Submitted by Tyler Durden on 09/06/2015 21:00 -0400
Having recently detailed the automakers’ worst nightmare – surging new car inventories – supply; amid rapidly declining growth around the world (EM and China) – demand;
Automakers just unleashed a massive production surge to keep the dream alive…
With inventories at record highs (having risen for 61 straight months)…
Which would be fine if sales were keeping up – but they are not…
It appears the bubble in new car sales is about to be crushed by yet another unintended consequence of The Fed’s lower for longer experiment.
Edmunds.com estimates that around 28% of new vehicles this year will be leased – a near-record pace…
Which means…
13.4 million vehicles (leased over the past 3 years in The US) – compared with just 7 million in the three years to 2011 – are set to spark a massive surplus of high-quality used cars.
Great for consumers (if there are any left who have not leased a car in the last 3 years) but crushing for automakers’ margins as luxury used-care prices are tumbling just as residuals have surged.
As The Wall Street Journal explains,
Consumers focused on the dollar amount of their monthly payment have taken advantage of low interest rates to sometimes buy more car than they might otherwise be able to afford.
But, aside from the actual cost of the vehicle, rates are only part of the equation determining monthly payments. The other is what auto makers and their financing arms think the residual value will be once a typical 36-month lease is up.
Those values surged after the financial crisis.
Now, a surfeit of off-lease vehicles is starting to depress prices, particularly for expensive vehicles.
Three-year old, used premium luxury-car prices are down by nearly 7% from a year ago, according to Edmunds.com data. Along with Fed interest-rate increases, that would make leases less of a bargain and used cars more attractive.
That new-car smell may soon involve more of a splurge.
And if you are relying on more easing from The PBOC… it has made absolutely no difference whatsoever in the past 10 years…
And all of this on top of the fact that the subprime auto loan market is set to collapse…
We’re gonna need a biggerer bailout… or more chemical plant explosions…
To sum up…
- The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels and increasing residuals to make the monthly nut affordable…. that cannot last.
- China’s economic collapse has crushed forecasts for the automakers.
- Inventories of new cars are already at record highs.
- Inventories of luxury high-quality used cars is at record highs and prices are tumbling.
- And July saw a massive surge in producton.
- What comes next is simple… a production slump – just ask The Atlanta Fed.
The gasoline that we must use by Obama mandate, destroys engines, tubes,? Car companies no longer warranty these parts for same reason.So why buy a new car? My car and truck are now 17 years old and going strong.Get offers to buy from strangers occasionally, but say no.
Meanwhile, just saw a piece on how car insurance rates are skyrocketing nationwide thanks to higher claims – both medical and mechanical.
In Michigan, it is ILLEGAL to discount ANY medical procedures resulting from a car accident. Which makes both our health insurance AND car insurance rates higher.
What people are not considering is that all these people driving more expensive cars than they can afford is driving up car insurance rates, that they won’t be able to afford either.
Cripes. How stupid are we.
sidenote, I’m in auto parts (partially) and this “surge” in production sure as HELL isn’t coming from US suppliers. They are sourcing from Mexico/Asia and then gifting the savings to the Union’s overtime and benefits.
No wonder there are so many people renting cars they can’t afford.
Double side-note, “…are set to spark a massive surplus of high-quality used cars…”
This cracks me the freak up. “High quality”? Really? The vast majority of human animals treat other people’s property like shit. On purpose. All it takes is for a few of their buddies to figure out that the “cheap” and “affordable” leases come with massive bills at the end of the term.
Massive bills that they end up rolling over into the next lease. I know a guy that is currently paying nearly $1200 in a lease payment (on a giant dually) because he has had to roll over his end of lease charges three times. His lease is up again next winter, wonder how the freak he figures on getting out of this one?
What a tangled, ready-to-collapse, web we have weaved.
Personally, I can’t wait for an auto market crash. This is just another government created bubble that, once popped, will mean lower costs for everyone. By destroying tons of older cars in the cash for clunkers scheme, the government drove down the supply of cars on the market. By bailing out the big 3 automakers, the government took on the finance wings of those companies and started giving out sub prime loans to artificially juice demand. It was clear from the start that they would usher in a bubble of new cars. Kyle Bass, the famous hedge fund manager actually made GM their largest position in anticipation of the bubble. But all bubbles eventually pop, and this one is no different.
If you’re in the market for your next car, this will be great! The market will be flooded with used cars, and prices will have to drop. Even new car prices will have to drop significantly to attract buyers. My current daily driver is only 9 years old and runs great, though I may be tempted to see what’s out there.