The fundamental law of supply and demand reigns supreme. When supply is much higher than demand, it’s a buyer’s market. For savvy auto buyers, with a little patience, good values should appear as the 2017 model year winds down.
While on vacation in Indiana, my regular lunch time walk to the local hamburger haven included a short cut through the sales lot of two large dealerships. They are loaded with inventory; balloons, sales stickers, and banners are everywhere. I love the sign in an $88,000 SUV, “Free car washes for life!”
I noticed one thing missing – CUSTOMERS!
Since the 2009 crash, loose lending standards caused auto sales to climb steadily, until recently.
Auto sales are declining. The Truth About Cars published May sales results:
“…May 2016 sales had fallen 6 percent compared with May 2015 levels.
…The auto industry is in a general state of decline in the United States. …Sales have now declined, year-over-year, in five consecutive months.”
It’s now six months as the Detroit Free Press tells us: “…Chrysler …announced its sales fell 7% in June while sales also fell 5.1% for Ford and 4.7% for General Motors.”
Inventories are rising. The Truth About Cars also reports “Domestic Automakers’ Inventories Soar Past 100 Days’ Supply.”
Incentive spending is on the rise. Bloomberg reports:
“Incentive spending reached a May record of $3,583 per vehicle on average during the beginning of the month, according to J.D. Power.
…Slower sales have saddled automakers with too much inventory and precipitated bigger discounts…”
Production layoffs followed. The Drive.com reports:
“…Ford has laid off 130 workers from its Avon Lake, Ohio truck plant. …The plant is slowing production to …match a decrease in demand.”
GM joins in. CNN Money reports:
“This is the fifth time that GM has eliminated a shift of work at a U.S. plant since last November, eliminating a total of about 5,000 jobs.
…About 700 of the GM workers …are expected to get their jobs back next year as GM ramps up production once again.”
Loan defaults are rising. Wolf Richter, who coined the term “#Carmageddon”, tells us:
“Subprime Auto-Loan Backed Securities from 2015 on track to be Worst Ever.
Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields.
…Those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.
And then there are those issued in 2016. They haven’t had time to curdle.”
Lenders are tightening standards. With delinquencies rising, and the Fed raising rates, lenders are becoming more selective. Bloomberg tells us:
“With both bad loans and interest rates on the rise, financial institutions are becoming more selective in doling out credit for new-car purchases, adding to the pressure for automakers already up against the wall with sliding sales, swelling inventories and a used-car glut.”
| The combination of slower sales, rising inventories, tougher lending standards, higher incentive spending and the end of the model year will provide savvy buyers a great buying opportunity. |
Most people HATE to buy cars. Like it or not, getting a fair deal (not overpaying) requires buyers to do their homework and be good negotiators. Both new and good used cars are expensive. Taking you time and doing your homework can save you thousands of dollars.
Some car buying tips!
If you owe more on your current vehicle than it is worth, keep driving it.
Wolf Richter tells us:
“Negative equity hits all-time record. The average negative equity in vehicles that were traded in for new vehicles during Q1 2017 has reached $5,195 per trade, the highest ever, according to Edmunds data. The percentage of trade-ins with negative equity has surged to 32.8%, also the highest ever!”
Edmunds.com has a nifty car depreciation calculator. The minute you drive a vehicle off the lot you lose 9% of the True Market Value (TMV). At the end of the first year, Edmunds estimates the TMV drops to 81%. It’s no wonder so many car loans are upside down.
| Trading in a vehicle with negative equity compounds the buyer’s debt problem. Digging out from under these debts can take decades. DON’T DO IT! Don’t even think about it…. |
Handle each variable independently. The three main variables are the trade in value of your current automobile, price of the vehicle you want to buy and cost of financing. Handle them in that order.
What’s your trade in worth? Check the Kelly Blue Book website before going to the dealer. Click the tab, “Check My Car’s Value.” This should give you a realistic guideline. One personal tip. KBB asks about the “vehicle condition”. Be conservative, go one step below what you feel is the condition of your vehicle. The KBB estimate should be the minimum you accept for your trade in unless the dealer has facts to refute your position.
How do you really know what the dealer is allowing for a trade? INSIST on negotiating each item separately. Start with the value of your trade in. The dealer may say it depends on what type car you are buying and that’s OK. Tell them what you want to buy. Then agree on the value of your vehicle.
Should you sell your car outright? The Kelly Blue Book provides guidelines about pricing your car fairly. If you have the time, sometimes it is a good alternative.
Don’t forget to factor in the sales tax? When you buy a car, most states tax the net amount due. If your state has an 8% sales tax, sell your car outright for at least 8% more than the trade in value; otherwise it is better to trade it in.
Do your homework on new car incentives. While dealers like to advertise great incentives, they vary by vehicle. The more the manufacturer/dealer wants to move the car, the higher the incentive. Check the fine print. Many incentives may refer to students, veterans or those trading in a vehicle from the same manufacturer.
Here are links to the Edmunds.com and Kelly Blue Book up to date incentive information.
Some incentives are bogus. I took this photo on my lunch time walk. While they may promote 0% financing, and the contract may spell it out – don’t be fooled.
The $88,000 SUV offered a choice between a $3,000 cash discount or 0% financing. If you want 0%, you overpay by $3,000.
The company that writes the loan will resell it as part of a package to investors. While the note says 0%, fees are passed along when the note is resold. The cost of money is included in the price, it’s just hidden from the buyer.
Determine the selling price of the vehicle you want to buy. After you have determined the value of your trade, ask the dealer what is the lowest price they would accept for the vehicle you like if you were paying cash for it. You can use the Kelly Blue Book guide to determine what a reasonable price is.
Don’t be in any hurry. Expect the salesperson to press you, “What will it take for you to buy today?” Your answer is “Give me your best price, and then I will decide if I need to visit some other dealers.” You have options and they have competition. They are highly incentivized to extract as much money from each buyer as possible. Your job is to be sure you do not overpay.
Never talk in terms of monthly payments. Discussing monthly payments is one of the biggest sucker lines going. A buyer who says, “I have to keep my monthly payments under $xxx”, is making a huge mistake. The salesperson will counter with, “If we keep your payments under that number, will we do business?” Many uneducated buyers end up overpaying for the vehicle with 6-7 year loans keeping the payments down. They can easily get upside down in the loan starting a chain of never ending automobile debt.
Shop financing. After you have agreed upon the price of your trade, and the vehicle you want to buy, then determine the best way to pay for it. Shop financing with your local bank or credit union. Check interest rates and fees associated with the loan.
| Calculate the net price of the vehicle, then determine the payments. If they are too high, or for too many months, you can’t afford the vehicle. Buy something cheaper! |
Read the contract. I had a dealer present a contract that included a “Dealer Fee – $250”. I said, “I didn’t agree to that.” He said, “Everybody has to pay the dealer fee.” My response was, “We agreed to a net price before taxes so reduce the price of the vehicle or increase my trade in allowance by $250.” I was halfway out the door before they agreed to make the change. I wonder how many unsuspecting buyers got nailed for an additional $250 because they didn’t read the contract.
Depreciation is the largest single cost of an automobile. After four years your car is worth approximately half what you paid for it. Buying a good, low mileage used car may provide an economical alternative.
The best way to take advantage of the buyer’s market is to do your homework and negotiate well! Good hunting!
And Finally…
“A government big enough to give you everything you want, is strong enough to take everything you have.” – Thomas Jefferson
For more information, check out my website.
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Until next time…
Dennis
www.MillerOnTheMoney.com
This is idiotic. Find a good mechanic; go to eBay; find the used vehicles that you’re interested in and can afford; pay your mechanic to test-drive the vehicles and check the “carfax”; purchase the selected vehicle for cash. Even better – find a local independent auto dealer and attend the local “dealer” auto auction with him.
You can get a lot of decent 5-6 year old vehicles for $6k or less – the kind our esteemed administrator happily uses for reliable transportation. People who spend a year’s income on a vehicle (and they exist) are crazy. Driving used vs new cars is the main difference between people who have money and people who don’t.
I ended up replacing my totaled Civic with a 2012 Civic with 34,000 miles for $11,800. New Civics are selling for $25,000.
Cheap bastard.
The kids get the Honda Insight with 120,000 miles. Not everyone is a business owner.
Bought a brand new 2005 Camry stickshift (yeah, they still make them…in Japan) on Dec. 30. Paid only a few thousand more for it than I paid for my Corolla 10 years earlier. Buy the right car at the right time and you can save thousands. Nobody wants a stickshift Camry, and because it was assembled in Japan versus the US, it has NEVER been recalled for the dozens of problems American-assembled Camry’s from the same year were recalled for.
Vacation…Indiana…WTF?????????????
Cap – saw that too. Seriously, what the fuck? He could have gne somewhere better – say Somalia, Yemen, or Newark.
Hi,
Anyone with grandchildren would understand.
Our family lives in the southwestern part of IN where IL, IN and KY converge. It is beautiful farm country where the people are very down to earth.
Best regards,
Dennis Miller
I would make a variation on the purchase “process” if you want to buy a new car.
1. Research what the average sales price is for the car in your zip. Once you know that, go to your Credit Union, or better yet just budget the cash.
2. Walk in to the dealership and appear to be the poorest slob in the world. State that you need a “payment you can afford”. This tells the sales guy that he can play with all sorts of numbers with you, it also lets them think that THEY can finance you. See, the key is letting them believe they can finance you, as they get a fat kickback from their bankster “partners” so they then can make less money on the car. If they think they can sell you the loan, they aren’t as stingy on the cost of the car itself.
3. Negotiate the price of the car, again emphasizing that the payment needs to be the most important consideration. Secretly keeping in mind that price of the car is your target.
4. Once you have gone through the sales guy, and that stupid “manager” and they give you the song and dance that they are losing money on your “deal”, then have them do all of the PURCHASE CONTRACT paperwork. Sign the purchase contract. Now they are committed to a price on the car. Be careful NOT to sign anything to do with financing yet. This is key. Only sign the purchase contract itself.
5. Here is where the fun begins. They then will take you, and the purchase contract to the finance office. This is where they lick their chops, as they are able to get you to sign paper that gives them an immediate (in some cases 6%) payday. The finance guy will present you with the loan documents. At this point, look them over, play the game. Maybe make a few noises like “hmmm, and oh, what does this mean”. Then, once you have the signed purchase contract in hand, and then the finance contract (unsigned – never sign), then look up and say to the guy. “You know, I think I will just pay cash…..”
The look of horror on the finance guys face is priceless. They will tell you that you can’t do that. BS – you can. You have a signed purchase contract for the vehicle. You also either have a cashiers check from the bank, or from your own funds. The only thing they do not have is a signed piece of payday for THEM. All you simply have to do at this point is to walk out of the finance office with the signed purchase contract, your cashiers check, and walk to the last point in the process. The payment counter. Here is where you actually give them the money, they detail the receipt, give you the temporary tag and record the info for the DMV. You may get blackballed from the dealership, but who cares. You just played some of the best players around….not only does it feel good, it just saved you a large chunk of change….I speak from experience on this, it is fun, and you feel vindicated.
Happy motoring.
Never buy from dealer – only used vehicles at auction.