The Auto Market Bubble Just Popped

The website CarGurus found that 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. It's also worth noting that - year over year - crossovers are down 6.3%, hatchbacks are down 9.14%, Wagons are down 9.79% and vans are down more than 10%.Show more

THE CAR DEALERSHIP PROBLEM:
Because Auto Dealerships buy cars on loans, rising interest rates are causing their inventory to become significantly more expensive to hold than it was in the past. As a result, many of them are making much less money than before and very motivated to sell.

THE AUTO LOAN BUBBLE:
Many banks and lenders issued loans on cars that were selling much higher than they ever should’ve been, simply because demand was high, inventory was low, and money was cheap. But today, buyers are underwater by an average of $6000 when they trade it in - meaning, they owe $6000 more on the car than the car is worth.

CAR REPOS ARE INCREASING:
Bloomberg just recently reported that “Car Owners are Falling Behind on Payments at 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 6.11% in September, the highest in data going back to 1994.”

BANKS ARE PREPARING FOR DEFAULTS:
Banks are now a lot more cautious about who they lend money to - this means that getting an auto loan is much more difficult today than it was a year ago. Auto Loan rejections are also occurring at the highest rate in 10 years, with banks now writing off some of their loans as complete losses.

According to CNN, “analysts predict that auto loan delinquencies will continue to rise into 2024 and peak at about 10% before they start to fall.” The bad news, however, is that car prices are still 33% more expensive than they were, prior to the pandemic - it's unclear if prices will fall below that level anytime soon.