GM, Ford Credit Arms May Lose Billions on Car-Price Plunge | Hacker News Reader

GM, Ford Credit Arms May Lose Billions on Car-Price Plunge

bloomberg.com

> Physical auctions have been halted for weeks along with much of the rest of the economy.

Ah! That explains why I can't find a used car right now. We were actually searching for a used car before the pandemic, and I've been checking constantly assuming the market would be flooded with them.

Now I understand why the inventory stoped changing as did the prices.

Carvana still has thousands of cars.

Disclosure: I work there, I think we’re pretty neat.

Yeah, but not the one my wife wants. :) I check your site every week, but as far as I can tell, the inventory isn't turning over much right now.

I don't know if you can share publicly, but if you can, I'd love to know what the inventory turnover rate is right now, or at least how many new cars are added to your platform each week.

Sorry, I’m not 100% sure what I can share. But I do know that we are still adding cars to the site daily.

How do you sell used Teslas for more than new? Started seeing this frequently over the last couple months. Makes it hard for me to pull the trigger

Today's: https://imgur.com/a/A2PbB7J

As unbelievable as it sounds, there is a whole segment of the car-buying public that is so convinced that used cars are always a better financial choice that they won't even look at new cars. I had this exact observation when talking to a used car salesman at a lot that sold both new cars and used ones right next door to each other. His used cars of the same model were more expensive than the new ones (which had big rebates). I asked how that even worked, and he enlightened me that it isn't the same market for the same customer, so it doesn't matter.

When is a new car a better financial choice?

Mostly when it's cheaper

Buying a car is never a sound financial choice.

That being said, if you buy a new car from a company that is known for solid resale value, you keep it for a long time, and you maintain it well, you may end up with nearly the same TCO over 10 years as a used one.

Timing can also work in your favor. If you buy a new car when car sales are down, once demand picks back up, the value of your car will rise along with demand. Not saying you'll make money on the deal, but that depreciation can reverse. Take 2009 for example, car sales in the US fell by nearly half. So if you bought a new car for $20k, it might have been worth maybe $13k or so on the used market in 2011, but by 2013, used car prices were going crazy and the same car might have fetched $16k.

I've been tracking the monthly value of all my cars in a spreadsheet for a decade now. It's kind of interesting to watch how much the KBB value fluctuates each month.

Is now a good time to sell a solid used car? I guess, if I’m in a strong financial position and have a used car and plan on getting something new, am I better off trying to sell it now or before the Coronavirus hit? What do you think?

So the used car market doesn’t know what Covid-19 means exactly to car values. Sales across the industry are down, and auctions have halted. So price discovery is harder than usual.

So it could be a good time because prices may fall further, or maybe not they may bounce higher. It’s likely not better than pre-covid, but so many things influence the used car market that it’s pretty up in the air right now. I say if you get a value that seems fair to you, then it’s a good time to sell.

Edit: also depending on your state it may make more sense to buy and trade the car in the same transaction. You can get some pretty hefty sales tax benefits from that.

There's some interesting videos of giant parking lots just filled with cars for sale right now -- randomly found one the other day:

https://youtu.be/AzD5u_fLo70?t=1400. (23:20)

Fascinating!

It’s a well known effect that for big-ticket items, liquidity drops before prices fall. Given a choice between selling at a big loss and just sitting on the asset, people will choose not to sell. That’s what happened with houses in the last recession.

Yeah but in this case the liquidity drop is artificial -- trading has been stopped.

It's hard to imagine anything other than a flood of used cars at some point in the near future. It sure feels like a lot of people are going to be cash-poor, and need to sell whatever they can. I have no idea how lenders approach repossessions when they might be stuck with a vehicle they can't sell because of a glut on the market.

We were going to replace our 15 and 20 year old vehicles this year, but we're holding off for now. We're hardly driving anywhere now, and who knows what the auto marketplace will look like over the next 6-18 months.

Maybe? Most people need their cars. It would seem that the far more common pattern would be to hold off replacing a used car that's still serviceable.

If they don't have a job to get to, they might need the money a lot more than the car. :(

You can get some amazing new car deals right now (the sellers are desperate for obvious reasons) and load rates are super low too.

If you need a new car and can still afford it, now seems like a great time to buy.

If you're looking for a used car, the consensus in this thread seems to be to wait a couple months as the market is flooded.

> You can get some amazing new car deals right now (the sellers are desperate for obvious reasons) and load rates are super low too.

I was going to say the same thing, Nissan has been in dire straights since the whole Ghosn fiasco [1] (a very interesting read into the shady business practices, geopolitics and nationalism within the International Auto Industry) and are giving out sweetheart deals.

A family member just upgraded to a new Altima with $0 down and 3 months covered, free delivery costs and because of their stellar repayment on the loan got instantly approved on a 1% interest rate on financing through Nissan itself.

I will say this as a person that worked in the Industry, specifically at VW during the diesel-gate scandal and buy-back program: VW never went that low on financing to sell cars as they were hemorrhaging Billions and their execs were being hunted and getting thrown in prison.

If we 'did our jobs correctly' in handling the customers most would just use their most of their refund checks as down payments and buy another one with a 5%+ 'VW loyalty' rate.

This is a buyers Market, even Toyota [2] is asking for lines of credit right now things are so bad!

I'm personally holding out for details from Elon/Tesla where the Cybertruck is being made to determine my next car. Giga Berlin is apparently going to be a Model Y factory to start.

1: https://www.bbc.com/news/world-50964040

2: https://www.bloomberg.com/news/articles/2020-03-27/toyota-sa...

On the other hand, are people going to crowd into busses and onto trains right after a pandemic?

We won't really know until it happens, of course, but perhaps the glut will be new cars, not used -- if a lot of people change their purchase decision from a new car to a used one to save a few bucks.

That's fine though. The main reason to buy used is to save money, but if the new cars drop to used prices, then you get a new car and save money!

New car production can be stopped. Vehicle repossessions/auctions can't. For that reason alone there shouldn't be a glut of new cars.

I wanted to sell my financed car and buy something else in cash, but I don't think I'd be able to sell it now and there isn't much on the used market, like you said.

I'm sure some deals will be a bad in the next few months but at the same time I'd take a hit on my current vehicle so I might just sit tight.

I've been looking too and been confused why there's hardly anything on craigslist right now, and what is there is mostly junk compared to normal.

There was talk of a vehicle loan bubble in months previous. I wonder how that impacts the feasibility of these financial arms of car companies's bottom line?

Is this another bailout target?

The sub-prime loans were likely priced correctly and with the expectation of a recession during the 84-month loan term.

The problem is leases. They are really attractive products for institutions because they get prime-rate buyers to pay sub-prime interest rates on an expensive vehicle. Dealers love them because it's easy to hide BS fees and overcharge people who are shopping on monthly payments.

However, it's so easy for a lender to lose their ass on leases. The lenders promise to buy back the car at some fixed price in the future. And finding the right price for a residual is a delicate balancing act, if it's too low then the monthly payments are high and there's likely some missed sales, and if it's too high then the lender has to pay above market value for the car.

Last year, the F Series truck sold nearly 900,000 units. Ford doesn't report their lease/purchase breakdown, but I expect it to be at least 50% of sales. Meaning, for every $1,000 their lease residuals fall, they are losing at least $450,000,000 per model year. And that's just looking at their trucks.

Not only that, Ford earned that sales money when times were good, then used the profits to pay out dividends and buy back stock. But now, their lending arm has to pay for this mistake when times are bad.

Granted, the F Series and other trucks are an outlier. A good selling car (or crossover) moves like 300k a year. But still, I have to imagine that even Rav4s and the like have a lease %.

This will be a bloodbath.

Edit: for reference, Ford's EBITDA were hovering in the low $10 billion range for the past five years.

Not surprised really...the car market, both new and used, must be taking a huge beating. Job security and loans plus "oh gee, do I want to be in a random person's car"

Home sales is probably worse though. No live-in sellers want buyers wandering around, and both sellers/buyers are almost 100% "wait it out".

Curious if there's a loophole here for the greedy.

That would be a really ambitious greedy loophole taker.

We were planning to put our house on the market May 1 with plans to move by July. We are actually a year later than we wanted to be "because life" and now we likely could be another year before we can implement our move.

I guess in a way we are lucky. If we had moved last summer, we would probably have an 80% finished custom home build in limbo right now.

Sure...you wouldn't be the target for the greedy. There must be, though, a pretty good market of people that HAVE TO sell or buy for job relocation, "need the equity", etc. And nobody really serving that in this environment.

And I say greedy, but there's a lot of room between the "we will give you half market value" and regular realtors right now.

I was driving through a very small town in Missouri a few weeks ago. A small used car lot advertised "disinfected and sanitized cars."

The new "undercoating?"

Yeah. There's a lot of ads right now for "at home shopping and delivery", etc. I wonder if there's any layoff statistics for car dealerships. It almost has to be terrible, new or used. Financial risk, coupled with "where would I drive anyway" and "I don't want to touch a bunch of used surfaces and sit in a car with a random sales drone".

Oddly the Subarus dealers I’ve contacted don’t seem eager to sell anything to me, maybe because I’m asking about the hybrid. I’ve contacted 5 of them and they really don’t try to sell at all.

And the ones I’ve emailed have put in zero effort to actually pay attention to what options I ask about. It’s weird.

Interesting. Maybe something to do with corporate vs local? Surely the local people get it? Now's the time to "deal".

So how exactly will they lose money?

Do they think people will default on their car loans due to unemployment, then the lender won't be able to repo and sell the car for enough to recover their losses due to low demand for used cars?

Or do they still think they'll make money on their existing loan portfolio, but be unable to roll maturing loans into new loans, because people will put off buying cars?

Because they will sell less cars. That means they hold more cars. More cars that are depreciating. They will drop prices to move cars. That means less profits.

cars were now too expensive for common people to begin with. now they're offering 84 month payment terms. when I arrived in america in 2012 car terms were 36-48 months. & when you look historically at car prices compared to wages, the situation is even dire

n I won't even mention the lemon market i.e sub prime market for used cars. were lemons are shifted amongst poor people like a dirty dollar bill through repos and crazy terms

We are living in strange times. If your credit is good, most automakers are offering no interest loans and also not doing the normal trick of making the no interest loan price higher to cover the spread. Very desperate to sell cars.

I have a lease ending in June and really trying to figure out if there's any waiting I should be doing or just get another one in June. I feel like I'm a few months too early.

Maybe I'll have to wade back into actually owning a vehicle if the prices absolutely tank.

Rentals are cheap now.

I drove by Kansas City International airport today. The peripheral lots were empty, the shuttle buses were parked; probably an indirect indicator for rental car demand.

In the spirit of today's negative crude price, maybe rental companies will pay you to rent a car.

>Maybe I'll have to wade back into actually owning a vehicle if the prices absolutely tank.

I would assume that if used car prices plummet, residual values on leases will fall, making the leases more expensive.

Lightly used vehicles will be where it's at.

Not necessarily, leases are determined by the difference between the residual value and selling price, not MSRP. Automakers will likely pile on incentives to reduce the selling price.

Since car makers have their own finance arms, the residual prices will likely be kept artificially high. This allows them to kick the problem down the road until lease expiration.

If I'm following your Hypothesis right, you're suggesting that maybe they will artificially deflate the cost of a lease to move them, and then pay the price when they get them back because they're worth less than estimated at start of lease?

... or just give incentives up front on the MSRP. Manufacturers do both, it depends on how the details of the accounting play out.

probably depends on the car. I was leasing a bmw 3 last financial crisis, and I heard from folks whose end-of-lease was coming up were offered heavy discount on their cars if they buy them out instead of returning. (like $5000 off residual) I don't think the sweet deal lasted too long though.

If you’re leasing a new car, now is as good a time as any. I think most dealerships would be really happy to move even one car off their lot this month.

I want to. They're all closed here (SW Ontario).

I think the world is heading into a deflationary crisis. We're just starting. Corporations seem to think they are immune. Governments cannot do much to stem this crisis. People should be ready to brace for more shocks. When we reopen, we'd still be in recovery mode for at least a few years.

Unless we print money. Lots and lots of money. I am counting on that happening, or else on total collapse of everything.

Printing money defaces the dollar to the world. You can never create value, even by printing money. The system will rebalance because nobody works for free and everything is sold to the top bidder.

Printing money does deface the dollar.

However, it can destroy or create value, depending on how its done and why. Words like 'never' and 'always' are rarely true in economics. Value is being destroyed through debt defaults, layoffs, and bankruptcies on a massive scale right now. Inflation would almost certainly destroy less value.

My expectation is we won't get out of this without either:

(1) An economic collapse

(2) Cleverness

(3) Inflation, to where post-pandemic prices are a small multiple of where they are today (e.g. 2-10x).

(4) Mass death and disability (people underestimate the economic impact of having a big portion of the population disabled by COVID19 for the rest of their lives)

Inflation seems like among the lesser of the possible evils right now.

Paywall-free link: http://archive.is/A9DZT

(Because why should I have to reset my cookies to read the news?)

Last paragraph of the article:

    GM and Ford’s captive-finance
    companies and Ally are doing
    what they can to limit their
    contribution to the glut of
    used vehicles hitting
    auctions by offering
    extensions to lease
    customers. “That helps to
    manage the supply dynamics
    relative to demand and we
    think that overall positions
    the market to be stronger,”
    Laclair said.

I suspect this is likely legal, but when I read it, I got this feeling like "that doesn't seem right". How can it be acceptable for a single private entity to control that much of the market?

It's certainly manipulative. The reality is that cars should be less valuable right now and for some period of time after an event like Covid19.

I have a lease that's up in May and have been offered an extension a few times. They are even incentivizing it by keeping the price the same which is interesting when you factor in lessee contributed cap cost reductions.

It’s cheap money on their part - keep the car in your hands and on your insurance for 3-6 months until the market settles.

There are three different entities mentioned in that quote, along with rental car companies and the leasing arms of the other automakers. And yes, of course these major volume producers are taking steps to limit their losses. They aren’t colluding, they don’t need to. It’s not illegal, nor unethical. Nobody has an obligation to dump cars into a falling market.

It's an option. Being able to put off car shopping for a while is worth something, and probably worth more now since it's a good time to avoid shopping in general.

You still need to be smart enough to decide whether it's your best option or not.

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