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.
My first house cost $54k 20 years ago. I wish I could've stayed there...
I paid $18k for a new truck 14 years ago that would costs around $50k today. That's ridiculous, I don't see how families living in $300,000 houses with kids drive around with 2 new cars these days...
Look into getting anti glare glasses for driving at night. It makes a heck of lot of difference. You are the problem, not the auto head lights.
Look into getting anti glare glasses for driving at night. It makes a heck of lot of difference. You are the problem, not the auto head lights.
Where, what year, what trim, and how many miles / what condition?
Personally, that wouldn’t be me as I would never buy new, nor would I ever volunteer to be robbed at gun point.
There is a damn good reason for that.
It's because for most of the young folk it's not doable, it's out of reach, far too expensive etc...It would be like you wanting a LearJet....It's not going to happen, so you're not going to be very interested.
Buying homes, getting married, having babies, buying mortgages takes secure, long time good jobs, good incomes, medical insurance and all the rest....
None of that is happening for most young Americans.
“The reason that the car market will crater is that many millennials don’t care to own cars.”
That’s definitely a factor but the full impact hasn’t hit yet. The snowflakes are convinced the car is “destroying Mother Earth”.
“I paid $18k for a new truck 14 years ago that would costs around $50k today.”
You can get a fully loaded F-150 Lariat for %50k. Fourteen years ago that MSRP was greater than $30k.
Exactly, someone is paying for the development of that car, and it’s not the buyers, simply not enough of them.
Yep, that would make sense. Since we’re talking about the planet, not some localized situation.
I have a 2000 Silverado 200k miles on it. Very happy with it. Well maintained. Changed the oil religiously and any problems that arose. Run like a clock
I bought a brand new pickup last year. Factory sticker was $52,430. I paid $36,622 for it. That’s for a brand new truck with 12 miles on the odo and no trade in. $36,622 is all the dealer got from me. And there’s no trade in for him to make it up.
You are correct about car looks. I have the first year of the redesigned Nissan Frontier pickup. 2005. It looks exactly the same as a 2017.
As an aside, on this particular pickup, Nissan Frontier sales are on the uptick. It's proven to be a reliable truck, and Nissan has not gone cuckoo with technology stuff with this truck. That way the price stays down, and it is a good choice for people who want a reliable, plain ol' pickup.
These are precisely the types of regulations Trump and the GOP need to kill.
Absolutely...at least when he’s informed of such. I suspect that there are a lot of leftist execs who really don’t mind this crap...as long as it’s applied across the board. So those people have to be dealt with first.
My '98 has served me well for nearly twenty years. Naturally, I've had to fix a few things over the years, but all the major components are in good shape, and she's still reliable.
I figure I'll get another 50,000 miles out of the motor before she needs a new one. That'll take a while, as I don't drive it much these days.
Base model F-150 starts at $27,110. http://shop.ford.com/showroom/?linktype=brand/?intcmp=hp-showbb
You need to add in the 50% most people pay in taxes and never see the total
Sales Tax...State Tax...Federal tax..Phone tax..Cable tax..gas tax ..on and on..property tax which gives the government the right to steal your house if you can not pay...you payed for fifty years but that does not count
I have a prius that I easily put 50,000 miles a year on...you don’t want to know how far I live from work. Just paid it off, sunk just 950 dollars into repairs, large and small, and it still runs like a new car.
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