As the saying goes, never let a good crisis go to waste. I’ve already added a few stocks to my portfolio and I’m continuing to look for more value opportunities. During my research, the car market has caught my eye. Although, I’m not looking to invest in the auto industry.
Instead, I’m looking at car prices. There’s a good chance the used car market will crash in 2020. And already, we’re seeing early warning signs. Last year, I shared my research on the growing auto loan bubble. Total loans have climbed from $700 billion in 2010 to almost $1.2 trillion today.
Now, with this self-induced recession, the car loan bubble is set to deflate. If you’re in the market to buy a car, it might be good to wait. You’ll likely find better deals as more auto loans default. On top of that, car buying demand is decreasing in other areas. This will push prices down even further.
Auto Industry Recession and Slowdown
With many Americans forced to stay home, less rubber is hitting the roads. In my neck of the woods (Baltimore and the D.C. area), rush hour traffic virtually no longer exists. Of course, traffic will come back… but jobs on the other hand, not so fast. And as income has disappeared with jobs, less people will be able to afford car payments.
Since the Great Recession in 2009, the U.S. has added just over 22 million jobs to non-farm payrolls. It took over 10 years to add that many new jobs. But in less than two months, total unemployment claims have spiked above 33 million. And more will follow.
The government has stepped in with direct “Economic Impact Payments.” I got mine, along with a letter from the White House. Although, this isn’t enough for most Americans with lost income. The bulk of the recent government bailouts has gone towards businesses to prevent job losses and also ease credit markets.
To prevent a sharp downturn, the Fed is manipulating markets in an unprecedented way. And Modern Monetary Theory has some dangerous flaws. Although, that’s a topic for another time.
The chart below shows a drop in 10-year interest rates in red. The blue line shows the growth in total auto loans.
Lower rates make car loans more affordable. Although, the government can’t push rates much lower. Going below zero is possible but it’s not sustainable for the world’s reserve currency, the U.S. dollar. And anyways, based on the number of jobs and income lost, it won’t be enough. On top of that, there are some other trends putting downward pressure on car sales and dealerships.
The growing gig economy is reducing the need to own a car, especially for people living in cities. With the rise of technology, ride-sharing apps like Uber and Zipcar make getting around without owning a car more convenient. It’s also becoming more cost effective. It’d be nice to not have to pay for car insurance, registration, taxes, gas, emission checks, repairs and maintenance, parking costs, tickets, etc.
Automation will push down the demand for car ownership even more. Awhile back, I researched driving automation and put together a list of 25 driverless car pros and cons. Lots of people overlook the impact driverless cars will have.
That future is interesting to think about but it’s still a ways out. So, let’s dive back into what’s happening in the car market in 2020.
Used Car Prices Crash with Early Warning Signs
According to the Manheim Index, wholesale used car prices dropped more than 11% in April. That decline is month-over-month and it’s a 9.2% decrease from a year ago.
When there’s a big drop in wholesale prices, retail prices often follow. So, we’ll likely see used car prices crash in the months ahead. After the 2008/2009 crisis, we didn’t see total car loans bottom out until well into 2010.
The recent spike in unemployment will lead to more subprime auto loan defaults over the next year. Used car repossessions will put more downward pressure on the car market. It’s not looking good.
Auto dealerships are also struggling. Many of them operate on leverage. Cars on their lots are financed through bank loans. And the dealerships need to turn over their inventory to meet payments. So, with decreased buying demand from the economic shutdown, they’re forced to lower their prices to sell cars faster.
It’s a tough situation but it isn’t all bad. With any crisis comes opportunity for those who prepare. We know history repeats itself. And in the used car market, there will be better buying opportunities ahead. This isn’t the first car market collapse and it won’t be the last.
On another positive note, the collapse in oil prices is helping us all out at the pump. There are plenty of silver linings if you look for them. The decrease in fuel prices has also created another great buying opportunity. I recently bought shares of Exxon Mobil.