The Auto Market Bubble Just Popped

What's up, Graham? It's guys here, and it's official: the auto market bubble has popped. Despite used car values previously outpacing that of housing, fine art, and the stock market, they've now just seen their largest decline in a decade. Electric vehicles are selling for 32% less than a year ago, and with owners starting to fall behind in their payments at the highest rate ever on record, there's a lot more pain expected to come very soon.

So, given the soaring auto default rates among Millennials and Gen Z, let's discuss exactly what's happening, why this is about to become a huge issue in 2024, and what you could do about this to drive out ahead, because there's a lot going on that most people are not talking about. Although, before we start, as usual, if you appreciate videos like this, all I ask for in return is that you take the like button for a quick spin by shifting it into gear and giving it a quick tap or by crashing that subscribe button if you haven't done that already. That's it! So thank you guys so much, and also a big thank you to Incog for sponsoring today's video, but more on that later.

All right, so to start, you probably noticed that throughout the last few years, the cost of buying a car has been getting significantly more expensive. In fact, I've mentioned it before, but up until recently, 80% of new cars were selling above MSRP, which has got to make you wonder what's going on and how badly is this going to come falling apart?

Well, as far as why car prices were previously the best performing assets since shorting WeWork, look no further than four main categories that are soon coming to an end. The first being limited production. See, in order to actually manufacture a vehicle, you need all the necessary components, and one of those is a little known piece that many people forget about—chips. Semiconductors like this make it possible for the car to control everything from windows, sensors, ignition, navigation, and nearly every other aspect that nobody pays attention to until it breaks.

In fact, modern cars require an excess of 3,000 of these chips in order to properly function, and even though that sounds like a lot, the auto industry only uses less than 3% of the global chip supply, while the rest gets used for consumer electronics. As a result of that, manufacturing delays, a lack of labor, and a supply chain crisis led to a shortage of semiconductor chips, which led to a shortage of new cars being built and created artificially low inventory for prices to remain high.

Two, we have low interest rates. Really, up until the beginning of 2023, buyers were able to obtain record low interest rates with terms as long as 12 years, meaning just like real estate, cars became that much more affordable to purchase. Of course, all of that excess demand also fuels record-high car payments, which today is the highest it's ever been at $753 a month. On top of that, auto loans are now the third largest debt category behind mortgages and student loans, coming in at roughly $1.5 trillion. So just like the housing market, the more purchasing power Americans had, the more car prices rode higher.

After that, three, we have longer ownership. Just like homeowners, you're choosing not to move because they've already locked into a low fixed-rate mortgage. Well, the same is happening to cars. According to July data, people are holding on to their cars for longer, which is why used supply has still not rebounded. After all, if you could afford your existing payment, why get a brand new car with a brand new loan and brand new taxes and brand new problems when you could just keep the car you already have?

Finally, four, we have greed. And we really shouldn't be too surprised with this one, because the reality is if you're running a business, you have to do what's in the best interest of the shareholder. But in this case, automakers realize that they could charge more if they manufacture less, and that's what they're doing. Kelley Blue Book recently ran an article explaining that automakers will consciously under-supply demand, with BMW saying that they plan to clearly stick with the way that we manage supply to keep our pricing power at the current level.

Although in terms of what this means for the future of the market and why this is a lot bigger of a problem than most people think, here's what you need to know. In terms of how much car prices have already fallen, take a seat and buckle up, because this is where things get really interesting. The website CarGurus checks values across millions of vehicles on a daily basis, and according to them, prices are down almost 1% in the last 30 days. The biggest decline came from none other than Tesla, with prices now 33% less than they were a year ago.

In fact, it's said that Tesla is singlehandedly to blame for the drop in EV prices because when they slash prices in order to sell more cars, it caused every other auto manufacturer to drop their prices to remain competitive. Not to mention, this is also the first time where used electric vehicles are outnumbering the new cars for sale, so used inventory is now in theory beginning to take away some of the market share from purchasing a new vehicle.

Beyond that, it's also worth noting that year-over-year, crossovers are down 6.3%, hatchbacks are down 99.1%, wagons are down 99.8%, and the worst from everything, vans are down more than 10%. Although don't get the wrong idea, because prices are still higher today than they were prior to the pandemic. But now that we're clearly on a decline, the question then becomes how far can prices fall and why is the entire industry at risk of a complete collapse?

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Now, with that said, let's get back to the video. All right, so in terms of how far car prices could fall and why the entire industry is at risk of a complete collapse, let's start with first dealerships. A YouTube channel called Car Edge, which I'll link you down below in the description because they're absolutely fantastic, exposed one of the biggest risks in the industry for sellers, and that would be interest rates. See, they clarified that dealerships often buy their cars on credit, meaning when you see inventory on their lots, those cars weren't purchased with cash; instead, they're financed.

When interest rates are at their highest level in 20 years, every single day a dealership doesn't sell a car is a day that's costing them a lot of money. For example, they clarified that two years ago, holding a pickup truck on a lot might cost the dealership only $2 to $4 a day in interest, but now it's costing them more than $12 a day. This means the dealerships are starting to get very motivated to sell off existing inventory, and most likely, they could soon be losing money on the cars that they sell if they wait too long.

Second, we have the auto loan bubble. As I'm sure most of us are aware, cars don't normally increase in value. Let's be real: 2020 through 2022 have been absolute anomalies. Historically, when you go and buy a car, it loses an average of 11% the moment you drive it off the lot. Within a year, it's lost 25% of its value. After three years, it's lost 46%, and within five years, the average car is worth 63% less than it would cost new. This makes sense because technology gets dated, the car experiences wear and tear, and newer designs come out.

The problem, however, is that many banks and lenders issued loans on cars that were selling for way higher than they ever should have been, simply because demand was high, inventory was low, and money was cheap. Like, two years ago, banks wouldn't bat an eye if you financed a $50,000 Toyota Corolla because that was the market value and people were willing to pay it. But today, buyers are underwater on their loans by an average of $6,000 when they trade it in. Imagine if you took out a $40,000 loan on a car that's today worth only $20,000. In that case, if you could no longer pay the $700 monthly payment, what do you do?

You can't sell the car because you don't have $20,000 lying around to pay off the loan. You can't refinance it because interest rates are higher today than they were back then. So many people are choosing to simply walk away from the loan, give it back to the bank, and let them take the loss on it. That's leading to third, car repos. Bloomberg just recently reported that car owners are falling behind on payments at the highest rate on record. According to Fitch Ratings, the percent of subprime auto borrowers at least 60 days past due on their loans rose to 6.1% in September, the highest in data going back to 1994.

On top of that, the Mishtalk blog also referenced a tweet where buyers are beginning to walk away from their cars if they're unable to pay back the loan. Like I mentioned earlier, sometimes it's just easier to walk away from the car and have the bank repossess it. This is why, fourth, banks are now preparing for default. With values falling, banks are a lot more cautious about who they lend money to and on what, meaning it's a lot more difficult to get a loan today than it was back then. Not to mention, the average interest rate has also increased substantially.

CarGurus also pointed out that auto loan rejections are occurring at the highest rate in 10 years, with banks now writing off some of their loans as complete losses, basically anticipating that certain borrowers are just never going to pay them back. According to CNN, all of this is just the beginning, and analysts predict that auto loan delinquencies will continue to rise into 2024 and peak at about 10% before they start to fall. In fact, the senior director at Fitch said that the subprime borrower could often be the first in line for where we start to see the negative effects of macroeconomic headwinds, and guess what: more than a third of Americans fall into this category.

This is also a significant problem with car payments now exceeding rent for a small portion of Millennials and Gen Z. So, in terms of what this realistically means for you, your money, and the market, here's what you came for: practically, on average, car values are declining on a year-over-year basis. So if you're planning to buy a car anytime soon, that's good news, except if you're planning to buy a pickup truck, because that category increased by an average of 7%.

Now, sure, that's not a lot in the grand scheme of things, but it is a sign that people are hanging on to utility vehicles that they use for work, so as a result, they'll have higher resale value. The bad news, however, is that used car prices are still 33% more expensive than they were prior to the pandemic, which I gotta say is pretty consistent for just about anything that you'd buy today, from real estate to groceries to services to stocks. This shouldn't be entirely surprising either, considering that the money supply also increased by 30%.

On a side note, I know they're not correlated one-to-one precisely, but you get the idea. It's just interesting. Anyway, Car Scoop found that used car shoppers have to buy cars more than twice as old as what the same money bought them in 2019. It's also worth noting that given the average car is driven between 10,000 to 15,000 miles a year, these cars are not only more than twice as old but have between 40,000 and 100,000 plus more miles for the same money.

Unfortunately, that's just the reality of today's markets, but it doesn't mean that prices won't continue falling further. And that brings me to the last point worth mentioning, and that would be "give my car back." This is a topic that I heard from Lucky Lopez, who runs an automotive channel that I'll link to down below in the description. To my surprise, it's true: the term "give my car back" is trending at the highest level ever in history.

This means there's a growing population of car owners who are simply walking away from their loan and their car because they owe more on the car than what it's worth and they can't afford to continue making the payment. This is also echoed by the website Zero Hedge, which is calling this "The Perfect Storm," where buyers took out excessive loans on cars they couldn't afford that were never worth the price that they paid, and now they're stuck. As a result of that, delinquencies are the highest they've been since 1994, and to be honest, I don't see a situation where this gets better anytime soon.

Truth be told, 99.99% of cars are not investments; they lose value. It's a really bad idea to finance depreciating assets at really high interest rates, and if consumers aren't able to sustain those payments, then I have a feeling we'll continue to see car repos and defaults skyrocket. Even though this isn't quite like the 2008 housing crisis, where homeowners took on adjustable-rate loans, we do face the reality that there's a growing population of people who can no longer afford $700 monthly payments in the face of rising interest rates, higher unemployment, and rising prices.

Now, in terms of what you can do about all this, I tend to think that if you own a car that you can no longer afford and you can't sell it because you owe more on the car than what it's worth, then it might be a good idea to reach out to the bank and see if you could renegotiate your payments. It never hurts to ask, and in the long run, it might save the bank some extra money from having to take an even bigger loss and repossessing the car.

Of course, if you're selling your car, I think it's always a good idea to price it realistically, take very good high-quality thorough pictures, and give it the proper exposure anywhere you can online. Finally, if you're looking to buy a car, now is the best time to negotiate. The market is absolutely changing in your favor, so use this to your advantage and try to score a really good deal.

Really, though, at the end of the day, all of it just comes down to this: cars are not an investment. It is not normal for a car's value to go up over time; that just doesn't make any sense. The sooner we come to terms with cars being a money-losing proposition, the more equipped you'll be to take this into consideration the next time a dealership tries charging $100,000 for a Toyota RAV4.

So, with that said, you guys, thank you so much for watching. Also, if you want more information that I'm able to include in a YouTube video, check out my newsletter down below in the description. It'll also be the pinned comment. It's totally free, and you'll get an update there every single week. So enjoy! Thank you so much, and until next time!