase can be... I sold my previous car to Carvana a few months prior (didn't need a car last winter due to COVID). So, that wasn't in play.
I tested a few cars at various local dealers (cross-shopped Tacomas, Rangers, Ridgeline, and a few similarly priced SUVs). All were easy enough to deal with - told them up front I wasn't buying that day and just wanted to test drive. Only one asked me to wait for the manager to chat - annoying, but whatever.
Once I settled on model/trim, I emailed every dealer within an hour's drive that had one in stock (several didn't - COVID shortages) and asked them to text their best price. First response was within 30 minutes, and a few texts later, I had the price down to my target (which was based on asking around some make/model forums online). The dealer did make me go through the whole extra warranty, tire care, and other add-on bullshit, but it was by phone and basically just me saying "No" a half dozen times. Annoying, but expected.
Anyways, the process is still a bit tedious and requires too much back and forth, but at least it can mostly be done via text or phone. The actual in-person stuff is pretty painless (and would be even easier if I brought my own financing).
In both instances, I paid with a certified check, so financing complications did not come up.
In my experience, Carvana was a substantially easier process. I picked the car out online, "ordered" it, and they showed up a few days later with a flatbed and put the car in my driveway. I signed some paperwork and we were done in less than an hour at my house.
The dealership took almost 3 hours to get me out of the door even though we had done a fair amount of work up-front to avoid having to spend time at the dealership. I suspect a lot of this could have been mitigated by the dealership if they were better with paperwork and interfacing with the DMV or doing some work ahead of time.
In the end, however, I'd rather not buy from Carvana again. You have no room to negotiate and their customer service is not great. Their prices generally aren't better than the dealer's prices BEFORE you negotiate with the dealers. If you're buying a newer used car (I usually buy cars that are 2-3 years old), the certified warranties that the car manufactures offer are a really nice bonus that Carvana can't offer.
For example, I just picked up a certified 2019 with around 19k miles. It's basic warranty will now run until 2025 or 100k miles. And the manufacturer warranties, in my experience, are substantially better than after-market warranties since the dealers' service departments work directly with the manufacture on servicing them and the dealers are more aligned with your interests than the manufactures' since they make a lot of money off doing repairs. Whereas third-party warranties are more like insurance and you better have your ducks in a row if you actually need to make a claim and expect to have it paid.
That said, I bought a car from Carvana a couple years ago, and the process was much better than one associates with buying a used car, generally. I think they have created an actually improved process/business, rather than just sucked up a lot of VC money to undercut on price. They are getting lucky with being in the used car business during a time when that is the hottest thing going, but they are also just better at it from the consumer's point of view, and it's not mostly about price.
it was definitely not about price for me. it was about selection and minimizing hassle. i’m still reluctant to buy a guitar online but had no problem w buying a car that costs 15x as much online.
i’ll definitely buy my next car online too.