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Old 14th November 2017, 07:16 PM   #1
ChristianProgressive
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Is the Auto loan industry the next bubble to pop?

https://www.washingtonpost.com/news/...=.adb1c3d4f93d

Familiar patterns return...
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Old 15th November 2017, 12:38 PM   #2
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Originally Posted by ChristianProgressive View Post

Not sure how far reaching the effects would be.

By ~2000, the tech sector had stunning amounts of speculative investor money... that went "poof". I'm sure that had repercussions overseas. Serious ones in fact.

The financial/mortgage sector's cock-up in 07/08, had ties into god knows what all manner of financial instruments and funds (worse than the tech bubble I'd guess?)... serious global impact.

Less than 10 million Americans losing their cars. Bubble, really?

Not good for sure, but...

Quote:
The problems with car loans are unlikely to cause another financial crash. The auto loan market is much smaller than the mortgage market. The average car loan is about $30,000, according to credit company Experian, compared with over $220,000 for the average home loan, the National Association of Realtors says. Still, economists and Wall Street bankers have been keeping watch on how many people are having trouble paying their car loans because they believe it's an early warning sign of economic distress.

Perhaps the effects will spread far and wide... jobs lost, auto dealers in a cash crunch, brokers fired (I wish).
I have no idea.
Perhaps you'd like to share your thoughts? Who should worry the most?
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Old 15th November 2017, 01:36 PM   #3
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Originally Posted by Jim_MDP View Post
Who should worry the most?
My guess is whoever's buying the junk paper.

This is very unlikely to have a major impact on the economy. Remember, the home mortgage defaults resulted in decreased housing prices, which resulted in more defaults, which decreased prices leading to more defaults, etc. I doubt if a similar situation applies to cars, because much more of the price of a car is based on the actual hard costs. With real estate a lot of a home's value is based on the land which can vary widely in value depending on the economy. And even if car values take a slight hit, car loans amortize much quicker than home loans, so you are building equity much quicker. In the first year of an auto loan, you'd probably pay off 10% or more of the principal, while in the first year of a home loan you probably don't pay off more than 1%.
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Old 15th November 2017, 02:59 PM   #4
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If past performance is an indicator of future, then it is likely people were mis-sold credit. The UK new car market has collapsed as people are not spending the returned money from earlier mis-selling as most of the money has now been repaid.
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Old 16th November 2017, 09:56 PM   #5
ChristianProgressive
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Originally Posted by Jim_MDP View Post
Perhaps you'd like to share your thoughts? Who should worry the most?
I think I agree with the last line that you quoted. It's a warning sign, a precursor. If/when it pops, it would be like the little earthquake shortly before a much larger one.

Of course that also depends on how big the problem gets. I'm not sure just how big the total auto finance market is to begin with.

I'm much more worried (at least for now) about the ongoing problems a Deutshebank. I need to look in on news about them and see what's up on that front. So far they've managed to dodge every bullet, but that can't last forever. Last news I had was that they were turning over transaction records related to Trump (and others') business dealings.

https://www.vanityfair.com/news/2017...he-bank-russia
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Old 20th November 2017, 03:55 AM   #6
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Compared to real estate, cars have the advantage that they are sellable overseas, so their price cannot crash much under the price level in overseas markets to which they could potentially be sold.
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Old 20th November 2017, 04:18 AM   #7
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Is anyone packaging car loans into collateralized debt obligations?
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Old 20th November 2017, 05:15 AM   #8
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Originally Posted by timhau View Post
Is anyone packaging car loans into collateralized debt obligations?
Do you mean like brokerages trading (including as booby prizes) "bad paper" or less profitable loans in larger collections?

Less cleared than with housing, but if there's enough volume... why not?
Could be a thing.

(My late parents' 1970 30 year kept getting passed as it was at 1.25% fixed. Pretty funny actually.)
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Old 20th November 2017, 07:15 AM   #9
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Originally Posted by JJM 777 View Post
Compared to real estate, cars have the advantage that they are sellable overseas, so their price cannot crash much under the price level in overseas markets to which they could potentially be sold.
Is that the "legend" being used to puff up this particular bubble? Back during the housing bubble we were told similar stories : bricks and mortar never decline in real value etc.

If there is a current bubble, and when it finally pops there is huge glut of unsellable jalopies in the USA, is it out of the question that the overseas resale market will weaken too?
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Old 20th November 2017, 07:44 AM   #10
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Originally Posted by Jim_MDP View Post
Do you mean like brokerages trading (including as booby prizes) "bad paper" or less profitable loans in larger collections?

Less cleared than with housing, but if there's enough volume... why not?
Could be a thing.
Would folks buy hundreds of billions worth of them as rock-solid, no-risk, AAA rated securities?
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Old 20th November 2017, 11:32 AM   #11
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Originally Posted by timhau View Post
Is anyone packaging car loans into collateralized debt obligations?
Absolutely.
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Old 20th November 2017, 03:37 PM   #12
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Originally Posted by JJM 777 View Post
Compared to real estate, cars have the advantage that they are sellable overseas, so their price cannot crash much under the price level in overseas markets to which they could potentially be sold.
In an interesting (and sad) twist, perhaps up to a million cars were destroyed in hurricane Harvey. There will certainly be demand for more cars. High quality repos will be in demand for those that cannot afford new, and new car sales will get a boost. Some of those defaulting on their car loans will be those who lost them in the hurricane as well, so no possibility of repo.
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Old 20th November 2017, 03:48 PM   #13
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Even with all the cool rides out there for the asking, I wonder how healthy the U.S. manufacturers really are.

Anytime you see a manufacturer offering interest-free purchasing and low lease costs, at some point those leased vehicles are turned in and essentially become a competitor against the new car sales.

Current US lease rates are the highest ever:

https://www.edmunds.com/about/press/...dmundscom.html
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Old 20th November 2017, 04:05 PM   #14
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Originally Posted by BStrong View Post
Even with all the cool rides out there for the asking, I wonder how healthy the U.S. manufacturers really are.

Anytime you see a manufacturer offering interest-free purchasing and low lease costs, at some point those leased vehicles are turned in and essentially become a competitor against the new car sales.

Current US lease rates are the highest ever:

https://www.edmunds.com/about/press/...dmundscom.html
Given depreciation, I really don't understand why anybody buys new cars. Late model used cars are a much better value, and a lot of those are lease returns.
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Old 20th November 2017, 04:43 PM   #15
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Originally Posted by CORed View Post
Given depreciation, I really don't understand why anybody buys new cars. Late model used cars are a much better value, and a lot of those are lease returns.
I've bought many new motorcycles, but never a new car.

The question of the lease returns really is serious as those 36 month old models are usually pretty close to whatever the current new model is at a lower price point.

Here in California you can't throw a rock w/o hitting a late model BMW or Mercedes lease turn in for sale.

What also concerns me is how many hourly wage workers are paying for a high dollar car lease while living in an apartment or at home. Paying $500.00 to $600.00 a month for three or four years for something you'll be turning in at the end of the lease doesn't make financial sense to me.
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Old 20th November 2017, 04:53 PM   #16
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Originally Posted by BStrong View Post
I've bought many new motorcycles, but never a new car.

The question of the lease returns really is serious as those 36 month old models are usually pretty close to whatever the current new model is at a lower price point.

Here in California you can't throw a rock w/o hitting a late model BMW or Mercedes lease turn in for sale.

What also concerns me is how many hourly wage workers are paying for a high dollar car lease while living in an apartment or at home. Paying $500.00 to $600.00 a month for three or four years for something you'll be turning in at the end of the lease doesn't make financial sense to me.
Unless you make a substantial down payment, you're probably upside-down on a new car as soon as you drive it off the lot (leased or purchased). This will bite you hard if you wreck the car, or lose your job or otherwise are unable to make the payments.
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Old 21st November 2017, 12:48 AM   #17
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Originally Posted by BStrong View Post
Paying $500.00 to $600.00 a month for three or four years for something you'll be turning in at the end of the lease doesn't make financial sense to me.
First time one of those guys started talking leases to me (late 1980s IIRC) I whipped out my HP-12C financial calculator and ran some numbers and realized that they were getting maybe 600 to 700 basis points above market interest rates for an auto loan. I am sure the margins have tightened since then but leases are a car salesman's dream, because he doesn't sell the price, he sells the payment.

Three simple rules when buying cars:

Never buy new.
Never lease.
Insist that the salesman talk about the price, not the payment.
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Old 21st November 2017, 03:31 AM   #18
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Originally Posted by Brainster View Post
Three simple rules when buying cars:

Never buy new.
Never lease.
Insist that the salesman talk about the price, not the payment.
The same applies to buying a house, a computer, a phone, or clothes. But only the poor follow the rule, because money is a means not the end, the end is to get fresh new unused quality and the latest trends and technological features, which older models don't have.

However, I have recently changed my car buying habits from "always buy new" to "always buy 1 year old". I get nearly the same as new, but for a significantly lower price.
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Old 21st November 2017, 03:33 AM   #19
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Originally Posted by Craig B View Post
Back during the housing bubble we were told similar stories : bricks and mortar never decline in real value etc.
Ehh...

Did someone believe those stories?

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Old 24th November 2017, 09:32 AM   #20
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^Actually, lots did, hence the problem.
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Old 24th November 2017, 10:06 AM   #21
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Originally Posted by Brainster View Post
First time one of those guys started talking leases to me (late 1980s IIRC) I whipped out my HP-12C financial calculator and ran some numbers and realized that they were getting maybe 600 to 700 basis points above market interest rates for an auto loan. I am sure the margins have tightened since then but leases are a car salesman's dream, because he doesn't sell the price, he sells the payment.

Three simple rules when buying cars:

Never buy new.
Never lease.
Insist that the salesman talk about the price, not the payment.
So why do corporate and government fleet buyers purchase new?
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Old 24th November 2017, 10:25 AM   #22
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Originally Posted by Sideroxylon View Post
So why do corporate and government fleet buyers purchase new?
In the UK at least, the discounts that largely offset depreciation.
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Old 24th November 2017, 02:12 PM   #23
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Originally Posted by The Don View Post
In the UK at least, the discounts that largely offset depreciation.
I thought also lower maintenance costs due to warranties and no exiating wear and tear.
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Old 24th November 2017, 02:35 PM   #24
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Originally Posted by Sideroxylon View Post
So why do corporate and government fleet buyers purchase new?
Corporations can write off the costs.

The government isn't spending their own money. Nothing is easier to spend than taxpayer's money.
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