Tag Archives: Used Cars

Rental Nation: Unique ‘Solution’ Emerges To Address Flood Of Off-Lease Vehicles … Lease Them Again

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ZeroHedge has written frequently of late about the coming wave of off-lease vehicles that threatens to flood the used car market with excess supply, crush used car prices and simultaneously wreak havoc on the new car market as well. 

As they’ve recently noted (see: “Flood Of Off-Lease Vehicles” Set To Wreak Havoc On New Car Sales), the percentage of new car ‘sales’ moving off dealer lots via leases has nearly tripled since late 2009 when they hit a low of just over 10%.  Over the past 6 years, new leases, as a percent of overall car sales, has soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a “good deal”…even though leasing a new vehicle is pretty much the worst ‘deal’ you can possibly find for a rapidly depreciating brand new asset like a car…but we digress.

Of course, what goes up must eventually come down.  And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory.  By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.

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So, what do you do when you’re industry is being threatened with a massive oversupply situation that could wipe out all pricing power for years to come?  Well, since reducing production is simply not tenable, one group of used car dealers in Wisconsin has an alternative solution…delay the problem for as long as possible by starting up a new used car leasing program. Per Ward’s Auto:

In a pioneering move, the 10-store Van Horn Group now leases used cars.

The 10-store dealership group in Plymouth, WI, began doing it to serve more customers and expand its pre-owned vehicle inventory, says Mark Watson, vice president-variable operations.

Used-car leasing is something of a rarity. But more and more dealers – such as George Glassman of the Southfield, MI-based Glassman Automotive Group – say it’s a good idea whose time has come and manufacturers should get behind it to help remarket waves of vehicles coming off-lease. That number is approaching 4 million a year.

“We are trying to create with used vehicles a unique position, one that allows us to put the client into more vehicle at a lower payment through a lease,” he says.

“Used car leases are an additional revenue opportunity and keep relationships strong with the bank,” says Tonya Stahl, Wisconsin Consumer Credit’s vice president-operations. “It helps us exceed customer expectations by providing flexible finance options for a successful and continual business relationship.”

Of course, while Van Horn’s used car leases provide a great opportunity for him to “double-dip” by effectively selling his used car inventory twice, it does very little to address the underlying problem of oversupply aside from marginally expanding the pool of potential buyers by lowering monthly payments.

Moreover, as Wards notes, used car leasing is not necessarily a new phenomenon as it has historically popped up during previous economic cycles when the auto industry faced similar problems.  That said, in past cycles at least, the concept was quickly scrapped after banks realized it’s nearly impossible to accurately underwrite the risk on a used vehicle when you have absolutely no idea how badly the car may or may not have been abused by it’s first owner.

Used-car leasing is not a new idea, although in the past it has been promoted sporadically, at best.  Could used-car leasing now become more mainstream, with a combination of the right new technology and, to put it bluntly, the renewed motivation to forestall a residual-value crisis?

Back when I was in auto retail, some banks did used-car leasing, as some captives do now, and some retailers did well with it, but it was not sustained by financial institutions.

Used-car lease retailers were hard to find, and not that well promoted. Worse, if trying to calculate a new-car lease back then was difficult (we are talking 1980s and 1990s), cyphering a used-car lease was pretty much impossible.

Unlike a new car, every used vehicle is unique, with a unique payment and residual (and forecasting wasn’t as sophisticated back then). Of course, we didn’t have automated vehicle-history reports (so some finance institutions were the victims of fraud on occasion, which no doubt led to the demise of used-vehicle leasing programs.

In the end, of course, this just moves most Americans one step closer to eternal financial hardship as profits are increasingly consolidated into the hands of monopolistic financial institutions who are all too happy to make you think that lower monthly payments are a “great deal” for you when in fact they only serve to insure that you never build any wealth and you never actually own any assets.

Source: ZeroHedge

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A Half-Million Flooded Cars and Trucks Could Be Scrapped After Harvey

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  • Auto dealers are expecting a surge in business once Houston gets back on its feet.
  • Used-car values are already close to a record high, and Mannheim Auto Auctions says prices could climb even higher over the next couple of weeks due to the tighter supply.

They seem to be in almost every picture or video of flooded neighborhoods in and around Houston.

There are scores of cars and trucks with water up to their windows and in some cases over the hood and roof.

In fact, the flooding is so extensive, Cox Automotive estimates a half-million vehicles may wind up in the scrap yard.

“This is worse than Hurricane Sandy,” said Jonathan Smoke, chief economist for Cox Automotive. “Sandy was bad, but the flooding with Hurricane Harvey could impact far more vehicles.”

After Hurricane Sandy battered New York and New Jersey in October 2012, an estimated 250,000 vehicles were scrapped.

While the New York metropolitan area has more residents than Houston, the number of vehicles per household is much higher in Houston.

That means more cars, trucks and SUVs were parked on the street and in garages when Harvey swamped the city and surrounding areas.

With so many vehicles in the flood zone, auto insurers will be busy handling claims and cutting checks so flood victims can buy another car or truck.

Auto dealers are expecting a surge in business once Houston gets back on its feet.

Those shopping for a used car may be surprised at the prices they see. Used-car values are already close to a record high, and Mannheim Auto Auctions says prices could climb even higher over the next couple of weeks due to the tighter supply.

Meanwhile, not all of the flooded vehicles will wind up in the salvage yard. Many will be cleaned up and resold, often without the new buyer realizing they are buying a salvaged car or truck.

“It’s going to happen, that’s inevitable,” said Frank Scafidi with the National Insurance Crime Bureau. “Look at all those vehicles floating around. There are people who will try to take advantage of the situation.”

The resale of repaired flooded cars is not illegal, as long as the flood damage is disclosed on the title to buyers. After Hurricane Katrina, thousands of rebuilt flood vehicles were sold to unsuspecting buyers with titles that had been washed or reissued in a different state.

“We didn’t see this on a huge scale until Hurricane Katrina,” said Scafidi. “Since then the public awareness of the problem is greater, but with thousands of flooded vehicles it’s hard to prevent this from happening.”

By Phil LeBeau | CNBC

Morgan Stanley: Used Car Prices Might Crash 50%

https://s15-us2.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Fi.ebayimg.com%2F00%2Fs%2FNDgwWDYwNA%3D%3D%2F%24%28KGrHqR%2C%21pIFHHmT%21rgjBR3Nj%21NVPw%7E%7E60_1.JPG%3Fset_id%3D2&sp=4aa19b8f56365e5e0abf849c77a95eae(informative economic commentary video at the end)  For months we’ve been talking about the massive lending bubble propping up the U.S. auto market.  Now, noting many of the same concerns that we’ve highlighted repeatedly, Morgan Stanley’s auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years. 

Here’s the summary (flood of supply, poor lending standards and desperate OEMs who need to keep new car sales elevated at all costs):


  • Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.
  • Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.
  • Rising rates: Starting from record low levels in auto loans.
  • Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle’s peak.
  • Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.
  • Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.
  • OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money ‘on the hood’ to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.
  • Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift.
  • Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.

All of which Morgan Stanley thinks could spark a 50% decline in used car prices over the next couple of years.  So, for all of you pension funds out there scooping up all of the AAA-rated slugs of the latest auto ABS deals for the ‘juicy yield’, now might be a good time to review what happened to the investment grade tranches of MBS structures back in 2009 when home prices crashed by similar amounts.

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And here are the stats…

Off-lease volumes have already doubled since 2012 and are only expected to get

worse…meanwhile, lending standards have gradually gotten worse and worse…

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…as further revealed by the growing share of ‘deep subprime’ loans in auto ABS deals.

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Of course, so far negative equity hasn’t been a problem for car buyers because lenders have been all too willing to roll those debt balances into new loans.  And, courtesy of low rates and stretched out terms, consumers haven’t really cared that their debt balances are ballooning so long as their monthly payments remain low.

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Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pushed on to dealer lots.

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All of which results in this fairly brutal outlook for used car prices:

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Dear OEMs, the first step is admitting you have a problem.


Musktopia Here We Come!

It ought to be sign of just how delusional the nation is these days that Elon Musk of Tesla and Space X is taken seriously. Musk continues to dangle his fantasy of travel to Mars before a country that can barely get its shit together on Planet Earth, and the Tesla car represents one of the main reasons for it — namely, that we’ll do anything to preserve, maintain, and defend our addiction to incessant and pointless motoring (and nothing to devise a saner living arrangement).

Even people with Ivy League educations believe that the electric car is a “solution” to our basic economic quandary, which is to keep all the accessories and furnishings of suburbia running at all costs in the face of problems with fossil fuels, especially climate change. First, understand how the Tesla car and electric motoring are bound up in our culture of virtue signaling, the main motivational feature of political correctness. Virtue signaling is a status acquisition racket. In this case, you get social brownie points for indicating that you’re on-board with “clean energy,” you’re “green,” “an environmentalist,” “Earth –friendly.” Ordinary schmoes can drive a Prius for their brownie points. But the Tesla driver gets all that and much more: the envy of the Prius drivers!

This is all horse shit, of course, because there’s nothing green or Earth-friendly about Tesla cars, or electric cars in general. Evidently, many Americans think these cars run on batteries. No they don’t. Not really. The battery is just a storage unit for electricity that comes from power plants that burn something, or from hydroelectric installations like Hoover Dam, with its problems of declining reservoir levels and aging re-bar concrete construction. A lot of what gets burned for electric power is coal. Connect the dots. Also consider the embedded energy that it takes to just manufacture the cars. That had to come from somewhere, too.

The Silicon Valley executive who drives a Tesla gets to feel good about him/her/zheself without doing anything to change him/her/zhe’s way of life. All it requires is the $101,500 entry price for the cheapest model. For many Silicon Valley execs, this might be walking-around money. For the masses of Flyover Deplorables that’s just another impossible dream in a growing list of dissolving comforts and conveniences.

In fact, the mass motoring paradigm in the USA is already failing not on the basis of what kind of fuel the car runs on but on the financing end. Americans are used to buying cars on installment loans and, as the middle class implosion continues, there are fewer and fewer Americans who qualify to borrow. The regular car industry (gasoline branch) has been trying to work around this reality for years by enabling sketchier loans for ever-sketchier customers — like, seven years for a used car. The borrower in such a deal is sure to be “underwater” with collateral (the car) that is close to worthless well before the loan can be extinguished. We’re beginning to see the fruits of this racket just now, as these longer-termed loans start to age out. On top of that, a lot of these janky loans were bundled into tradable securities just like the janky mortgage loans that set off the banking fiasco of 2008. Wait for that to blow.

What much of America refuses to consider in the face of all this is that there’s another way to inhabit the landscape: walkable neighborhoods, towns, and cities with some kind of public transit. Some Millennials gravitate to places designed along these lines because they grew up in the ‘burbs and they know full well the social nullity induced there. But the rest of America is still committed to the greatest misallocation of resources in the history of the world: suburban living. And tragically, of course, we’re kind of stuck with all that “infrastructure” for daily life. It’s already built out! Part of Donald Trump’s appeal was his promise to keep its furnishings in working order.

All of this remains to be sorted out. The political disorder currently roiling America is there because the contradictions in our national life have become so starkly obvious, and the first thing to crack is the political consensus that allows business-as-usual to keep chugging along. The political turmoil will only accelerate the accompanying economic turmoil that drives it in a self-reinforcing feedback loop. That dynamic has a long way to go before any of these issues resolved satisfactorily.

Source: ZeroHedge

Retail Store Traffic & Used Vehicle Prices Are Declining

Retail:

According to Wells Fargo’s Ike Boruchow, it’s “increasingly clear that retail is under significant pressure” adding that store traffic remains weak (likely to get softer this week due to Easter shift), while markdown rates are not only elevated on an annual basis, but also getting sequentially worse. He concludes that “retailers are running out of time” to reach elevated Q1 numbers as consumption is failing to rebound.

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S&P Retail Stocks

Whether due to displacement (from online vendors), due to concerns about border tax, or simply because the US consumer’s plight – despite the recent surge in Trump induced animal spirits – has not changed one bit, the pain for US retailers continues, and as a result, the outlook for malls and other retail-associated secondary industries will remain bleak for the foreseeable future.

Used Vehicles:

Desutche Bank is gravely concerned: We’ve grown increasingly concerned about U.S. Used Vehicle Pricing down 7.7% yoy during February, per NADA. A decline in used prices has been widely anticipated given a significant increase in used vehicle supply (off-lease vehicles). But the magnitude of the recent drop was nonetheless surprising (February’s drop was largest recorded for any month since Nov. 2008). Used prices have a significant impact on New Vehicle demand/pricing through their effect on affordability (most new car purchases involve a trade-in).

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Let us hope this is all because consumers are focused on buying houses instead.

http://www.zerohedge.com/news/2017-03-20/retailers-are-running-out-time-channel-checks-show-13-collapse-traffic

http://www.zerohedge.com/news/2017-03-20/used-car-prices-crash-most-2008