A Record 25% Of Used Car Trade-Ins Are Underwater
We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, loosening underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield.
Today, we find that Edmunds’ “Q3 2016 Used Vehicle Market Report ” reveals that many of the same problems also afflict the used auto market. The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values continues to spike and currently stands at an all-time high 25%. Moreover, the average balance of the negative equity also continues to rise and stood at $3,635 for Q3 2016, up from roughly $2,750 in Q3 2011.
Meanwhile, the average used car price also continues to rise and stood at $19,200 as of Q3 2016. This implies that, since most people simply roll their negative equity into their new loans (because, why not?), many used car buyers are likely sitting on loans where
15-20% of their outstanding balance simply reflects their negative equity from their previous car.
But wait, there’s more (think weekend CNBC infomercial). Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011. Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term. While interest rates have certainly come down from Q3 2011, they haven’t declined nearly enough to offset a $3,300 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.
Of course, none of this is terribly surprising. just another ponzi scheme, courtesy of accommodative fed policies, which will all come crashing down at some point. And while timing when bubbles will burst is always tricky, with terms already maxed out, treasury yields spiking and used car purchasers extremely sensitive to monthly payments we suspect the time could very well be near.
I’m waiting for this auto-bubble to pop.
I figure next car is likely going to have to last a loooooooooong time (due to collapsing supply chains the world over) so longevity and reliability are at the tip-top of my list.
Seriously considering 2014 Lexus IS 250 F-Sport.
Right now they are too much, but once the credit market explodes and prices collapse I’ll probably pick one up. My XE2 has some 170,000 on the clock and while that makes the car still a baby — the family is going to need a “get around” car when I am forced to bring them to Germany after the US turns into a warzone.
The Feral Reserve will always supply credit so long as digital digits, wood pulp and state force exist.
Things break under stress. Europe’s stress load is higher. The US is still fat and sloppy, and with Trump will be dumping, or at least decelerateing the rate of increase in assorted stress. Where this goes. China..Europe. who knows.
Yeah baby yeah. Hahahahaha. I was in the car business for 9 years and 6 years was a bug stretch. 7 years or to the new owner 84 months is just insane. Your paying primarily 60 months of interest with hardly anything going to principal. Just plain out STUPIDITY on the owner. 60 months was considered crazy around 04 to 06 to finance. Then 72 months started to become the norm. UGLY is all I can say
. when I am forced to bring them to Germany after the US turns into a warzone.
Things aren’t looking so good in Germany, either. You’d better make sure that F-Sport is Sharia-compliant, because I don’t think it is.
But seriously, let there be no mistake. What you are witnessing here is WEAPONIZED IDIOTS.
The smug AnarchoCapitalist insists that what happens between an idiot, the car yard and the bankster is none of his business, because he is not one of those three people. Perhaps there exists a scenario in which the AnarchoCapitalist is right. But that is not what we have right now.
The banksters can not force sensible people to become debt slaves. But they can convince the idiots to become debt slaves.
(And as per usual, I use the word “idiot” as a shorthand description of these people. Some of them are indeed idiots. Some are desperate. Some of them are smart people who have been deceived. Some of them have great talent, just not in the area of compound interest and Ponzi financing schemes, but I digress.)
The banksters can not force sensible people to become debt slaves. But they can convince the idiots to become debt slaves. And now the producers can sell for greater profit to the idiots. So the sensible people must either pay the higher price or do without. Either the sensible people become idiots or they become extinct.
Some people can live without cars. Some are happy to tolerate other forms of transport. Others have need for vehicles to carry their tools of trade or because their work location(s) are not frequented by alternative means / efficient timing etc etc. Where the sensible can not compete, they must either become idiots or leave.
By allowing idiots to indebt themselves in order to purchase beyond their means, we are allowing a mismatch of social signals to contaminate society. The banksters have allowed the idiots to project a greater social status than the sensible people through ostentatious displays that were earnt neither through hard work nor innovation, but merely through the adoption of Ponzi Financing schemes. Artificially enhanced displays of social status always have and always will be with us. But such things were sometimes kept in check as the idiots quickly became bankrupt and met the balancing hand of the repossessors. But now the time lapse between the debt actions and the repossession consequences has been stretched out to a practical infinity, the damage to society is immeasurable.
It is not enough to say, “Well, I am safe because I am not an idiot. This does not affect me”. The idiot and his banksters push prices artificially high so that all who try to enter the market are overworked for too small a return. The Supply/Demand balance has been broken by the idiot and his bankster-enabled debt-money. Earnt money can not compete against non-earnt bailed-out-bankster-enabled debt money. The only options left are. join the idiots, do without, walk away from the system or destroy the system.
I would agree up to a point. Sometimes you just want a sweet new ride for a special reason or purpose. Granted my truck is used and going strong, as is my Yoda (195K). However 10 years ago the wife needed a new vehicle and we had some cash in the bank. We got a small 3 year loan and she paid it off in 2. With the 60/60/100 warranty, we paid nothing for over 6 years except oil changes and brakes. Now it’s closing in on 122K after 10 years and should last until she retires. It was the last time we buy a new car.