jrmckinley

I thought it may be interesting to post this article for those of us who buy used cars and also for anyone who may be close to trading or selling their used car for something new or different. The article is 3 months old, but I just saw new data released last week that is actually slightly worse than this article (I can't find the new article to post- if/when I find it I will update. It has some awesome info and graphs). In a nutshell, we are potentially watching the bubble of sub-prime auto loans about to burst which will have a big impact on the value and supply of used cars. The numbers they're seeing have not been seen since the financial crisis of 2008. And no...it is not just scary related to the sub-prime (credit score of less than 600) loans. It's virtually everywhere.

When the bubble bursts, you'll likely be able to buy used cars at a discount not seen in recent memory. Unfortunately, same logic will apply when "trading up" as you will see dealers and individuals offering substantially lower values on your current car.

http://www.usatoday.com/story/money/...oans/91427770/

Oliver Enterprises

I plan on keeping my LS FOREVER. But my minivan, I hope it sells soon.

Wandl

How about this link

https://www.bloomberg.com/news/artic...-your-driveway

Shows not only the bubble is bursting on new car sales, but with close to a 90% acceptance rate (i.e. 9 out of 10 consumers can get approved....though subpar credit requires conditions like equity/fees) it has been easy to "sell & finance" a car. Granted this isn't as bad as the mortgage industry meltdown, but the rising NPL's (non performing loans) isn't going unnoticed.

Obviously overall, supply is going to flood the market which then impacts demand and ultimately pricing. So yes I agree I think the better used deals on great vehicles like the LS have yet to come.

comotiger

I will make the following naive observations without having read the articles you posted. I feel that the auto loan bubble may not burst like the home mortgage bubble to cause widespread pain Sure, there are superficial similarities (instant credit without checking income etc.), but the similarity stops there. And even if it bursts, I don't think it will affect the market for flagship cars like the LS.

1) A lot of the home mortgage bubble was fueled by folks flipping or refinancing homes. Homes were considered an investment that could never depreciate. On the other hand, I don't think anyone buys a car as an investment, other than rich collectors, but they are not driving the market.

2) Even if the auto bubble bursts, it will not affect sales of high end vehicles like the LS. Just like the home mortgage industry was preying on folks at the lower to middle of the income scale (to finance or re-finance homes in the 100-500K range), IMO high end home sales were relatively the same (over $1 million). I think it would be the same situation with the LS. 99% of the folks buying the car in the >45K range are not going to default, so it is not as if "foreclosed" LSs are going to flood the market and drive down prices. Such a scenario might affect compact and midsize cars that sell for <40K new, but not the LS.

Like I said, these are my instinctive observations free of any basis in data and statistics . Please don't kill me!!

Tec80

Do they sell credit default swaps on auto loan-backed securities?

Oliver Enterprises

Comotiger - Actually, I see a lot of merit to your argument. Because, not drawing a line to a $ amount, but LS buyers are usually those that have put themselves in the position TO BE ABLE to purchase an LS. And what that means mostly (if I could explain it another way) is that potential LS buyers generally have NOT put themselves in a bad position. That combined with the fact that LS vehicles are not nearly the most common vehicle on the road.

It's not like the typical buyer looking for a Hyundai Elantra hooptie because they just crashed the previous hooptie while drunk, and are now fleeing the bank note and have to find the next hooptie with what little cash they can scrape together. Maybe those kinds of buyers might be able to find plenty of Hyundai Elantras at a very low cost over the next couple years.

I'm using the Hyundai vehicle as an example because I was recently involved in an auction. There were all kinds of hoopties in this auction. One of the hoopties was a 2003 Camry with 210k miles, and looked like it was lived in by homeless people after being used to film the (not so) fast and furious. But still, that Camry was auctioned for far more than the next comparable hooptie. Because it was ... a Toyota, and a Camry at that. Some Hyundais there in similar to better condition, but they were sold dirt cheap because no one was interested (myself included). I was interested in buying and flipping the Camry. But, it went too high. And unlike the 'wise guy' who bought the vehicle, I would actually have fixed it up RIGHT. And put money in it (which is why I had to let it go, too expensive go and put even more money into it). The guy that bought it will just hodge-podge it back together and sell it to some unintelligent victim. Of course that makes me wonder, who would have been wiser? The 'wise guy' who will just slop it over and make a profit? Or me, who would actually have done it right, spend some money on it and make it worth a hoot? Maybe that guy.


Jason

DarKnight

iTrader: (3)

Very valid points.

jrmckinley

I don't entirely agree with Como, which means I also don't entirely disagree...! I wasn't necessarily trying to tie the auto bubble to the housing bubble, but was just referencing that the statistics on loans have not been this ugly since the 2008 financial collapse (which obviously included the housing bubble). I see more similarities than most who have responded to this thread, but I also don't think if/when the auto loan bubble bursts it will have anywhere near the ripple effect the housing collapse had.

However, where I strongly disagree is lumping in luxury car buyers and high-end ($1 million plus) home owners into a category where they are "able to" purchase these items and somehow that excludes them from the risk. I know a handful of extremely wealthy people who live in neighborhoods where the starting "low-end" home is $1.2 million and they go up to $12 million.. These are huge neighborhoods with hundreds and hundreds of houses. Between 2008-2012 I was shocked at the percentage of foreclosed houses in these neighborhoods - and you wouldn't believe the suicide rates in these neighborhoods during that time period. This was a consistent theme I heard from wealthy folks I know in Atlanta, Dallas, and areas in south FL (Boca, West Palm, Fort Lauderdale, Miami) so I felt like I had a decent sample size to draw from. It was really sad but eye-opening. You never have any idea how leveraged someone is until stuff hits the fan. And the data of delinquent car payments (payments later than 90 days) combined with the # of sub-prime auto loans is pretty staggering right now... In my opinion, there's no way luxury brands are excluded, and no way the folks who drive high-end cars and have nice houses are excluded either. Even in my circle of acquaintances, I know my fair share of people who make a fraction of what I make, yet drive a way nicer and newer car than me... but they are leveraged to the nth degree.

While I think the odds are lower of a major impact to the LS, S550, Audi A8, BMW 7, etc. I don't think they are excluded by any means from this potential bubble bursting. There are tons of people who want the "flash" of a high end car but really don't have the means of affording it if something changes with their job or lifestyle.

I think we'll see the bubble burst in the next 12-15 months, and I think the impact will hit every segment of cars for sale in one way or another. My $.02 of course.

DarKnight

iTrader: (3)

I think it could go either way. One of the most important factors is going to be an educated buyer whether it's a house, car, etc. I've been on both sides where I didn't have much financial education and made poor financial decisions and then been on the other side of the spectrum. I think it comes down to buying what you can afford and also putting away for the hard times.

comotiger

Living within one's means makes good financial sense always. I don't think that is necessarily related to an auto loan bubble.

When the home mortgage bubble burst, banks failed (credit default swaps), and credit for everyone, including healthy businesses, dried up, leading to massive job losses. Loan APRs went up, home loans went upside down, and people walked away from their homes even if they had decent paying jobs, leading to foreclosures, depressing home prices further. Homes were no longer an appreciating asset, they were a sink hole.

If and when the auto bubble bursts, will that lead to massive job losses that would affect people's ability to make monthly payments on their auto loans leading to more defaults (positive feedback loop)? Sure, defaults may rise, but cars are always a depreciating commodity, so the effect of a bubble burst on supply and demand, especially at the high end will be fairly small.

Again this is my 0.02 with complete ignorance of stats and data. To paraphrase the Holiday Inn commercial, I am not an economist, but I did drive my LS today .

jrmckinley

LOL at the Holiday Inn and economist comment.

DarKnight

iTrader: (3)

I'm going to respond probably in complete ignorance to the intricacies of loans and the market and such. I don't think it's a good comparison between home loans and auto loans. When you get an auto loan it's for a shorter period usually and you know that your payments are going to be the same for the life of the loan if you do nothing but make your minimum payments on time. Home loans are structured different with ARM loans and the sort so there's more potential to not be able to afford your payments down the road. I think with auto loans it's just a matter of knowing what you can afford and sticking to it.

Oliver Enterprises

DarKnight - While I don't disagree with you at all, one difference I see to "argue" with your point is that, cars are a lot easier to "walk away from" than a house. If I had to NOT make a car payment (I haven't had a car payment in 9 years), I would hide away my car, and tell the creditor to pound sand. Yes, I would do that, at least until I had the funding to then pick back up and finish paying the loan (although I know there would be complexities in picking back up to pay back a loan later). But I would pay back that loan when I could. But you can't hide away a home. So, there's differences, and I think a car would be easier to NOT pay than a home. This all comes from a person (me) who is ignorant to what all would happen if I tried to squirrel away a car, and then tried to repay it later.

R Z

The secret is pay cash.