Used-car prices are falling faster and faster…

From Justin Brill, Editor, Stansberry Digest:

Porter’s bold prediction is getting attention today…

Longtime readers know he’s been warning for more than three years that the boom in subprime lending would lead to disaster for the auto industry. He has repeatedly pointed to growing supplies of used cars – and plunging used-car prices – as a key milestone in the coming crisis. As he and his analysts explained in the March 2014 issue of Stansberrys Investment Advisory (emphasis added)…

It’s one of the most important lessons of finance: The easier the lending standards become, the larger the credit losses will eventually grow

The average auto loan today is for 65 months (five years), and 20% of all auto loans are now for durations between 73 and 84 months. Likewise, the average amount of these loans (more than $26,000) is the largest ever recorded. And finally, the percentage of subprime borrowers is now at a record high – 27% of all car borrowers. That’s almost double the amount of subprime borrowers that were in the car market back in 2009.

Americans currently owe more than $800 billion against their cars and trucks – 34% of this debt is owed by subprime credits. Another 10% is owed by “deep subprime” – folks with credit scores below 550…

If you lived through the subprime-mortgage debacle, you must know what will happen… Defaults will suddenly rise. Credit losses will follow. Used-car prices will fall as more and more cars are auctioned off. More and more car buyers will find credit suddenly unavailable. They will be unable to roll over their loans or get into a new lease, as credit becomes tighter. More and more vehicles will pile up on dealer lots.

Delinquencies and defaults have been quietly rising for months. And now, suddenly, used-car prices are accelerating to the downside. As Bloomberg reported this morning…

Your not-that-old car might not be a clunker quite yet, but it’s probably a lot closer than you think.

The average used car lost 17% of its value in the past 12 months, dropping from $18,400 to $15,300, according to data from Black Book, an auto analytics company. That annual depreciation figure has been increasing steadily, too. The average used car today depreciates nearly twice as fast as it did in 2014, when the annual rate was just 9.5%…

The problem, of course, is supply. Seven consecutive years of increasing U.S. auto sales have put a glut of vehicles on the road. What’s more, an increasing share of those sales came with a lease, so there’s now a rising tide of machines flowing back onto the market when their three-year contracts run out.

Hmm, where have we heard that before?

In addition, the article notes the decline is having a dramatic effect on many companies…

The increasing pace of depreciation is also bad news at the corporate level. Companies with huge fleets of cars and trucks – think dealerships and rental chains – are seeing their balance sheets tick down by the day. Consider Avis Budget Group: In the quarter ended June 30, the rental-car empire managed to rent more cars than in the year-earlier period, and at fairly stable prices. Yet its profit dropped 92% as it struggled to sell vehicles it wasn’t using. Expenses tied to vehicle depreciation and lease charges increased 12% in the quarter.

Hallett at KAR Auction said many fleet managers are in a similar pickle. At Hertz Global Holdings, for example, depreciation per vehicle was up 27% in the recent quarter; at the time, Hertz had 500,000 vehicles. “We call it losing money by volume,” Hallett said.

Avis, in response, has resorted to selling more cars directly to consumers, cutting out the middleman at dealerships to realize slightly higher prices. And it’s buying fewer 2018 models as it gears up for next year.

Unfortunately, while many folks are apparently surprised by the sudden decline, we suspect these losses are just beginning

Today’s flood of used cars is being driven by the 3.5 million 2014 vehicles coming “off lease” this year. But there are another 4 million 2015 vehicles coming to the market next year… and a record 4.5 million 2016 models coming in 2019.

In other words, there is more pain ahead. The downturn has barely begun.

Regards,

Justin Brill

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