One fond memory I have of the pre-recession era was cheap cars. A pristine 1992 Mercedes 190E in a garage kept red that I bought for $1000. The two year old 2002 Infinit Q45 that I bought for $23,600 and sold for $32,500. Heck, even the beaters. Old late 80’s Town Car’s and Crown Vic’s with only 80k or so. The last of the good Saab 900’s. Volvo 240 wagon’s that had been given Volvo OEM components from day one. All of them I bought for $500… or less.
It had been a great time to be a used car dealer and an automotive enthusiast. I sold over 150 vehicles in a space the size of a driveway and had plenty of time to travel, do some local bid calling, and begin my writings at TTAC. I was a happy man.
Then it all went to the proverbial pot. 1000+ new car dealers got shuttered and the remaining dealers looked at their sleds (trade-in’s that were $5000 or less) as new sources of revenue instead of assets that needed to be liquidated on the cheap. The finance fodder that had guided new car sales went the way of irrational exuberance and liar loans.
Buy-here pay-here dealers quickly began to occupy the gaping void that had been left behind in the conventional finance markets. The bidding wars at the auctions soon began and what was once a $700 throwaway vehicle soon became a $1500 car that could now make over $3000 if you could market it right. A low-end 12 year old Taurus which would have usually financed for $500 down and $50 a week for 12 months now fetched $700 down and $60 a week for 15 months… then it was 18 months. Now it’s two years plus a healthy smattering of bogus fees.
One reason is because that same 12 year old Taurus is likely fetching more than $2500 at the wholesale level. Millions of consumers need wheels now and the manufacturers and the banks aren’t able to finance them. Bad credit. Bankruptcies. Repossessions. Judgments. Foreclosures. All these issues that used to be exceptions are now as common as Wal-Marts in most areas of this country.
I expect folks to have at least one of these issues. Whereas beforehand I would always sell these cars for cash and be done with it. Now I can’t. My $1500 to $2500 cash licks have largely gone down to a $300 to $700 level, with fewer of them. Wholesale prices have gone way up. ‘Good’ inventory has gone way down. To the point where you now go to an auction and 90+% of what you see is junk that was hoarded by dealers who now try to get the premium prices that come with tax season.
There is a magic spigot that will end most of this. Credit. Or to be even more precise, credit scores. Once consumers begin seeing their past transgressions fall off their credit reports, the used car market will begin to slowly decline. That is assuming that a ‘black swan’ event doesn’t happen between now and then.
The foreclosures and credit card deficiencies that began in earnest on early 2007 should begin to be cleared off consumer’s beacon scores by 2014. Seven years is usually the limit for these items and despite the usual self-anointed labeling of buying behaviors, we are not a nation of fiscal conservatives. Between keeping ‘Old Reliable’ and buying the new car, most sub-prime consumers opt to play the part of the rich man by remaining a poor man.
Will that be the end of the highly priced used car? Nope. From late 2008 to early 2011 there was a massive reduction in new cars built. This should lead to continued high prices for used cars in the times to come.
But who knows? Maybe the purchase price for new vehicles will decline by a third (in real terms) as it did between 1994 and 2009? Perhaps the number cf components needed to make a car will continue to decline? Or cars may become modular with electric batteries taking the place of their internal combustion engines? There are millions of what if’s in this business.
Excellent post, Steve (as usual). When you write about the vagaries of the used car business, I feel like I’ve gotten a secret view into a mysterious world. One point: you mention “black swan” events. They are not only unpredictable but extraordinarily rare (and not even necessarily bad). I’d guessing that there are numerous possibilities for somewhat-more-likely events to occur, but good luck in figuring what they might be. Market guessing is a lot like market timing. Very seductive to try, certainly, but ultimately a fools errand. I don’t envy you’re trying to calculate what to do next.
So once again the only constant in life is change. Although lately I am often reminded of the old adage: “May you live in interesting times.”
Curse, not adage.
As an educator I can tell you it is both. ;)
Very interesting indeed. I had to replace my aging truck that was dying of old age/very high (read, extreme) mileage with a much newer vehicle and because of my current employment state (FT but with piss poor hourly wage), I could not swing a cash payment down, nor could I really afford anything terribly new.
After a quick car buying calculator run through, I found I could not really afford much beyond $160 a month payments on my current budget and that was assuming a 72 month loan and pre-approval of $20K so I may be able to finance a new car (Fiat).
Well, reality set in when I could not get that kind of loan (pre-approval from my credit union) and ended up having to go much older and found, at a new car dealer, a very nice 2003 Mazda Protege5 that they were selling. It’s original price was $8422, but because of my lower than expected score (not wretched, but not fabulous either) and still lacking plenty of credit history, plus, the car had 110,680 miles on it, many lending sources would not loan money on a car that was over 100K miles. After several days, the dealer found a source in Chase Bank, Despite my score, I still managed a 48 month loan (all we could get), $173.36 monthly payment at 10% interest rate, not too shabby but to make it work, the dealer (Honda dealer at that) had to lower the price to $6400 on the car though. Out the door with $1000 trade on my dying 92 Ranger truck, $1100 down (thanks tax return), with license (pro-rated due to having been renewed in Nov), tax and GAP insurance, I financed just over $6K total, not bad I say.
So far, I love the car quite a bit and it has a few things I’ve never had in a car before, like leather and a sub woofer and keyless entry.
So that’s one saga of the times we are in.
@Ciddyguy
“GAP” is not actually insurance it is an agreed forbearance by the lender to forgive the underinsured amount if the vehicle is totaled in an accident and the actual cash value is not enough to cover the loan balance. Note that you bought a car that was already depreciated, and you paid essentially $2000 down. What this tells me is that the ACV should never be below the expected insurance proceeds. In most cases GAP is really a DVF (dealer vacation fund). BTW, if you have to buy GAP as a condition of receiving financing, GAP should be disclosed as part of the finance charge. Actually any credit life or disability insurance that you have to buy should be treated as a finance charge on the contract. Credit life and disability coverage is usually a bad deal. You can get better coverage for less elsewhere.
Conslaw,
You are right in that it simply covers the payout of the loan. I was given this and an actual insurance, but the finance gal said the GAP is the better deal for one, it’s less than the insurance itself, and two, it will cover the residuals that are left, should the car get totaled while I’m still paying on the loan, especially if I’m still considered upside down on the loan (usually the first 2 years or so of the loan for a 48 MO loan).
She said it’s less expensive (about $10 a month it came out to be) but it will cover what the insurance company (mine in this case) doesn’t cover, ie, the loan as the insurance will simply cover what the car is worth and without GAP, I’d be left still holding the bag when it came to the loan itself.
My site Supervisor learned that the hard way. 2 years ago, he and his wife bought a Saturn Vue (I think a 2007 MY), didn’t get GAP at the time of purchase and this past fall, his wife got hit and the car was totaled, they were still technically upside down on the loan when it happened. So now he’s holding the bag I believe and they now have another car, a similar age Mazda CX7 SUV and they now have GAP on it, lesson learned.
I have also been told by our print center lady on GAP, if you pay off the loan early, notify the dealer and they’ll then notify GAP and you get money back, based on when you paid off the loan and how much remains before the end of the loan’s term, and the payback may be substantial (the portion you don’t use in effect from what I understand)
It was all discussed at the time I signed the initial papers for a loan we thought might work but in the end, Chase took the risk and my GAP with set up with that loan.
She was the one who recommended the GAP as it covers the loan so I’m not holding the bag and for the price, well worth that peace of mind.
I know someone else who lost his car in a flood and he was thankful for the GAP for he still owed on the loan when his car got totaled in the flood.
“Between keeping ‘Old Reliable’ and buying the new car, most sub-prime consumers opt to play the part of the rich man by remaining a poor man.”
If old reliable truly is reliable then it should be kept. But, a new sub-$15k car is probably a lot smarter, as a daily driver, than a used car right now.
A cheap new car can be driven into the ground, and will still have decent re-sale value with those desparate for any transportation.
People really have no idea what new cars cost, I always laugh when I see used late model Japanese cars being sold at CarMax for more than they could be had for new.
And I don’t really forsee a used car bubble to pop anytime soon.
The problem with Average Wage vs CPI is that the CPI excludes the cost of food and fuel, and a few other things – which would reveal the wage stagnation this country is experiencing is even worse than the CPI numbers would suggest. Total purchasing power for the average wage earner today is significantly less than thirty years ago – and there is less debt (leveraged from real estate “assets”) to make up the difference, which had been virtually the only reason our economy grew through the 1990s and 2000s.
That is 100% correct. I won’t even go headlong into some of the more screwy elements of the CPI. Such as how healthcare is weighed and the ‘hedonistic adjustments’ that are done in an arbitrary manner.
“That is 100% correct.”
Actually, it isn’t:
______________________________________________
Has the BLS removed food or energy prices in its official measure of inflation?
No. The BLS publishes thousands of CPI indexes each month, including the headline All Items CPI for All Urban Consumers (CPI-U) and the CPI-U for All Items Less Food and Energy. The latter series, widely referred to as the “core” CPI, is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI.
Most importantly, none of the prominent legislated uses of the CPI excludes food and energy. Social security and federal retirement benefits are updated each year for inflation by the All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W). Individual income tax parameters and Treasury Inflation-Protected Securities (TIPS) returns are based on the All Items CPI-U.
“Common Misconceptions about the Consumer Price Index: Questions and Answers” http://www.bls.gov/cpi/cpiqa.htm#Question_1
Of course there is no single “true” CPI. Every consumer experiences an overall inflation that depends on exactly what he buys, so there as many possible ways to figure CPI as there are consumers in the US.
Maybe some people’s experienced inflation rate really is 10% today; I suppose all it would take is a high consumption of gasoline to get there. Certainly we will be paying the piper for having allowed ourselves to remain so utterly and increasingly dependent on oil when the warning signals have been going off since 1973. And no doubt with an exceptional unemployment rate lots of people are feeling at least that much loss of purchasing ability.
But having lived through a time when most consumers were in fact experiencing typical inflation of near 10%, I would say if anyone thinks we are truly near that now he is wearing his tin-foil hat three sizes too tight.
Steve,
Great article.
As to your statement on CPI, see my comment below (and ‘safes milk’ made a reference to SGS, too, for purposes of getting to a more accurate inflation measurement).
The economy is recovering, according to the newspaper headlines, cable news networks, Good Morning America, radio broadcasts, your local action news at 5 bubble headed bleach blonds & national anchors on the highly scrutinizing national network news at 6:30 pm.
That’s probably why everyone is so confused. They look at their neighbors, families, friends and communities, and can’t reconcile what they’re being told daily from the highly credible main stream media pundits and prognosticators with what they see and hear in their hometowns.
actually, it’s more correct than not. without getting political on a car site, the government does not compute any of the cpi figures the way they used to do it. there is a whole industry of alternate statistics. shadowstats.com estimates that cpi-u (includes food & energy) is actually above 10%, if you use the methodology from 1980.
http://www.shadowstats.com/alternate_data/inflation-charts
Of course there is no single “true” CPI. Every consumer experiences an overall inflation that depends on exactly what he buys, so there as many possible ways to figure CPI as there are consumers in the US.
Maybe some people’s experienced inflation rate really is 10% today; I suppose all it would take is a high consumption of gasoline to get there. Certainly we will be paying the piper for having allowed ourselves to remain so utterly and increasingly dependent on oil when the warning signals have been going off since 1973. And no doubt with an exceptional unemployment rate lots of people are feeling at least that much loss of purchasing ability.
But having lived through a time when most consumers were in fact experiencing typical inflation of near 10%, I would say if anyone thinks we are truly near that now he is wearing his tin-foil hat three sizes too tight.
Excellent post, Steven… Your words could apply equally to the current housing market… We are holding onto both our vehicles, which have 190,000 (Ford Bronco) and 195,000 miles (Subaru Impreza), respectively… So, we shall be buying a new car in the next couple of years, and, unlike most folks, we have an excellent credit rating… I looked at a four year old Subaru on a local lot: $16,000! Told my wife: “For a couple thousand more, we could buy a NEW impreza!” which is what we shall do, around 2014 or so.
Great post as usual Steve. Yes, I wholeheartedly agree the used car market is crazy high. As an old car guy, “I am always in the market”, and in my near daily excursions to several online sites the asking prices both dealer and private just amaze me. Especially on high mileage(100K to 175K) cars and trucks.
I want to get a newer road car for my coast to coast forerays. My 2002 Buick Century, 105,000K miles worries me for a long distance trip. In all my searching over the past months, I have arrived at what I believe is the best “value” buy on the market today………A used 2011 Chevy Impala.
There a literally several hundred of these for sale in the Salt Lake Valley. As they are a mainstay of rental fleets, they turn over at auctions like crazy. I have my eye on a few(LT, leather, sunroof, under 10K miles for between 17 and 18K(asking price). If I want to go to a LS I have seen them as low as $13,500. I know they aren’t “cutting edge” but they are a size I like, good hiway mileage, dependable and I actually think the styling is nice…………and they’re damn near new.
great post, steve. i can get a better feel for our economy reading your take on things that i do from the wall street journal. btw, i intend to keep my 2002 volvo xc70 as long as it will have me.
So there are benefits to those who live within their means, pay their bills on time, and work hard?
Guess I EARNED the ability to buy a new car if I want to.
I won’t be buying a new ride for awhile, but maybe I’ll get some respect the next time I venture into a dealer and they run my credit….
This makes me happy…
I didn’t realized how high the used car prices got until we went to look at them. In 2009 I got a fully loaded Jeep Liberty, CRD at that, 24k miles, for $19k. Flash forward we were looking for a car for the wife. Around $20k. Was going to the slightly-used route, until the slightly used cars were as much as the new cars!!
I thought we were screwed, as her credit was ruined by identity theft, and I wasn’t even in the system. But cash is king, and with $4000 down we got a 2012 Mustang at 3.9% APR. In my name only, but I think that’s pretty good for somebody who had no credit history what so ever.
There is a way around this though; buy something old, really old, and rebuild it yourself. I have a 78′ Chevy Malibu for a daily driver. I don’t even have $3k into. It runs great, drives great, virtually no property taxes, cheap to insure, and really cheap to fix and keep running.
“Maybe the purchase price for new vehicles will decline by a third (in real terms) as it did between 1994 and 2009”
I’ve seen a couple of hard data points that back up this observation.
Earlier today while browsing at a Private Party Rental Space Car Lot I saw a loaded 2004 Grand Cherokee where the seller had saved the original window sticker that showed MSRP of $42k Earlier this month a family member purchased a 2012 Grand Overland Summit Grand loaded with more airbags and technological dodadery for $50k.
While researching the Subaru Legacy for Curbside I came across pricing data from the early 90s. The 1st Gen Legacy sold for ~$26-29k versus $18-22 for today’s comparably sized & equipped Impreza.
I heard a radio ad for a local Chevrolet dealer this morning, five-time champ Jimmy Johnson’s store. The ad boasted that they ‘got’ 4.9% financing on a new Malibu for a customer with a looming foreclosure and a 500 credit score. It sounded like a parody.
What we need is a government program to handle new car loans. Let the student loan folks run it. No payments / no interest for 4 years, 1% interest after that, approved for $100k with zero income and regardless of odds that you’ll ever get a job with enough income to pay it back and if you do need to make payments, just buy another car and get a deferment!
Then the price of new cars can skyrocket!
Introducing the 2020 Kia SUXX 4000 sub compact, perfect first car for your teenager, only $99,999 with 3 co-signers!
It will be great, until it isn’t.
If Obama’s cabal wanted to promote private car ownership, we’d already have this.
I don’t see used car prices going down anytime soon. It’s supply and demand: the demand for good, used cars being much higher now due to more people in this country not being able to afford a new car than before the latest economic bubble (housing, and the dot-com bubble before that) popped.
My wife and I are both working, with two kids in daycare. Our financial situation is worse than 5 years ago with the savings account at about half of what it used to be. Energy costs are up significantly, both for the home and for the two daily drivers. We won’t even talk about the grocery bill. And our pay has basically been flat for the past few years. Discrecionary spending must necessarily decrease unless we want to load up the credit cards (which I do not).
We drive 10-15 year old cars and I do my own repairs. I just spent $750 today to put new tires on the minivan, as I have been running used tires on it and the second used set was almost done.
The engine just expired in my 1996 Civic with 172K miles on it – no compression in one hole. I’ve got a used engine and tranny sitting in the garage ready to drop in. I’ve got to get this car running again as it gets 35mpg average so I really need to be driving it. Needs timing belt/water pump & other stuff before reinstallation, so probably a few hundred $ in misc. parts plus my “free” labor to get it back on the road.
I really, really WANT to believe that things are going to get better, but speaking for myself (and muttering a lot of bad words under my breath every time I check the bank account), it’s OK, but a new car is not something I can ever see in my future. Don’t take this the wrong way, as I am VERY thankful that my wife and I are both employed. But it seems that we’re still slipping backwards on the treadmill . . .
Speaking from experience, I had to analyze my fixed costs to alieviate financial strain: I dumped my house (for a big loss) and now rent. I have enough cash now that I can go out and buy a brand new Focus ST with cash if I wanted to. That’s a big IF.
It all stems from changing your life style. Sure, I miss owning a home and the stability associated with it, but the trade off was worth it to me. I also cut the hypothetical ‘cord.’ No more cable, no more expensive internet. Just a simple cell phone plan.
The economic trials we’re going through were brought on my our unsustainable lifestyles. And yes, you’re lucky to be both employed. My changes stemmed from a divorce and being laid off. It was definitely a wake up call.
Even better, credit scores screw the most financially cautious.
I own everything I have free & clear including both cars. I have *zero* debt, and paid my student loans off early(ten years ago). Every bill gets paid on time every month and Stuff like renters insurance gets paid up front in 1-year chunks. I have never defaulted, never missed a payment, etc. I have money in the bank(though not a lot, I am still on the low end of the economic spectrum).
However because I never happened to need a credit card, and because I have been careful enough with my money to be able to buy what I wanted up front in cash so I’ve never needed a loan. With all this I am aparently a *terrible* credit risk. My score barely cracks 600. So apparently I am a worse risk than people I know who have had repos or debt collectors.
So if I *wanted* to contribute to the economy in a big way, like by buying the house I keep looking at, I’m effectively locked out by the current system.
Unfortunately, no credit is just as bad as bad credit. Get a credit card and use it to pay all of your bills and just pay it off every month. Your credit score should start to climb.
I think pch works for the government.
He’s old reliable in defending the credibility of the (laughable) official statistics put out by the gangsters in D.C., whether regarding unemployment, GDP growth or the rate of inflation.
The CPI puts world class contortionists to shame in terms of manipulation, twisting and compressing.
If anyone here wants to know what the reported inflation rate (or unemployment rate, for that matter) would be if the government was utilizing the more accurate methodology PREVIOUSLY utilized for measuring it (for some ‘odd’ reason, the BLS and Federal Reserve have “reformulated” their methodology of calculating it as of late…hmmmmm), you can get the actual figures on economist John William’s SGS site.
Here’s what would be the ‘official’ inflation rate using the methodology used way back in the ancient days of the 1980s and 1990s versus the ‘official’ rate reported today (hedonic adjustments and not taking food or energy prices fully into account really has a profound and downward affect…hmmm):
http://www.shadowstats.com/alternate_data/inflation-charts
Wow, look at that difference!
But I’m sure it will be said that I’m naive to think that the government or any of its multitudes of sub-agencies, let alone the non-governmental Federal Reserve, would do anything as sinister as to intentionally underreport the rate of inflation (or unemployment), because…you know… that’s just crazy talk.
“I think pch works for the government.”
Well, now my cover is blown.
Now that I’ve been outed, perhaps it’s time that you, my agents and I became acquainted. Step outside, and you’ll find me in the black helicopter hovering to your left. (No need to wave, our facial recognition software will locate you immediately.)
I don’t see any black helicopters.
I just see the Beard throwing federal reserve notes from his helicopter.
By the way, which tri-area of government leechery do you live in? DC, Virginia or Maryland?
“I don’t see any black helicopters.”
That’s good. The tech guys will be pleased to know that the stealth equipment is working.
Can you hear us hovering? We’re still working on the rotor noise.
http://lh4.ggpht.com/_sd4aOA0Ur-I/TdMYKylxgJI/AAAAAAAAQAQ/d-RCmX75y_s/_bernanke-helicopter%5B5%5D.jpg
I bought a new car about 5 months ago, a Mazda2 Touring, for right at 16k, but with $8k cash down. I’m pretty happy with my $200 payment for a new car that does everything I need and I don’t have to worry about any financial surprises with my mode of transportation. With a prompt divorce after signing the papers on my car, it’s just me and the Mazda now. Only debt I have. Sold the house, credit cards are paid off. Money in the bank. Ready for the worst.
If I were actually looking for a car to get to and from work and couldn’t get something new, I’d likely look at something fully depreciated and take my chances with a mid 90’s Civic with a toolbox, gallon of water, and a quart of oil in the trunk ready to go.
DeadWeight Apparently you haven’t noticed that this is a car site! Many of us are more than a little fed up with your rants, so please go away and don’t come back if you have nothing related to cars/auto industry to write about.