Why the automotive industry's good times could end in a crash

[wingcar]

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Interesting story...perhaps not having that new Hellcat in my driveway isn't such a bad thing after all.....

Why the automotive industry's good times could end in a crash

By Aki Sugawara

It's seemingly a new golden age for gearheads — between cars like the Ford GT and Acura NSX basking in the spotlight at the 2015 Detroit auto Show, and the 707-horsepower Dodge Challenger Hellcat selling briskly. With the revival of General Motors and Chrysler from the brink (albeit, at an $11 billion cost to taxpayers), the recession in 2008 is fading as a distant memory.
Yet underneath all the fanfare of a recovery, the automotive industry isn't as healthy as it seems, and could get a lot worse.

Ridiculous click bait you may say, citing how companies like Honda posted all-time annual sales records in 2014, or how oil prices threaten to drop down to $40 a barrel. The professional forecasters expect U.S. auto sales to hit 17 million this year, a near-record level. Yet dig into the data though and a more ominous picture emerges — here are five points why:

1. Consumers aren't making any more money, but are buying pricier cars: The average price of a car reached a new high of $34,367 in December last year according to Kelly Blue Book. That's in spite of stagnant wages, which although increased by about 2 percent, cancels out when factoring inflation based on the Consumer Price Index (CPI). Some would argue CPI understates inflation since it changed how it calculated quality and substitution adjustments back in 1996—which would mean the middle-class has been on the decline since 2008. That'd be consistent with how the majority of Americans feel like they're falling behind the cost of living.

2. Expensive rides are increasing the debt burden of consumers: If people aren't making any more money, how can they afford an Audi A4, which starts at $35,000? In a word its debt. Conventional wisdom says to buy based on the 20/4/10 rule — a 20 percent down payment, a 4-year loan and the total cost adding up to no more than 10 percent of the gross annual income.
But given stagnant wages, it's no surprise that a 20 percent down payment isn't feasible for many, especially when considering the average amount in a savings account is below $7,000. Hence, more and more buyers rely on longer-term loans with little down payment. According to Experian Automotive, one fourth of all new-car loans were 6 to 7 years long in 2014 — with faster growth than any other type of loan — and the average length for a car loan reached an all-time record of 66 months last year. Why should that be a cause for concern? Because of the dreaded "S" word.

3. Subprime automotive lending at its highest since the subprime housing crash: Loans purchased with poor credit are on the rise, according to Equifax, and make up 30 percent of all loans. Analysts are quick to defend the data, saying only 0.71 percent of subprime loans are in default. But there's no sign of abating, and 8.4 percent of borrowers who took out loans in the Q1 of 2014 and had weak credit and missed payments by November, according to Moody's analysis of Equifax's data. That's the highest since 2008, when the subprime housing market came crashing down.
Granted, automotive subprime doesn't nearly have the same risks as housing subprime because it's much easier to repossess a car than a house, and there's no counterpart to toxic mortgage-backed securities. But as recent Federal Reserve figures show with the $15 billion increase in non-revolving credit, the burden for auto loans is only getting worse. Plus, unlike houses, cars are a depreciating asset that drop in value as soon it goes off the lot. So if somebody goes underwater in payments three years into a six-year loan, the person might be inclined to just hand back the keys.

4. The trap of low interest rates. How can I be such a Debbie-downer, in face of all the sunshine rhetoric about recovery? Much of it comes down to the Federal Reserve's policy of zero-percent interest. The Fed chair—both Janet Yellen and her predecessor Ben Bernanke—have insisted that the rate depends on progress of the economy, namely, inflation and unemployment. The drop in unemployment to 5.6 in December has some cheering from the rooftops, but the labor participation rate is at its lowest since 1978 at 62 percent. At best, the recovery is fragile; at worst, it's exacerbating the rise of non-revolving debt.
Yellen has said she'll bump up interest rates later this year to keep inflation in check and prevent another housing/asset bubble, but even if they were to revert back to 5 percent interest as it was in 2006—as opposed to the 10+ percent in the '80s—the market for those fully loaded Ford F-150s would shrivel up given the lack of consumer liquidity. New-vehicle loans are stretching out when the average interest rate for buyers with great credit is 2.6 percent; would we see 9-year car loans if those rates rose to 4 or 5 percent? And even if unemployment, labor participation rate and wages start recovering, it wouldn't be the same, because...

5. The younger generation is broke. Generation Y has no money to drop a hefty down payment on a car, or afford a shorter-term loan to offset the inevitable rise in interest rates. Adults under 35 have a negative savings rate of 2 percent, and have been burdened by spiraling student loans, which have increased by more than 500 percent since 1999. Oh and that 5.6 percent unemployment rate? Much of that comes from the older generation reentering the workforce, while labor participation for those 35 and under has dropped by 4 percent. Maybe that partially explains the decline of the youth-oriented Scion brand.

What does it all mean to average American? These are longer-term trends, whose effects may take years to materialize — at least, while the economic turmoil in Europe keeps the U.S. dollar strong. Housing starts alone may keep the U.S. pickup market soaring in 2015, and the pent-up demand for new vehicles among wealthier buyers has proven durable so far. So you probably won't wake up Sunday morning to a headline in your Facebook or Twitter feed that the auto industry suddenly tanked. But on a practical level, there's always this sage advice: live within your means — even if it means forgoing that Sublime Green Dodge Challenger Hellcat glistening at the dealership.

[JB400]

I just got done reading this article as well.   If it's true, we haven't learned our lesson from the last bubble.

[lukedukem]

so you think if i save my money and wait for this bubble to burst. i can get a nice truck for cheap when they start repossessing them


Luke

[odcics2]

Author needs to do more fact finding before writing an article.   

[Mike DC]

              
Society does not work right with a 1929 wealth disparity.  Doesn't matter how well we can justify it to ourselves.

Every several generations we have to re-learn this again the hard way.  
 

[stripedelete]

              
Society does not work right with a 1929 wealth disparity.  Doesn't matter how well we can justify it to ourselves.

Every several generations we have to re-learn this again the hard way.  
 

[1974dodgecharger]

fire sale during the crash on 69 daytons and 70 superbirds all for 200 dollars  also HELLCAT on sale for 10 grand....come and get em....

[Cooter]

Finally, someone has put into words what I've been seeing for YEARS. I have my lifestyle set up on mickey D's pay, I do a little better, but certainly not enough to spend like some morons. It's amazing how many today make $2500.00/month and spend $2450.00/month...yet, wanna put another $1500/month car payment on top because "you only live once".....

[Ghoste]

Author needs to do more fact finding before writing an article.   

No money in that.  There are thousands upon thousands of writers vying for a crumb of the pie and twice that number of wannabes.  You want to sell stories it better be sensational and what could be more sensational than predicting another global economic meltdown?  People are largely growing tired of hearing how their every move is destroying the planet, no one is buying into the low oil prices will cause the zombie apocolypse, we no longer care how many guys shot Kennedy, Cuba is about to become our friend, drug lords are passe, terrorists are still terrible and we all already knew Bruce Jenner wanted to be a woman.  Whats left?  Economic disaster.  We aren't fully recovered so pour cold water on good news and hope you can sell your little article.

[stripedelete]

"you only live once".....

Listen closely to advertisements it's "what you deserve".

[lukedukem]

Author needs to do more fact finding before writing an article.   

No money in that.  There are thousands upon thousands of writers vying for a crumb of the pie and twice that number of wannabes.  You want to sell stories it better be sensational and what could be more sensational than predicting another global economic meltdown?  People are largely growing tired of hearing how their every move is destroying the planet, no one is buying into the low oil prices will cause the zombie apocolypse, we no longer care how many guys shot Kennedy, Cuba is about to become our friend, drug lords are passe, terrorists are still terrible and we all already knew Bruce Jenner wanted to be a woman.  Whats left?  Economic disaster.  We aren't fully recovered so pour cold water on good news and hope you can sell your little article.

I knew it


Luke

[500Jon]

As long as there is a nice tarmac road and cheap (good quality) gas, what's there to worry about?

Don't over-complicate the pleasure of being alive and owning a Mopar!!!

Everything else is just window dresssing...............

[HPP]

I just got done reading this article as well.   If it's true, we haven't learned our lesson from the last bubble.

Actually, we are repeating the bubble every 12-15 years and its growing in size and scope. Anyone remember the Savings and Loan Crisis of the late 80s/early 90s? That was only a precursor to the '08 meltdown. Imagine the mess we will have in 2020.

[odcics2]

As long as there is a nice tarmac road and cheap (good quality) gas, what's there to worry about?

Don't over-complicate the pleasure of being alive and owning a Mopar!!!

Everything else is just window dresssing...............

[J-440]

 Live within your means and act your "wage".  Oh and by the way GM, I want about a $20,000 discount on a new Vette since that's how much was taken from my 401K to bail ya'lls sorry asses out!!   

[myk]

Why should the American people be expected to live within their means when their politicians/over-lords/masters in charge spend money like it's going out of style and the national defecit is beyond comprehension?  The government has its wasteful expenditures and I have mine...

[Cooter]

Why should the American people be expected to live within their means when their politicians/over-lords/masters in charge spend money like it's going out of style and the national defecit is beyond comprehension?  The government has its wasteful expenditures and I have mine...

Cause unlike them, you and I have no taxpayers to foot the bill and we go to jail.

[Ghoste]

 

[TruckDriver]

Ford fourth quarter earnings fall

http://news.yahoo.com/ford-4th-quarter-earnings-fall-venezuela-trouble-120121055--finance.html

[Mike DC]

          
Our tax dollars don't just get burned in a huge bonfire every year.  That money is going somewhere.  

[Ghoste]

A lot of the great things they are spent on might as well be bonfires.  Not every tax dollar is going somewhere useful just because its going somewhere.

[stripedelete]

That big ole' elephant on the other side of the room is the fact that government spending fuels way to much of our economy to cut it back.

[Mike DC]

  
I wasn't trying to say the govt spends our money well.  I was saying they give it to powerful thieves.  

America hasn't stopped being productive in the last 40 years, we have just stopped getting paid for it.  Times have never been better for the .001%.  

[Challenger340]

I don't believe Interest Rates are going anywhere for a very, very long time.

Every currency worldwide is absolutely TANKING against the U.S. greenback..... name ONE currency that has NOT recently ?
and,
as the U.S. Dollar goes higher in value, it increases costs on U.S. Exports which will be a huge head wind to the U.S. recovery, before it really gets going.
Any Fed Interest Rate rise would push the greenback higher yet !
No matter.... data will show the U.S. recovery sputtering well before June when any rate hike by Yellen would be contemplated.

The problem post 2008/9 global financial crisis was, is, and will continue to be, based in a world wide "over-capacity" problem built on cheap money = Debt.
The QE experiment in the U.S. has done little.... just shifted the problem elsewhere temporarily, this time to the Eurozone who now last week announced a $1.5 TRILLION QE program of stimulus of their own.... which together with other currency de-valuations worldwide will slow U.S. Exports and GDP potential.

Based in this global "over-capacity" scenario.... there is a finite amount of "growth" to go around.
One can't "grow".... without someone else "shrinking" ?
If someone "wins"... someone else has to "lose" ?
The U.S. recovery that just started.....
will be derailed by a Eurozone currency devaluation of 20% over the last 6 months, and now a $1.5 Trillion Dollar QE program of their own.

The U.S.A. can't drag the global economy up with it..... the American consumer is just not THAT strong financially anymore with stagnant wage growth, and as the buck rises,(sure the imported junk gets cheaper)... but less of them foreigners to buy American made stuff because it gets too expensive.
Hell,
I may even cancel my trip to Vegas this year because my Canadian Dollar is down to .78 cents from close to "parity" not long ago ?

[el dub]

         
Our tax dollars don't just get burned in a huge bonfire every year.  That money is going somewhere.  

here's where its going