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Brewing Automotive Financial Crisis


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Is a perfect storm about to hit the auto industry? Rising interest rates along with cars quickly losing value after being purchased for inflated prices during the past couple of years is setting up a possible crisis in the auto sector. The feds continue to hike interest rates after already raising them 4.5% and more hikes are coming. Added to that are many buyers in the past couple of years owing a lot more then the vehicle is worth and inflation driving new vehicle prices higher then ever. Interesting article. Is it going to balance out on it's own or will a combination of factors create a serious recession in the auto industry?

 

https://www.thestreet.com/technology/elon-musk-sounds-the-alarm-over-a-brewing-automobile-crisis

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There will be a lot of repos hitting the bays. Pity the folks that totaled their Raptors, Mach 1s & Cobra GT500s bought at $10k+ over MSRP and settle at loan value or less. On a more positive note, the economy may slow down enough to allow industry to get supply caught up before they also have to batten down. $748/mo average new vehicle payment, $525 for used; $2064/mo plus escrow average mortgage payment in the US. Bad moon rising.

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Didn’t see this one coming at all! How big of a crap storm, i don’t know but it’s pretty clear some folks are about to be in a world of hurt.

 

My anecdotal evidence I’ve seen is vehicles are flooding FB marketplace, craigslist, and auto trader from owners that don’t own their cars. When Carvana goes bankrupt, it’s just going to get worse. And yes, that’s almost guaranteed to happen.
 

Why anyone thought on paying over sticker for a commodity vehicle was a good idea I will never understand. I get supply and demand , but from what I’ve seen most people that were buying weren’t necessarily buying for need. 

 

 

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1 hour ago, jcartwright99 said:

Why anyone thought on paying over sticker for a commodity vehicle was a good idea I will never understand. I get supply and demand , but from what I’ve seen most people that were buying weren’t necessarily buying for need. 


What it boils down to is people are terrible with money. A friend of mine works NC State credit Union that deals with mostly State employees. Their are people out there who own a home then get a home equity loan to pay off 28 credit cards (!)or something like that and then do it again three years later when they run into the same problem of living outside of their means. 

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15 hours ago, 2005Explorer said:

Is a perfect storm about to hit the auto industry? Rising interest rates along with cars quickly losing value after being purchased for inflated prices during the past couple of years is setting up a possible crisis in the auto sector. The feds continue to hike interest rates after already raising them 4.5% and more hikes are coming. Added to that are many buyers in the past couple of years owing a lot more then the vehicle is worth and inflation driving new vehicle prices higher then ever. Interesting article. Is it going to balance out on it's own or will a combination of factors create a serious recession in the auto industry?

 

https://www.thestreet.com/technology/elon-musk-sounds-the-alarm-over-a-brewing-automobile-crisisater

just me but I'm not certain Elon is the best to describe money management after buying twitter and destroying it as it appears he is doing to me, but then I'm not a multi billionaire

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I dont understand walking away from a car or house just because you’re upside down.  Keep it and keep making payments as you originally contracted and you’ll pay it off or pay it down.  Default and you’re screwed from a future credit standpoint.  It’s like selling a stock that drops for a big loss instead of waiting for it to go back up.

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44 minutes ago, akirby said:

I dont understand walking away from a car or house just because you’re upside down.  Keep it and keep making payments as you originally contracted and you’ll pay it off or pay it down.  Default and you’re screwed from a future credit standpoint.  It’s like selling a stock that drops for a big loss instead of waiting for it to go back up.

 

That's great in theory, however if you lose your job that may not be possible. Layoffs are happening, don't let the unemployment numbers fool you. 

 

It's one thing to make good money, have a bunch of cash saved, and be wealthy to have overpaid for a car because you could and wanted it now. It's an entirely different story, when you just make ok money, have no savings, and a pile of debt, yet pay more than MSRP. Those folks are already redlining it and any sort of uptick (read inflation) in expenses can turn their lives upside down. I'd imagine these are the folks that are struggling right now. They can try and sell their car but are underwater now, after 2 years of being able to sell your used car close to what you paid for it. Would you rather pay for housing/food or an over priced car note?  And yes, a lot of Americans are stupid with their money.....YOLO!!!!

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1 hour ago, jcartwright99 said:

 

That's great in theory, however if you lose your job that may not be possible. Layoffs are happening, don't let the unemployment numbers fool you. 

 

It's one thing to make good money, have a bunch of cash saved, and be wealthy to have overpaid for a car because you could and wanted it now. It's an entirely different story, when you just make ok money, have no savings, and a pile of debt, yet pay more than MSRP. Those folks are already redlining it and any sort of uptick (read inflation) in expenses can turn their lives upside down. I'd imagine these are the folks that are struggling right now. They can try and sell their car but are underwater now, after 2 years of being able to sell your used car close to what you paid for it. Would you rather pay for housing/food or an over priced car note?  And yes, a lot of Americans are stupid with their money.....YOLO!!!!


Not talking about a repossession.  I’ve heard about people perfectly capable of paying but deciding to just stop because they’re upside down.  Happened a lot in the real estate bust.

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I agree its mostly people are bad with money. So are many corporations, governments and billionaires. (Yes Elon borrowed some of the money to buy twitter on not such good terms.) When things get tough people those at the edge of their means will always be the first to be hurt. Its not how much you make its how much you keep. I always try to buy a less car, house, etc than I could afford according to the bank, credit union etc. Since my payment is less than I could actually afford given my monthly cashflow I can afford to pay more than minimums most months and pay things off relatively quickly. But I know that one I am in the minority that I can afford to do that, and two many will spend right up to their limit no matter how much they make. Finally yes three many make just enough to get a loan for something basic and then are screwed if anything goes wrong.  

 

Prices have been out of crazy the last few years, new and used vehicles. The bubble has to pop sooner or later you would think. I thought I read somewhere repos were increasing already this fall.

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2 hours ago, akirby said:


Not talking about a repossession.  I’ve heard about people perfectly capable of paying but deciding to just stop because they’re upside down.  Happened a lot in the real estate bust.

 

During the housing crisis, things were different. You could get a house with little to no money down. Put that along with interest only loans and adjustable arm loans on massively inflated prices. People didn't sink much into them and then payments went way up and housing values went way down.

 

I know several that walked away or short sold their homes. Was it bad for their credit score? Yes. Did FICO and other scores lessen the impact of that on credit scores during that time since so many people were experiencing this? Yes, if they didn't ease it up a bit we would of mostly would of added several years to that recession. They all were fine after about 4/5 years. Each now owns a home.

 

Back on topic though, I see it as bunch of things all adding up to people making poor decisions during a strange time. Cars, houses, Peletons, etc. Add that to government handing out thousands of dollars to families. Unemployment benefits that were increased 25-50%. The whole pandemic was the FOMO (Fear of missing out). Whether it was toilet paper, food, school supplies, Christmas trees, cars, homes....the media (remember, everyone was stuck at home either watching TV or on the internet) made it a frenzy and the government helped pick up the tab. People kept up that habit as the pandemic was easing up and as supplies for a lot of things was still lower than usual.

 

There is no such thing as a free lunch though and now we are paying the price for it. People are furiously trying to flip homes and cars, before the bottom fully drops out. This is what will cause Carvana to go bankrupt. They perpetuated the inflated car pricing problem. Not by using already inflated auction prices but by beating auction prices by 10% so people would sell their cars there and boost their inventory. So then they could further mark them up and inflate prices.

 

In short, 2023 is going to be a tough year for those that overextended themselves in 2020-22. Expect a lot of people to get their cars repod.

 

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1 hour ago, jpd80 said:

You always hear about the people defaulting but never about those that continue to pay higher debts,

so I’d be wary until we see actual default rates or numbers - not saying that it isn’t rising……

 

Here are some numbers from Cox Automotive. Auto Market Weekly Summary: December 19 - Cox Automotive Inc. (coxautoinc.com)

 

Auto loan performance in November saw further deterioration. 
  • Loans delinquent by 60 days or more increased by 3.3% and were up 27.5% from a year ago
  • Of all auto loans, 1.74% were severely delinquent, an increase from 1.73% in October and the highest rate since January 2010.
  • Compared to a year ago, the severe delinquency rate was 38 basis points higher.
  • In November, 6.75% of subprime loans were severely delinquent, increasing from 6.69%
  • The subprime severe delinquency rate was 158 basis points higher than a year ago, and the November rate was the highest in the data series back to 2006.
  • The high level of severe delinquencies is starting to lead to higher levels of defaults
  • Loan defaults increased 26.6% from October and were up 34.2% from a year ago
  • The annualized auto loan default rate in November was 3.01%, higher than the 2.95% rate in November 2019.

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4 hours ago, jcartwright99 said:

Those folks are already redlining it and any sort of uptick (read inflation) in expenses can turn their lives upside down. I'd imagine these are the folks that are struggling right now.


That’s the position I find myself in right now. Yes I make good money but my hours keep getting cut for various reasons. I haven’t yet worked a full 8 hours this week. I’m seriously considering getting rid of my Fusion a year early because I’m having a hard time paying for it thanks to the cost of living going up so much recently. 

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2 hours ago, jcartwright99 said:

In short, 2023 is going to be a tough year for those that overextended themselves in 2020-22. Expect a lot of people to get their cars repod.


Thats the frustrating part for someone like me. By no means have I overextended myself. My wife and I both are of the opinion that credit cards are for emergency use only and if we can’t pay with money straight from our checking account (let’s be honest here, not many of us carry much cash around anymore) then we don’t need whatever it is. I’m just very glad I didn’t get sucked into an adjustable rate mortgage or I would be really screwed. 

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We know that Ford Credit usually has a high bar on credit scores, ensuring that it’s customers are not likely to default if things go bad.

 

Sure, there are job losses and new employment happening every month so it hard to know what 2023 will bring. Maybe the reserve should stop jamming on the brakes with interest rate rises until the full effect of the current situation is felt over the next three months 

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17 hours ago, jcartwright99 said:

Didn’t see this one coming at all! How big of a crap storm, i don’t know but it’s pretty clear some folks are about to be in a world of hurt.

 

My anecdotal evidence I’ve seen is vehicles are flooding FB marketplace, craigslist, and auto trader from owners that don’t own their cars. When Carvana goes bankrupt, it’s just going to get worse. And yes, that’s almost guaranteed to happen.
 

Why anyone thought on paying over sticker for a commodity vehicle was a good idea I will never understand. I get supply and demand , but from what I’ve seen most people that were buying weren’t necessarily buying for need. 

 

 

When you see people paying a $10,000 mark up over MSRP on a Ford Maverick that’s a really bad idea. We bought one for my dad on X-plan. I’d never pay a mark-up like that on any commodity vehicle. Unfortunately it’s going to collapse as interest rates keep rising and people run out of all the “extra” money they had saved up when things shut down over Covid and the govt. was sending out stimulus payments. The only good news is maybe some deals to be had on repos?

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13 hours ago, fuzzymoomoo said:


That’s the position I find myself in right now. Yes I make good money but my hours keep getting cut for various reasons. I haven’t yet worked a full 8 hours this week. I’m seriously considering getting rid of my Fusion a year early because I’m having a hard time paying for it thanks to the cost of living going up so much recently. 

Sorry to hear that. Hourly jobs can be rough when you’re sick or situations arise where you can’t work. Sounds like you are playing it smart though. Hang in there!
 

 

 

 

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9 hours ago, 2005Explorer said:

When you see people paying a $10,000 mark up over MSRP on a Ford Maverick that’s a really bad idea. We bought one for my dad on X-plan. I’d never pay a mark-up like that on any commodity vehicle. Unfortunately it’s going to collapse as interest rates keep rising and people run out of all the “extra” money they had saved up when things shut down over Covid and the govt. was sending out stimulus payments. The only good news is maybe some deals to be had on repos?


But what does the markup (more like $5k on Mavericks) or drop in value have to do with people defaulting on loans?   The payment isn’t changing and if people lose their job or reduce disposable income then that would affect any vehicle loan regardless of current prices, market value or markups.

 

Just not seeing the connection between defaults and markups or being upside down unless people are just walking away from the vehicle by choice.

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42 minutes ago, akirby said:

But what does the markup (more like $5k on Mavericks) or drop in value have to do with people defaulting on loans? 

 

Values on those ridiculously overpriced cars are dropping precipitously nowadays, accelerating the timeframe for customers being "underwater" on their car loans. This has led to lenders waiving "open auto" stipulations, which has major ramifications on loan default and repossession rates as described here. Auto Lenders Removing "Open Auto Stipulations" & What Could It Possibly Mean For The Economy in 2023 (eyeonearth.org)

 

 

 

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22 hours ago, tarheels23 said:

just me but I'm not certain Elon is the best to describe money management after buying twitter and destroying it as it appears he is doing to me, but then I'm not a multi billionaire

 

 

Tesla stock is down 65% YTD according to morning news, so he may have plenty to be concerned about.

 

A quick look suggest Ford, GM, and Toyota are not being hit quite as hard, which I suppose can be expected since higher-price luxury items are first things buyers cut back on.  Or maybe Tesla stock was just overpriced to start with.  I’m not a multi billionaire either so don’t know where all this is headed.  My only personal thought is that vehicles have become too expensive for many American families.  Stellantis CEO made similar comments a while back regarding Europe, warning too many buyers could be priced out, so problem may not be limited to US economy.

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40 minutes ago, Rick73 said:

 

 

Tesla stock is down 65% YTD according to morning news, so he may have plenty to be concerned about.

 

A quick look suggest Ford, GM, and Toyota are not being hit quite as hard, which I suppose can be expected since higher-price luxury items are first things buyers cut back on.  Or maybe Tesla stock was just overpriced to start with.  I’m not a multi billionaire either so don’t know where all this is headed.  My only personal thought is that vehicles have become too expensive for many American families.  Stellantis CEO made similar comments a while back regarding Europe, warning too many buyers could be priced out, so problem may not be limited to US economy.

I too am priced out of the market and driving a 10 YO C-Max with 107k miles but the car is great and just installed new tires so good for another 5 years, by then the market will have rebounded and looking for an EV.

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In the coming years, true Level 5 "autonominity," (where there are no steering wheel or pedals, vehicle has 100% control 24/7 in all weather,) will be priced out of reach for all but the most affluent. Private vehicle ownership later this century will be as rare as private aircraft ownership is today. I believe that, like aircraft there will be time share options, and subscriptions for most personal transportation.

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1 hour ago, Chrisgb said:

Private vehicle ownership later this century will be as rare as private aircraft ownership is today. I believe that, like aircraft there will be time share options, and subscriptions for most personal transportation.

 

I agree Chrisgb. Bob Lutz, the former Ford, BMW, GM, Chrysler, and Exide top executive, mentioned something along those lines about 5 years ago. Lutz added that in future eras, automotive sport using conventional, human driven cars will survive in private country clubs catering to the rich.

 

Quote

"Automotive sport — using the cars for fun — will survive, just not on public highways. It will survive in country clubs such as Monticello in New York and Autobahn in Joliet, Ill. It will be the well-to-do, to the amazement of all their friends, who still know how to drive and who will teach their kids how to drive. It is going to be an elitist thing, though there might be public tracks, like public golf courses, where you sign up for a certain car and you go over and have fun for a few hours."

Edited by rperez817
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2 hours ago, Chrisgb said:

In the coming years, true Level 5 "autonominity," (where there are no steering wheel or pedals, vehicle has 100% control 24/7 in all weather,) will be priced out of reach for all but the most affluent. Private vehicle ownership later this century will be as rare as private aircraft ownership is today. I believe that, like aircraft there will be time share options, and subscriptions for most personal transportation.

Level 5 is nothing more then a pipe dream for another 20-30 years. 

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