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 drive all of my vehicles 10 plus years. It now looks like I’ll never buy a new one again.
“Base model F-150 starts at $27,110. “
ROTFLMAO!
And I have posted links ...
“Base model F-150 starts at $27,110. “
Do you realize that ford.com says no one should pay over invoice for fords?
Buy a Mercedes Sprinter. Mine will be 11 with 230k miles, paid for for 6 years and will go at least 5 more. It has a turbodiesel
Rather than purchase price, consider cost of ownership and operation on a per mile basis. The Sprinter is cheap.
So did I. Scroll down to the F-150. I understand MSRP and Invoice, and incentives. Just five years ago, the same base MSRP was under $20,000. And you could get good discounts then, too.
The link you posted shows the starting point for that F-150 as over $30,000 for a bare-bones truck. Even with discounts, its higher than I'm willing to pay for a basic unit.
I know the car market and truck market are two different things but I am not seeing the kind of market conditions he is describing.
“The link you posted shows the starting point for that F-150 as over $30,000 for a bare-bones truck. “
I rechecked the link. The starting point is LESS than $22,000!
It is NOT a barebones truck. It is an XL. Six cylinder, six-speed auto, power windows, power steering, CD and towing package.
“Just five years ago, the same base MSRP was under $20,000. “
$24,300 for the same package.
I’ve never owned a diesel, but I’d consider it.
Our old tractor is gas, but when we replace it, I’ll probably go with a diesel. Once I need diesel for the tractor, a diesel pickup will make more sense.
I don’t know but check that both use same diesel fuel.
Most of the driving will be on our property and the tractor is diesel so we already have the tank. Not to mention I know how to do basic repairs on a diesel.
That's their end-point, after all the discounts/incentives. Yes, it may go lower with either of the three listed additional discounts, depending on their terms and your ability to meet them. However, the starting point is still over $30,000.
MSRP is $27,110 for a base-model F-150, right on Ford's site, in my link in post 78. Again, that's the suggested price, but that's where they start before incentives and discounts. Still way too high.
Heck, I just configured one at Ford's site in the same fashion as they have at your linked dealer, and MSRP with towing, power windows/locks (Equipment group 100A), CD player (Equipment Group 100A), and V-6/Auto, lists out around $29,710 (including shipping and the option price on Equipment Group 100A). Heck your dealer's starting point of over $30,000 is higher than anything I can find on Ford's site for the same truck shown.
Yes, they get it all the way down to $22,000 with incentives and discounts, but that's where the damn thing should be priced to begin with.
“That’s their end-point”
That is their posted starting point.
“Heck your dealer’s starting point of over $30,000 is higher than anything I can find on Ford’s site for the same truck shown.”
LOL. The window sticker is linked on the page.
“MSRP is $27,110 for a base-model F-150, right on Ford’s site, in my link in post 78. Again, that’s the suggested price.”
Right on ford.com it says invoice is the suggested price.
This during a time of relatively low inflation. I doubt that many people have kept pace.
And right in the middle of that linked sticker, the "Total before discounts" is $30,425. I understand sticker/MSRP and all that, but the point is, the price their asking is the "after" price, not the starting price. Total MSRP is $29,675 after a $750 discount. It's right there on the sticker.
s/b the price they're
“, but the point is, the price their asking is the “after” price, not the starting price”
The point is you call the dealer Internet rep and that price is the starting price. Been there, done that.
I can explain that....they suck.
They're ugly, way over-engineered, and priced about 300% more than they're worth. I wouldn't take a new car if they gave me one.
For less than half the cost of one, you could have the vintage vehicle of your choice restored and upgraded with modern brakes, suspension and drivetrain.
For a little more, you could have a pristine custom version with an expensive interior and paint job...all done by some skilled American worker, probably right there in your own home town.
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