- People are saying it could completely collapse,
taking down the rest of the economy with it.
The Great depression for cars.
I needed to find out for myself
what in the world is happening here?
So I started with the fun part: Car shopping.
And of course, my lizard brain quickly went from market
research to of picking out rims on a Lamborghini.
I personally like the silver ones.
Then I got back on track, and the
commonalities between these cars starting to pile up.
I was nips deep in a blizzard of
chip shortages, high interest loans, crazy laws about
lending repos, and even the bond market.
Not that kind. Bond, not bondage.
I quickly realized the auto market was rapidly
heading towards a brick wall at full speed.
And something's not right here.
Straight away, prices are high.
Like way more than I expected.
I own one old beat up car and a fleet of box trucks.
But I haven't really been
paying close attention to prices.
And this isn't just new cars.
Used cars with tons of miles
are also selling at a premium.
So I started looking back over the past few
months to discover that prices were even higher.
Just a few months ago.
It turns out that lockdowns and pandemics
are bad for the car industry.
Who would have guessed it?
But soon after lockdowns starting in
2020, car makers stopped production and
canceled their orders for new microchips.
And it turns out a new car
needs like 100 of these things.
So production ramped way down
and then came stimulus checks.
And they did exactly what they
were supposed to, stimulate the economy.
This did something weird that I'll explain in a minute.
But people started buying cars again.
So car makers ramped production back up.
Then just about everything that
could have gone wrong, did.
Resources to build these things were now hard to get.
Two different car microchip builders started on fire.
Then a Texas blizzard shut down even more manufacturers,
so there was way more demand than supply.
The average price for a new car was over
$47,000 in May, up 13% in one year.
Then, because a lot of people either couldn't afford or
find new car, this jacked up used car prices.
And I mean really jacked up the price on used cars.
They averaged $30,000 at the end of 2021.
This price chart says everything you need to know.
Obviously, this isn't sustainable, but does that
alone mean a car bubble will pop?
Probably not.
So I began to wonder how people were
even able to afford these crazy prices.
And the answer is high interest loans.
but I needed to dig deeper.
So I was on the computer and
I found this weird little trick.
People who would typically have a hard time
getting a loan were often given the chance
to use their last month's income on the
application, and it seems harmless and fairly obvious.
But stimulus checks,
Those counted towards income, and lenders were cool
with not looking too carefully at the details
for the sake of making a deal.
But why? Weren't the lenders worried about lending
to someone who might default on their loan?
It turns out not really, for a few reasons.
First, insane predatory interest rates.
25% APR is not an uncommon right.
Next, 75% isn't unheard of.
Let's pause for a moment and think
about what 75% APR looks like.
Let's say you buy a 2006 Jaguar for $5,350.
You put $2,000 down and take out
a loan for the remaining $3,350.
Let's say it's a three year loan.
At the end, you would have paid more than
$10,000 total interest of $5,000 on a $5,000 car.
And this isn't hypothetical.
This actually happened to someone. And that's not it.
Loan duration has increased as well.
Where a typical loan used to be three
to five years, now it's much more frequent
to see six, seven, even eight years.
using that Jaguar from earlier, if they had a seven year
term instead, they would have ended up with $14,000
in interest on a $5,000 car.
Now, this is wonderful for one group - the lenders.
They're just rolling in that sweet passive
income from your extended length loan.
But of course, that's only true
if you keep making your payments.
Aren't they worried about that?
Again, not really.
Cars are easy to repossess.
In fact, many lenders require you to have
an electronic tracker to be installed in your
car until the loan is paid in full.
Stop paying, and they'll just send a tow truck
to come pick that thing out of your driveway.
Now they get all the money you already paid, plus
they get to sell that car to someone else.
And here's where I got confused.
Trying to answer this question led
me down another extreme rabbit hole.
It turns out that there's no federal rules
regarding maximum interest rates on auto loans.
It's all up to the states.
So for people of these states, good luck,
because you have no auto loan rate limits.
And for everyone not living in those states
who just breathe the sigh of relief, you
may want to suck that one back in.
Each state is different.
But there is one consistency
that they're all very inconsistent.
For instance, New Mexico protects its citizens by allowing
only a 175% interest rate on auto loans.
Oregon has a nice 36% limit for loans from banks,
but loans from car dealerships have no limit.
And Florida, which has an 18% interest
cap on auto loans, has another law
allowing car dealers to charge much higher.
Guess what the court sided with
on a dispute on that one?
Here's a hint, not the woman who got
stuck with 27% APR on a 2004 Pontiac.
After coming to terms with the fact that
I decided to look at what this means for all those folks
who got high interest car loans during the Pandemic.
And what I found has implications for
the entire auto industry and the economy. It's repos.
Lots of repos.
There have been 2.2 million cars repossessed
so far this year, which is the same
number for all of 2019.
Repos on so-called subprime car loans are up 11% since just
2020, and the recession is just getting started.
The reason that this matters, beyond the fact that
many people are losing their cars, is that the
cost of used cars has been declining.
And don't get me wrong, the
cost is still ridiculously high.
But now lenders, whether they're banks, credit unions or dealerships,
will likely have to sell cars at a loss.
Poor banks and lenders always
getting a shortened stick.
But there's more to this story.
You see, during the Pandemic, lenders gave out loans
with high loan to value or LTV ratios.
In this case, the value of the car.
If you have a $5,000 loan on
a $10,000 car, the LTV is 50%.
Now, an 80% LTV ratio is normal.
But the Pandemic was not normal.
So we saw many loans at 120% to 140% LTV.
That's like having a $14,000 loan on a $10,000 car.
So if the car is repossessed, lenders could actually
owe more money than the car is worth.
And this is compounded by the fact
that prices are falling for used cars.
And I'll be honest, I don't have a whole
lot of sympathy for lenders who jack up interest
rates or loan to people that they shouldn't.
But this got me thinking about how most people
felt about banks following the 2008 crisis and how,
even though the banks were the ones making bad
decisions, it was the whole country that suffered.
Part of the reason 2008 was so destructive was thanks to
subprime mortgages were packaged together and hidden among
healthy mortgages and sold as these nice
AAA rated mortgage backed securities.
It was like this nice investment burrito, except hidden
inside the burrito was a few pieces of investment dookie.
We all know how that panned out, but
it's a good thing that there isn't the same
kind of dookie investment burrito for auto loans as
there was for housing loans, right? Right?
Oh f**k, they don't even call them dookie Burritos.
They're called
if you want to sound cool.
But they work pretty much
like mortgage backed securities.
Auto ABS are created when lenders
sell their loans to a financial institution.
They're then bundled into a portfolio to sell to investors
who make money off the repayment of these loans.
And these Auto ABSes are a hot commodity right now.
- That Hansel's so hot right now.
Corporations have already sold $58 billion
worth so far this year.
That's 36% more than in 2020.
This is despite the fact that asset backed securities
of all kinds typically take quite a beating during
economic downturns, which we're in one right now.
Their justification is that even though used
car prices are coming back down to
earth, new car prices are still rising.
However, I think the risk
of this is severely understated.
Record numbers of people are defaulting on their loans
and this is only likely to increase considering the
ridiculously high interest rates many people are paying.
We've seen that lenders put themselves into vulnerable situations
on their high LTV loans, and the odds are
we're in the beginning of a recession right now,
which means this whole thing just could get worse.
Now, I do have a few thoughts about what we can expect
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Now, if you're thinking about buying a new car, maybe wait.
It could save you a significant amount of money.
at least little bit in the next six to twelve months.
The question is whether this will be a
gradual decline or a straight up bubble popping.
But if there's an autobubble explosion, will this
just crush the rest of the economy?
It won't be good for sure, but I don't
see it taking down the entire world with this.
Total consumer auto debt is about $1.4 trillion.
Let's say a bubble popped and
$500 billion of that collapsed.
This would still only be about 10%
of the loss of the dot com bubble.
So as long as you're not paying
75% interest, you should generally be okay.
Unless, of course, the auto industry is just the
first domino to fall, causing much larger industries to
also collapse, leading to the entire economy to free
fall into a pit of despair.
But until then, I'm Max Maher.
I'd like to thank you so much for watching
and I hope you have a profitable day!