IF YOU PLAN ON BUYING A CAR SOON, A BETTER DEAL MAY BE ON THE HORIZON

Which saying is more appropriate: “Time heals all wounds” or “Those that forget history are bound to repeat it”?    In 2008, individuals were highly leveraged and woke up after the Great Recession with a desire to get out of debt.  My, how quickly things can change.  Household debt recently eclipsed its 2008 peak.  Is this history repeating itself?

In 2008, household debt was concentrated in mortgage debt.  This debt was the main cause for the Great Recession.  At the time, mortgage loans were sold freely with lending standards almost non-existent.  Dodd-Frank was enacted to secure banks and raise lending standards to help stabilize the US economy.  Dodd-Frank did not, however, address auto loans or student loans.  As a result, many banks liberally loaned money for auto purchases (see first two charts below).  In many cases, it was the only avenue for banks to grow their businesses.  Many banks jumped into the game, especially sub-prime auto lending where the banks had little to no experience.  Today, we are seeing a rise in auto loan delinquencies – especially in the sub-prime area where almost 20% of those loans are now delinquent.  Student loans are a story for another update, but their situation is similar to auto loans.

Credit expansion has historically led to economic growth.  Fueled by expanded auto lending, car sales have been strong the past several years.  This has helped the overall economy grow.  With household debt at record levels, we can not rely on additional borrowing to spark the economy.  This is one reason why tax cuts which give businesses and individuals more money to spend is imperative at this point.  Otherwise, growth may stagnate.

Why car buyers should wait a few months for a better deal?

We believe one of the things you can expect over the next several months is lower car prices.  As you can see from the last chart below, consumers are tapped out on auto loans.  This leads to less demand for autos.  Less demand at a time when used car supply increases as delinquent autos are repossessed will lead to lower auto prices.  This pricing pressure should lead to lower used car prices and lower new car prices.  If you are looking to buy a car, it may make sense to wait a few months for this scenario to play out.  If you do, you likely will get a better deal in the months ahead – especially in the fall when the new car models come out and auto dealers are forced to unload current year excess inventory.