And that’s just the beginning of the bad news…
We just wrapped up recording our weekly podcast and during it we were speculating that the bubble was about to burst in the auto industry. Just like with the housing industry in 2007, banks, automakers, dealerships, and consumers have been acting like the good times would never stop rolling. After all, the average car payment has surged past $700 a month and a record percentage of car shoppers are carrying monthly payments of $1,000 or more. With the economy sputtering out, something has to give in this scenario. We’re starting to see the first sign of cracks in the dam as repossessions skyrocket.
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A report from Barron’s calls the current situation in the automotive industry “an underappreciated ticking time bomb” – an assessment we agree with wholeheartedly. As the deluge of car repossessions begins, Quill Intelligence CEO Danielle DiMartino Booth says repo companies are buying entire car lots to store the vehicles they tow away. Those companies are preparing for a rough, long recession where they will be incredibly busy. This reality has been acknowledged by other executives in the industry, but too many people still don’t understand how bad the coming storm will be.
In the Barron’s report, a dealer offers a disturbing observation about this trend of car repossessions: most loans originated within the last two years. That’s unusual, with origination years all over the map normally. So what’s driving this trend? Well, it could come down to people getting all kinds of government money during the covid lockdowns. Some were making more from Uncle Sam’s checks than they did at their regular job. If you’re not great at managing money, in a situation like that it’s easy to buy more car than you can afford.
Of course, eager dealerships and banks who gladly helped get people set up with vehicles they couldn’t afford contributed greatly to this problem. Just like with the last housing bubble, greed is a big factor. As harsh as it sounds, economic downturns help strip away resources from those who mismanaged them before and help direct them towards those who behave more wisely, unless the government intervenes because any of the parties are “too big to fail.”
Even worse, that same dealer told Barron’s instead of the usual 80% loan-to-value ratio on these financed cars which have been repossessed, he’s seeing on average about 140%. Keep in mind, the value of many vehicles has risen considerably in the past two years. That dealer said he’s seen a huge wave of people making $2,500 a month owing $1,000 a month in car payments. He also added that repossessions among prime borrowers have roughly doubled, indicating all the talk of higher-income households being more insulated from this downturn is likely not aligned with the coming reality. Anyone who wants to say the auto industry and lenders aren’t in serious trouble is in a state of denial. As the automotive market bubble bursts, it will have spillover effect for the rest of the economy as banks take a bath.
If you’re thinking a wave of repossessed cars will help bring prices back down, that auto dealer interviewed by Barron’s has a bucket of cold water to chill your enthusiasm. He pointed out that the banks control the flow of repossessed vehicles into the used market. Those large car lot purchases will allow them to sit on inventory, leaking only so many to the public at a time, keeping prices high even as the economy falls. We’ll see if he’s right about that soon enough.