Going Bankrupt | The Car Market Bubble Just Collapsed

What's up, guys? It's Graham here. So we have to talk about the car market bubble because even though you probably thought that 2022 couldn't possibly get any worse, it was found that car repos are exploding. That's a bad omen. See, for the last few years, the price of automobiles has been skyrocketing from a combination of excess demand, a shortage of parts, and loose lending requirements. That's resulted in a used car becoming the best performing asset of the entire year.

But now, there's brand new data which suggests the entire industry is about to be turned even further upside down, with delinquency rates reaching as high as 23 percent. Automobiles across all segments are seeing a week-over-week decline. In fact, the entire situation is so severe that Doug Demuro addressed this publicly on his Instagram and warned about the potential impact this is going to have on the entire market, both for buyers and sellers.

So let's talk about what's going on, what this means for the entire market, when and how much prices could fall, and then finally what you could do about this to not lose money—since, uh, that's kind of like making money if you don't lose it, right? Oh, and also I want to give a huge shout out and give a lot of credit to the YouTube channel Your Advocate Alliance. They're a father-son duo who pulls some incredibly detailed research that I couldn't possibly have found on my own. So a link to them in the description for anyone who wants to check them out, along with Lucky Lopez, who also provides some really great insights into the inner workings of the auto industry.

So thank you guys so much, and also a big thank you to Experian for sponsoring this video, but more on that later. All right, now as a quick background, if you're wondering what's going on and why the entire market just pulled a complete 180, let me bring you up to speed.

See, when most people think about car prices, they would imagine a chart like this. In a normal market, a new car would be expected to lose anywhere from 9 to 11 percent of its value the moment you drive it off the lot, and from there prices continue to fall by an additional 10 to 20 percent a year until after five years of ownership, you'd be left with about 40 percent of the price that you paid. Well, 2020 completely messed that up.

Because of a shortage of auto manufacturing, a limited supply of parts, record low interest rates, and a surge in demand, car prices began to defy the odds of gravity. Year over year, used car prices have increased by 22 percent, outperforming the stock market, real estate, precious metals, luxury watches, collectible art, Legos, fine wine—basically whatever you have sitting in your parking space has become the most in-demand item since the invention of sliced bread.

But I think it goes without saying, used car prices cannot stay this high forever. After all, when you look at other pandemic-related shortages, lumber has already fallen back down to 2018 prices, copper just declined 30 percent, shipping container costs are normalizing, and across the board, we're slowly beginning to come back to an economy that isn't completely flush with money—except with one slightly massive problem.

As I mentioned before, it was found that 85 percent of all new cars are financed and that the auto loan market has ballooned to a one and a half trillion dollar industry. In fact, in the last decade, the amount of auto loan related debt has increased by over 75 percent. But that is just the tip of the iceberg. An Iowa Law Review found that, contrary to popular belief, over the last 10 years, car dealerships have begun making more profits in the financing of cars rather than the car sale itself, and that transitioning from auto sales to loan sales has resulted in a loosely regulated gray market industry that was only a matter of time until it collapsed.

How can they let this happen, you might ask? Well, I did some digging and was extremely surprised to find out that dealerships have successfully lobbied at the state level for less oversight, meaning there's no federal oversight on auto loans, unlike you have with mortgages, student loans, credit cards, and even payday loans.

As a result, all auto loans are passed through non-uniform state motor vehicle retail installment sales laws, and with very little framework to abide by, auto loans could be given to practically anyone who asks. No, seriously. A few weeks ago, I learned that a Jalopnik investigation in late 2021 found that between 25 and 50 percent of loans were given to customers who might not be able to afford them, and lenders rarely verified the income and employment of borrowers to make sure that they could actually afford the loan.

In fact, if the loans The Consumer Reports looked at, these verifications happened just four percent of the time. Now if you're watching this thinking, no way, they have to be checking more than that, right? Wrong. Because the answer lies in the way that cars are currently being financed. A professor of law at Georgetown University warned about the potential auto loan abuse in 2018 when he described a vast part of the entire industry as fast and usurious.

In that paper, he mentions that when it comes to auto financing, there are generally two options. One is direct lending, where the customer gets pre-approved for a loan that is entirely separate from the car purchase, and the second is an indirect loan, where the customer applies for a line of credit through the dealer, which happens to be between 80 to 90 percent of the time.

Now in that second scenario, dealers are allowed to pull your credit application, send them out to sometimes dozens of smaller lenders to bid on, and then they can compile the best offers in terms of what's called the minimum interest rate. By doing this, the dealership is allowed to see the lowest they could go, from which could then be marked up at the dealer's discretion without the customer even knowing. So obviously, I'm simplifying the entire process for the sake of making a YouTube video, but guess which tends to be the most profitable?

That's right—indirect subprime loans. Under the current law, dealers are allowed to keep a portion or all of the interest rate markup as long as the buyer makes the payments for the first three to six months. Over the last few years, subprime borrowing has seen a major comeback, sometimes with interest rates as high as 20 percent.

And oh wait, it gets even better—and by better, I mean worse—because Bloomberg noted that as many as one in five auto loan borrowers admitted in a survey that their applications for debt contained inaccuracies. That basically implies that not only are lenders and dealers turning a blind eye to income and employment verification for the sake of issuing a loan, but twenty percent of their customers are also lying about their financials for the sake of being able to drive off in a new car.

When you use your own Reddit, Super Stonk even called it an infinite money glitch, while lenders issue overpriced loans, repossess the car when the buyer can't pay it, and then resell the car again at a markup while prices are high to start the cycle over again. It's kind of genius, actually, although like I mentioned before, this type of market can't last indefinitely and it's beginning to show some signs of a complete meltdown.

That's why it's more important than ever to make sure you have the proper insurance coverage on the car you drive, especially when you might be overpaying without even realizing it. But thankfully, our sponsor Experian is there to help. They offer a price comparison tool that allows you to submit your information, and from there they can match you with the policy that best fits your needs.

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In times like this, making sure you're paying a competitive amount for the proper coverage is something that everyone has to take extremely seriously. So sign up today using the link down below in the description to see how much you could begin saving.

And now with that said, let's get back to the video. All right, so going back to the auto industry, as the Your Advocate Alliance mentioned, in a normal market like pre-2019, auto delinquencies hovered around 2.2 percent. So at any given time, about 1 in 50 borrowers were more than 30 days behind in their payment. However, today that number has jumped substantially.

In fact, you're probably going to want to hear this because I couldn't even believe it. The state with the lowest default rate was Utah, with four and a half percent of all auto loans more than 30 days late. But that's the best because you also have states like California with an 8.7 percent default rate, Texas has a 10 percent default rate, and Washington D.C. has a 23.4 percent default rate, where nearly one in every four borrowers is behind.

Once a payment is more than 90 days late, generally, this is the point that a lender will begin to repossess your car. And with more and more borrowers falling behind, along with higher gas prices and rising interest rates, we're beginning to see that used car demand is slowing down. As mentioned by Your Advocate Alliance, every single car segment is down in price, with new luxury cars seeing a 0.34 percent decline week over week. Multiply that over a year, and if things continue with the same trajectory, we could be due for an 18 percent decline.

This is something that Doug Demuro even addressed as someone who runs the popular car auction website Cars and Bids. For some reason, I read this all in Doug's voice, but he goes on to say, "I've been setting many of the reserve prices in the last few weeks. It's been interesting as the market is finally slowing down from the peak, and many sellers aren't ready to accept it." Based on our recent sales, the car market is still stronger than it was in the old days, but it's absolutely dropped from its peak.

And that's where we start going into the biggest issue. Remember those lenders I talked about? Well, because of the loosening state-regulated financial requirements, auto loans are getting longer and longer, with Experian noting the number of car loans of 72 months or more is the highest it's ever been. On top of that, some lenders are willing to finance more than 125 percent of the car's value to include for higher prices, sales tax, registration, licensing fees, and so on.

And when a car is financed at the top of the market, from which prices are beginning to soften, it's easy to see just how quickly a buyer could be underwater on their loan. And when that starts to spread throughout the rest of the market, all of a sudden it becomes the bank's problem. As YAA explains, once a bank repossesses a car, they're usually only able to recoup about 70 percent of that car's value at wholesale auction.

So when they're lending $25,000 on an overpriced $20,000 car that's now worth $15,000, while it sells for $11,000 at auction, the end result is a massive loss to the investor when the original buyer is inevitably unable to pay. All of this is to suggest that in the event of a severe recession, where we see continued unemployment and ongoing inflation, borrowers will absolutely begin to fall behind at a faster and faster pace, leading to lower and lower prices and eventually strict regulation across the entire auto loan industry, which frankly is probably past due.

Now, in terms of the good news, depending on which way you look at it, some new cars are actually beginning to still defy the odds and continue getting more expensive, with the average price of a new vehicle increasing to $48,000. Fecal inventory is also still stuck at 1.1 million units, meaning that demand is still matching supply, and with shortages still plaguing the entire industry, prices are not falling as fast as they would have otherwise.

So in terms of my overall thoughts, it's pretty simple. If you have a car and can no longer afford the payments, or if you're worried about losing your job and falling behind, now is still a good time to sell and get yourself into something that costs less. Of course, if you can't sell because you owe more on the car than what it's worth, it becomes trickier.

But most likely, if you could make the payments, the longer you hold on to the car for, the more you could pay down the loan until eventually it balances out. The thing is, unlike investments, most people are not out there speculating on used car values, and they simply need something that drives them from point A to B.

So it's never something that I would suggest: sell your car here and then bicycle to work and then wait and then buy it back down here for 40 percent less. Chances are, it's not even worth it for like 98 percent of the population. And if you have a car that runs and drives, it's probably best to keep on driving it.

But if you're in a position where you've locked yourself into an unaffordable loan and can get out of it, now would be a good opportunity to do so. And for anyone who wants more information, I will link to a lot of great resources down below in the description so you can see way more information beyond what I'm able to cover here.

So with that said, you guys, thank you so much for watching! Also, feel free to add me on Instagram. Thank you so much for watching, and until next time!