Posted on 06/11/2017 10:11:26 AM PDT by 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.
I have a 2000 Yukon 2500hd and I will keep it till I die.
I would like a Mustang/Challenger/Camaro with a lot of H/P,
a six speed, radio, heater and the rear end and suspension goodies to keep it going straight and fast. But that ain’t gonna happen any time soon.
I guess i’ll have to keep my 03 Mach1 Mustang even though it has more crap than I need.
Earlier this year, I bought a clean 2012 Ford E-250 with 100,000 miles on the clock for $16,000. The term of the loan is three years at about $400 a month.
I bought it from Century Trucks in Grand Prairie, Texas. They tell me they have customers coming in from all over the country.
Go back to 1980 standards.
+ cost of metal
Tell me about it. I've been offered as much as $5,000 for my 200,000 mile, 1998 Silverado extended cab pickup. Unbelievable.
The reason that the car market will crater is that many millennials don’t care to own cars. This is partly because they can’t afford to, and partly because with Uber they don’t have to. People’s need for transportation will soon be satisfied by many few cars.
The reason that the car market will crater is that many millennials don’t care to own cars. This is partly because they can’t afford to, and partly because with Uber they don’t have to. People’s need for transportation will soon be satisfied by many few cars.
... many fewer ...
It costs more because our money has lost 60% of its value in the last 50 years. In 1967, we bought a new 2000 sq ft home on 2 acres in Beaumont, TX for $15,000. Our new Chrysler New Yorker sedan cost $4,000. Anyone who has lived in this country more than 40 years knows that our government has robbed us of 70% of our dollars’ value. The crooked politicians stole our money to build massive fortunes for themselves and their cronies & to buy the votes of the poor and the stupid. And what have we gotten for that massive transfer of wealth from US families to the greedy government? It still wasn’t enough, so they borrowed $20 TRILLION that generations yet unborn will have no way to pay back. The past three generations of politicians, with few exceptions, should have been jailed.
Less metal every year.
I paid $49,500 for a 2700square foot house in 1979!
First car after getting married was a 1974 Plymouth Duster three speed with no cigarette lighter that was priced at $2,499. That (plus tax and some other small dealership charges) is what we paid for it. Sure wish we still had that car.
I can beat your Sentra deal. I bought a mercury Sable from a buddy who was transferring overseas. Paid $1500. I drove it 2-3 years, my daughter drove it 2-3. My son had it about a year when he got rear ended by an inattentive young driver. The kid’s dad paid us $4000 for the car.
I’ve heard that many millenials are not really very interested in the idea of owning your own home or a new vehicle. I guess if you’re still living in mom’s basement because you can’t get a decent job with your art history degree and still paying off student loans that might be the case.
Have a 14 yo car with bright daytime lights. Never heard these lights can be turned off. Too much trouble at this point in time, but good to know.
And those bright nighttime lights of some cars are blinding! Who thought that was a good idea?
Bookmark
Nice.
Good list, but you left out a biggie: customers willing to buy at that price point. Until people stop shelling out big bucks for vehicular crap sandwiches, auto manufacturers will keep peddling vehicular crap sandwiches.
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