Pop Goes The Car Bubble . . . And It May Not Be a Bad Thing

Eric Peters Autos ^ | 09 June 2017 | Eric

[Lorianne]

Almost every negative thing happening in the car business – in particular, ludicrous technical complexity for the sake of electronic gimmickry and also to cope with diminishing returns federal “safety” and emissions mandates – could be gotten under control by the simple expedient of cutting off the monopoly money/debt-financing that makes it all possible.

The seven year loan.

“Free” money (zero or very low interest).

Give-away leases.

The car industry is riding a bubble that’s proportionately as large as the housing bubble of a decade ago. And it is going to pop. For the same reason that a wave has to crest and wash ashore, once set in motion.

Signs of trouble abound. They build them – but no one comes. Not without inducements that amount to give-aways.

For several years now the car manufacturers have been resorting to truly desperate measures to prop up new car “sales” – in air quotes because it’s a dubious proposition to describe as a “sale” a transaction that involves exchanging the item for a sum insufficient to cover the cost of its manufacture, plus a profit sufficient to make the exercise worthwhile.

Yet that is exactly what is going on.

As new car prices rise, the cash back offers, dodgy leases and other “incentives” necessary to move them off the lot also rise in frequency and inanity. Examples include the leasing of electric cars for less than the cost of a monthly cell phone contract (Fiat made just such an offer; see here) and “below invoice” transactions that rely on the manufacturer (e.g., Ford) paying a dealer to “sell” a car (e.g., manufacturer to dealer incentives) for the sake of getting rid of it, getting it off the books.

Or rather, onto someone else’s books.

Give-away leases.

The car industry is riding a bubble that’s proportionately as large as the housing bubble of a decade ago. And it is going to pop. For the same reason that a wave has to crest and wash ashore, once set in motion.

Signs of trouble abound. They build them – but no one comes. Not without inducements that amount to give-aways.

For several years now the car manufacturers have been resorting to truly desperate measures to prop up new car “sales” – in air quotes because it’s a dubious proposition to describe as a “sale” a transaction that involves exchanging the item for a sum insufficient to cover the cost of its manufacture, plus a profit sufficient to make the exercise worthwhile.

Yet that is exactly what is going on.

As new car prices rise, the cash back offers, dodgy leases and other “incentives” necessary to move them off the lot also rise in frequency and inanity. Examples include the leasing of electric cars for less than the cost of a monthly cell phone contract (Fiat made just such an offer; see here) and “below invoice” transactions that rely on the manufacturer (e.g., Ford) paying a dealer to “sell” a car (e.g., manufacturer to dealer incentives) for the sake of getting rid of it, getting it off the books.

Or rather, onto someone else’s books.

Once the papers are signed and the car is driven away, it is no longer the dealer’s problem. He no longer has to worry about it. If the “buyer” fails to make the payments, it is now the lender’s problem.

And that problem is written off, in its turn, when it becomes necessary to do so. The bank makes up the loss via interest and fees on other debt. Or by re-selling the repo’d vehicle at exorbitant interest to another debtor.

Rinse, repeat.

The dealer, meanwhile, has made a “sale” – and it is so recorded and reported, adding another log to the swaying Jenga tower.

Sound familiar?

But wait – there’s more!

As the ever-more-desperate measures to prop up new car sales become ever-more-desperate and more and more people who really can’t afford new cars “buy” them anyway, it depresses the used car market. Why “buy” a used car, after all, when you can “buy” a brand-new one for about the same monthly payment?

The used car market is cratering – and that is a sure sign the fat lady is clearing her throat.

Remember: Interest rates on new cars are lower (even nonexistent) and the loan/debt can be extended over a preposterously long period – seven years is now routine – while the loan/debt on the used car must be of shorter duration because of the greater and faster depreciation on the used car. The typical three-year-old car is worth about 75 percent of what it was worth when new – and will only be worth about 50 percent after another three years. Writing a loan/debt on an asset that will almost certainly be worth less than the balance due on the loan before the loan can be paid off is what you call a bad deal.

The loan/debt limit has probably already been reached. Seven years is a kind of Event Horizon for car loans because after seven years, almost every car – regardless of make or model or what it sold for when it was new – will be worth less than 50 percent of what it sold for when it was new. They can’t keep pushing off the paid-for date in order to keep “sales” from wilting, permanently.

This is why the bum’s rush to ride-sharing; to the rent-by-the-hour (via an app) business model that GM (Maven) and Ford (the firing of Mark Fields) and pretty much the entire car industry have embraced as their only possible savior. The people running major companies are many things but idiots they are not – some superficial evidence to the contrary notwithstanding.

Poltroons and greedheads, certainly. But not dummies.

They know that they can’t keep pushing out loans indefinitely to sell cars. It is not tenable, both because of the debt load (unsupportable) and depreciation, which imposes a physical limit on loan duration. Hence the new rent-by-the-app (and hour) business model. It is the only way the business can continue without going out of business.

Either that or economic sanity returns.

The government stops mandating diminishing returns emissions rigmarole, for instance. And here’s a real whopper of an idea: We get scientists, not politicians and regulators – to prove that harm (real harm, not some ugsome bureaucrat’s hypothetical) would result from dialing back the current rigmarole to, say, model year 2000 standards.

Consider: Were new cars “dirty” in 2000? Were the skies suffused with smog? People choking and coughing, falling comatose into gutters? No, to all of the above. The fact is the cars and the air have been clean for decades – but the EPA continues to pretend otherwise, to maintain the fiction of the need for its continued existence.

Same for the presence or absence of back-up cameras and anti-whiplash head rests and whether the car can do an egg-beater roll without its roof crushing. The fact that some people want to be parented doesn’t mean the government has the right to parent the rest of us. Let those who want and need adult diapers go ahead and wear them, if they like.

So, the good news out of all this bad news is that it must soon come to an end. The cost-no-objecting and mandating; the noxious, suffocating parenting.

It is going to end – because it cannot continue.

[Grams A]

Telling my age but our first house, which we purchased in the late 1960’s, was a three bedroom split, two bath, double car garage with a basement on huge lot for $27,500 and it was brand new. Sold that and bought another new one with four bedrooms, three baths, 4300 square feet in 1980 for $61,000. Had more money in the bank then than now, too.

[Diana in Wisconsin]

I have two cars - a 2008 Ford Escape and a 2000 VW Golf with 40K miles. I bought it from my Little Old Lady Step-Mom’s estate when she passed. Both have been paid off for - FOREVER. I honestly can’t remember the last time I had a car payment. Sometime in the early 90’s, maybe?

Dave Ramsey taught me to buy quality cars for cash and keep them maintained for forever!

Now, if only the bubble would pop in something important to me, like, say, Precious Metals? LOL!

[discostu]

Seven year loan for a car that will last 12 ain’t that outrageous. It’s a different world now. Keep in mind most new cars have a 10 year warranty too, so if repair costs go up after 4 (not as likely as it used to be as models hardly change anymore and the 4 year old car can usually use parts for this year’s model) you ain’t paying it, the company does. The modern level of vehicle durability has changed all the math.

[stationkeeper]

Check out the prices on GM’s Tahoe/Yukon/Escalade family of SUV’s.
They took a precipitous jump when the latest versions were introduced a few years ago.

I asked a dealer about the big price jump:.......”Chevy Volt”.

[windcliff]

ping

[RightField]

We put in this little gizmo to turn off the Daytime Running Lights in our Honda CR-V. It's touted as the way to turn off the Accessories (radio & 12V outlets), but we needed the 12V to power the auxiliary braking setup while we're towing the Honda behind our motorhome. Even though we have a secondary trickle charger on the car battery while towing, the car battery would sometimes be nearly depleted after a long day of driving. Since we installed this fuse cutoff switch in the DRL fuse, no problems. I hate those lights any, so I just keep the turned off now.

Auto Fuse Bypass

[wintertime]

My 14 year old VW diesel Beetle is still running great. I love my car as much today as I did the day I drove it off the lot. Great car.

[TexasGator]

“maintenance”

Maintenance? Really! My last repair was on an 82.

[wintertime]

Most cars look like vacuum cleaners. Borrrrring!

[gibsonguy]

You are so right. CAFE is just about the worst things ever imposed on an industry. At one time cars were built with the priorities of Style, Comfort and Performance. At GM for instance entire floors of people exist just to cope with CAFE requirements. It adds enormous amounts to the price is cars and strangles engine performance. Yet 12 states have threatened to take Trump to court if he cancels the almost impossible CAFE requirements Obongo tossed in on his way out the door.

[discostu]

The wife’s Tacoma is 15, needs a paint job but it runs like new. I had an 04 Sentra until there was an illegal left in front of it. I never liked that car (Sentra’s got too big, I like em small) but I paid $10K for it and the insurance company gave me $4.5K so I’ll call it a win. Now I’ve got an Elantra, they’re paying me back for the battery I had to replace last week, I don’t know when batteries landed in warranties but the guy at Checker said he thought it would be an a few e-mails later they’re sending a check.

[TwelveOfTwenty]

Tell me again, exactly why a new pickup truck should cost between $45K - $55K dollars. RIP OFF!!!!

As I recall, the same thing was said of selling a car for $8,000.00 about 40 years ago.

That said, the price you quoted is for loaded trucks. More basic trucks list for much less, and I'm seeing big trucks discounted about 8-9 thousand dollars around here. If you're in the market, now might be a good time.

[discostu]

Yeah aerodynamics have taken a lot of the fun out of cars. At least the outside. Whipping corners with no effort can be kind of fun though.

[setha]

Shame that they won’t let the companies count CAFE compliance based on their global lineup, versus their US lineup.

The US market is still for larger, more powerful cars & trucks - despite the environmental activists push for 4bangers & turbos.

[DoughtyOne]

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Just $880.00 to 91.00%

[enduserindy]

A used Chevy express, say 2006, 3/4 ton v8 with racks and shelves for 10k with 200,000 miles is a joke. Waiting too.

[Windflier]

"...ludicrous technical complexity for the sake of electronic gimmickry..."

There are far more bells and whistles in newer cars and trucks than I'll ever need, or want.

We have a 2013 Silverado that is so jam packed with high tech features, I still haven't figured them all out - and we've owned it for three years. I almost prefer driving my 2012 E-250, which is bare bones, in comparison.

[enduserindy]

I remember when daytime running lights came out. A friend of mine cleaned up with sylvania stock. He told me he would.

[rb22982]

If you can get a 0 or 0.9% loan, why would you pay cash? I can get 3-4% on a diversified dividend portfolio or save 3.5% by paying off my mortgage faster. Also, most new cars will not have major issues until long after 4 years are up - more like 10 these days - unless you drive 20-25k mi/year (7k for me).

[enduserindy]

Those deductions don’t pay for the van. Mileage rate is the same if I pay 3k or 30k for it. Throw in all the section 179 and bonus depreciation rules and it’s not so simple for some of us either.