Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Car bubble?

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Well! Here’s something I wrote a couple months ago and blithely forgot to post. This was before the Fed decided to start raising interest rates. It’s an interesting idea, if you have a vehicle that’s getting old but still running…don’t be in any hurry to replace it just because rates may rise.

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At our networking group, the thought is that we’re seeing a “bubble” in cars comparable to the housing bubble, BECAUSE interest rates are so low. With a 1.9% or 2.9% loan, you incline to buy a WHOLE lot more car than you can actually afford. Growing numbers of people are already defaulting on these loans. And if the economy stumbles — as it inevitably will, for whatever goes up must come down — a huge number of people will default.

Some of the guys suggested waiting a year, on the theory that the market will be flooded with repossessed vehicles offered at a cut rate.

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LOL! “Whatever goes up…” It pays to be a cynic: we’re never disappointed and sometimes pleasantly surprised. 😀

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6 Comments

  1. I would say this may have some merit to it. The auto manufacturers and dealers may be reporting great sales years, but flipping to the financing side of the business tells a different story. Manufacturers are going back to their old trick of offering loss leader financing deals to induce sales, which is to say actual demand isn’t as rosy as they’re painting. Reading/listening to the earnings reports of banks who are major players in auto financing over the last couple quarters a common theme is the degradation of borrower credit quality. There are few scenarios that could play out from there, but by the end of each of them the result is the same – increased default rates.

    • Hmm… That’s interesting to know.

      Looks like if you couldn’t in theory afford that chariot at, say, 5% or 6%, you ought not to grab it. Comes under the same old Frugal Heading: Live BELOW your means.

  2. Hmmmm….Couple of things….This reminds me of the good old days in Real Estate sales. We were always told that “people don’t buy a price….they buy a monthly payment”….which I always found to be just about right. As for vehicles….different ball game….few things in life that you can buy, drive around the block and lose 25% of the value on the same day….But that’s what happens with vehicles. I have given SOME thought to buying a new vehicle to replace my 14 year old unit. But a comparable truck would run me $35-40K. So instead I bought 4 brand new shocks from Rock Auto for $71…She’ll ride like a new one. IMHO default rates do have some impact on used car pricing….but what really shapes the market is when large numbers of lease vehicles are released onto the market. A good example would be Nissan Leaf….these cars went for $35-40K new…but now one can buy a 3 year old Leaf with low mileage for $8-10K…value has fallen off the table.

  3. Yeah, I’ve seen a few mentions of this as well and this could mean a slowdown in the next couple of years in the auto industry. Fortunately, one positive outcome of the bailout is that the restructuring made it so that the break even point for the US companies is much lower than it used to be, meaning that the auto companies will likely remain profitable, just less so, if a slowdown comes. During the past couple decades, they’d pretty much start losing money at the first sign of a slowdown, which would lead to a lot more layoffs and cuts across the board, including in R&D which then further set them behind the competition. With the lower break even point, these swings should be a thing of the past.

    • I sincerely hope you’re right, Money Beagle. As an old bat, I would be very surprised to see the pendulum quit swinging…yet given the extremes to which pendulums do go, it would be a blessing to see slower, gentler swings.

      Still…given a choice in the matter (with a car that crapped out in a drug-ridden slum and a roadside service that left me waiting for 5 1/2 hours, there wasn’t much choice), I probably would wait until next summer or next fall. If there’s no hurry, a wait and watch strategy for major purchases surely can’t do much harm.

  4. Here’s what I find troubling. If one was to purchase a new vehicle and take advantage of the “0 down and 0% interest” AND the vehicle cost totaled $30K….which in today’s market is modest….The payment is $500 a month… for 5 years. That’s $6K a year for transportation….not counting insurance, tags, gas maintenance and taxes…How do folks do it?