For months we've warned that declining used car prices could spell disaster for subprime auto securitizations (see "Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations"). While it's always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.
As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market. While American's love their brand new cars, if used car prices become too soft then substitution can hurt new car sales. Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.
A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.
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new car prices could be 30% less than what the dealer is selling them for and never phase the car industry. It might increase sales which then would lower used car prices which are as bad as new car prices. Their profits are the same as a loan sharks.
ReplyDeleteI sold my Ford stock last month after seeing the rise in 30,60, and 90 day loan defaults. That is the tip of the iceberg compared to lease buybacks.
ReplyDeleteOwn Ford for the dividend, not the capital gain.
Not to worry. As someone who is in the auto business, I can tell you that there is going to be a backlash to the "technology" in the new cars that will create a desire for the older cars.
ReplyDeleteTry driving a car with lane departure warning, automatic emergency braking, or smart cruise control.
You will quickly be trying to disable the systems. These systems are VERY annoying and you are in a constant struggle trying to decide who's driving the car.
Add to that the Apple Carplay or Android Auto that eliminates the factory installed NAV system and requires you to have a smart phone with a data plane to use it. Oh, and by the way, when you use your smart phone for NAV your every move is being tracked.
100% correct there 4:26
ReplyDeleteI hate the new technology
Prefer to just drive a basic truck
Just turn the key and go
Always works
4:26 I agree. The adding of all the systems you mention inflate costs. They are not necessary. A car company will release a no frills, stop, go, car with crank windows decent in price and send waves, i just wonder who it will be.
ReplyDeleteIt won't be a company selling cars in America since they have to comply with all the regulations on cars. For instance all cars will be required to have automatic braking systems in 2022.
Delete