By on August 4, 2011

Last night I sold a car. Not just any other vehicle but the ‘family’ vehicle. A 2003 Honda Civic Hybrid that I purchased three years ago for $6500. For 50,300 miles it proved to be a perfect fit for a family of four. My wife loved it. But with used car prices outperforming in a three year period what the Dow couldn’t attain in ten I decided to cash it in. The price three years and 50k later? $6450.

I wasn’t smart when I got that price last night. I was lucky.

So were a lot of other people. I posted an article about a month ago about how used cars are in the midst of a bubble. There are a lot of ‘symptoms’ that people see as causes. The lack of new car purchases. A ‘new frugality’ driven by media fashion and economic need. The death of nearly a dozen car brands that made the bulk of second-rate products over the last fifteen years.

But there is one other ‘big’  thing that is stirring all of it up. Credit.

A lot of you are already familiar with the consumer credit so I’ll make it brief. Credit scores have declined considerably and with that obviously comes a delay to ‘access’ the credit needed to buy a new car. Some may be able to buy a car in a few years when their credit report improves. Others may take seven or ten years to get back in the good graces of the banks and finance companies that make up today’s auto loan market.

OK, that’s all nice and gloomy. But here is how it effects the used car market.

Today a lot of these folks who had bought new or CPO are now buying their vehicles through buy-here-pay-here lots (BHPH). The average payment at a BHPH lot is now around the $85 a week level. In otherwords, the payments have not gone down for most car buyers at all. Just the type of car they can get access to and the type of company willing to finance them.

That new Saturn a few years back has been replaced with a five year loan on a six year old Chrysler PT Cruiser. I’ve seen these vehicles have overall payments of $15,000+ out the door. That is given that the poor soul in question pays the thing off (about a third don’t).

A long term ‘manageable’ weekly payment is all a lot of these paycheck to paycheck folks are looking for. Until their credit situation improves these working class folks will remain firmly in the used car market.

The consumer credit conundrum would usually get solved with improved credit scores and increased risk taking by sub-prime auto finance companies. This is what happens  in a typical market. However there is an even bigger monolith standing in the way of that outcome happening anytime soon.

The small business credit market.

There have been countless studies that have attributed economic recoveries to small business development. The fellow who gets laid off from corporate America may have to go it alone to survive. If he succeeds, then chances are he can grow and build his business while creating jobs in the process. To make that happen he needs one thing.

Capital. Without access to loans he can’t scale the business and hire people. No credit means no job growth, which means that John Q Downsized will not be buying any shiny new Lincolns in the next few years. Or as they say in the academic world.

“Although credit analysts have long advocated securitization of small business loans, pools consisting solely of SBLs have been rare. Despite this, small businesses have found ways to access the broader credit markets through securitized real estate, credit card, vehicle, and other loans.

Diversification often reduces the vulnerability of small businesses to disruption of any single source of credit, whether from banks or segments of the broader credit markets. While diversification of credit sources has some benefits, it cannot completely shield borrowers from a widespread financial crisis. In the recent crisis, funding from banks and the broader credit markets were both disrupted. To the extent that smaller businesses had become more connected to the broader credit markets, they may have faced tighter credit conditions than their medium-sized counterparts. Moreover, to the extent that corporate bond markets returned to normal after the crisis, the credit disruptions faced by many large businesses ended sooner than the disruptions faced by small businesses. Recognition of the particular vulnerabilities of small business to financial crises is vital if we are to develop effective credit maintenance policies, such as public loan guarantees.

Note: Attributed to James Wilcox, professor of economics and finance at the Haas School of Business, University of California, Berkeley… taken straight from this site

This is just a really nice way of saying that friends, family or habitual speculators aren’t going to be able to help the small businessman out. More importantly, don’t expect the banks to regardless of what bountiful gifts are given to them by the powers that be.

So I guess the next stop for those needing access to a loan is… the title pawn… the cash advance store… perhaps the embryonic online loan sites between individuals. Unlike the junk bonds and CDOs of times past (collateralized debt obligations), I don’t see any magic pill that will yield the resources needed to grow cash strapped businesses.

At some point the used car market will plummet down to Earth. Someone out there will develop the next financial instrument that helps America re-leverage itself with pride and confidence.  But until that rainbow of hope leads to a pot of gold, don’t expect the average price of a used car to decline.

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53 Comments on “Hammer Time: Aberrations...”


  • avatar
    aristurtle

    Well that was depressing, particularly because I’m in the market to buy a used car sometime between now and this winter.

    • 0 avatar
      dwford

      Good luck. If you were thinking of buying something relatively new – 2009/2010, just buy brand new. The price difference is so small right now, it’s not worth the effort to cull through the herd to find the right one. If you are looking for something older, start now! You aren’t in a rush, so you can spend the time to find that well maintained car.

      • 0 avatar
        aristurtle

        Nah, nothing that new. My budget is around 6-7K. I only drive during the four months or so of the year when it’s too cold to ride a motorcycle, so I can’t really justify spending new car money on this.

        Also I have an irrational fear of debt.

        But I’ve got a few months to work with so hopefully something good will come along.

      • 0 avatar
        Educator(of teachers)Dan

        In my area you can still get a loaded 10 year old Panther with less than 100,000 miles for that budget.

      • 0 avatar
        aristurtle

        I’m seriously considering that, Dan, but I would prefer something with a manual transmission.

      • 0 avatar
        Educator(of teachers)Dan

        Anything with a stick shift in that budget is likely to have been thrashed but look carefully. Someones grandmother (or grandfather) may have bought a stick shift to be frugal and the kids (who might not know how to drive stick) might be looking to get rid of it. Stick shift Mustangs (or other sporty cars) and the like in your budget however are likely to be nearly dead at that price.

    • 0 avatar
      Mathias

      Wait til at least late October, or even December. That’s the dead time in the car market, and unless you’re going for Japanese precious metals, you should be able to find a good deal even this year.
      As ever, the trick is to buy what few people want. I’ve seen some decent deals — looked like it anyway, craigslist — on Mercury Villagers, 1999 through 2002. Minivans are so not in, and the powertrain is Nissan truck, very pleasant and durable. 25 mpg freeway; I used to own one.
      Plus the usual Panther suspects ;->

      I’m currentlly walking a post-doc at work through the process, and there isn’t even a decent ’04 Taurus in sight. Best deal so far is an ’05 Malibu V6 w/ 85k for $7,300 obo. Ick. And this is MI, the cheap-car capital of the U.S. It’s rough out there.

    • 0 avatar
      56BelAire

      So am I arisTurtle, only I need one in the next month and I have been looking for 3 months already. I am totally blown away by asking prices by both dealers and private sellers. I simply can’t believe cars are selling for KBB, NADA or Edmunds TMV published prices.

      I’m looking for 2006-2009 sedan, no more than 75K miles, willing to spend 15K tops. I’m open to Acura TL, Audi A4, Buick, Mercury/Ford, Avalon, etc.

      Our other cars are; 2008 Subaru Forester Sport 5-speed, w/50,000 miles, 2000 Accord w/175,000 miles(original owners}, 2004 F-150 PU w/75,000 miles, 1967 Pontiac Catalina Ventura Cpe, 63,000 miles original, was my Dads car. Getting rid of 2002 Buick Century(bad trans),101,000K miles.

      I need a good road trip car, I make 2-3 coast to coast trips a year.

      I’m seeing cars with 100K-125K miles and people and dealers are asking absurd prices IMO. I’ve gotten down to making offers(about $2,500 less than asking) on two cars and the owners acted highly insulted. I’m actually to the point of considering putting 3K into the Century. It’s great on the road(30MPG on trips), very comfy, great radio AM/FM-Cassette/CD concert sound and is in very good condition other than trans.

      What do I do? Thanks guys.

      • 0 avatar
        Steven Lang

        Go to car-part.com, find a low mileage replacement unit, and get the tranny installed. Your out the door cost should be no more than $1500.

      • 0 avatar
        Educator(of teachers)Dan

        I don’t know where you live Amigo or how BIG or small you need the car to be. 15K will get you a Mercury Milan or Monteego, Ford Fivehundred, lightly used Buick LeSabre, or any number of lightly used Panthers in my area. It would also get you a Pontiac G6 or previous generation Malibu but I’ve always found the G6 to be cramped.

      • 0 avatar
        Dukeboy01

        @56BelAire

        I vote for “Fix the Buick’s transmission.” If you like the car overall, put some money in it and you can get another 100K out of it.

        You say that the cars you’re looking at in your $15,000 price range already have 100K+ miles. That means (to me) that there is a better than even chance that their transmissions are about to need some work soon. If you buy one of them and the tranny goes six months from now, then you’ll be in exactly the same position you’re in now, just with a different car that you’re making payments on as well. Why go through that hassle?

  • avatar
    dwford

    The lack of new car purchases can partly be blamed on the lack of inventory for many new car models. How many people are waiting out high new car prices until better supply leads to discounts? Many consumers are failing to see the value in paying full sticker AND having to wait weeks to get some of the hot new models in a market where everything else seems to be 1/2 off.

  • avatar
    eggsalad

    Two years ago, I bought a 22k mile 2005 Scion xB for $11.5k.

    Two years later, the car is two years older and now has 45k miles.

    Based upon similar models I see for sale, I think I could get $10-11k for it now.

    Not bad.

  • avatar
    Bryce

    Reality is setting in for US citizens. Stupid greedy Wall street crashed the world economy nows the time to wonder why your govt bailed them out for free

  • avatar
    George B

    Steve, are there any inexpensive new cars that compete with the BHPH used cars? I was under the impression that some Kia models dip into that market.

    Been wondering what would happen if smaller banks that are definitely not too big to fail were given the option to operate under the banking regulations and practices of 1992. Regulations with reforms after the Savings & Loan crisis but before CRA expansion, Glass-Steagall repeal, and current paperwork overload. Bet the economy would be better if smaller banks were allowed to focus on the business of banking.

    • 0 avatar
      CJinSD

      I’ve seen some $77 a month lease ads for Fiestas in San Diego. If I couldn’t afford to pay cash for a used car, that would appeal to me. Accents, Aveos, Rios, and Versas tend to make up the rest of the cheaper-than-used offerings. I’m guessing the BHPH crowd have terrible credit precisely because they make decisions like buying cars from BHPH lots.

      • 0 avatar
        srogers

        For $77/month I’d take that. I’d save more than that on gas compared to my ’02 Focus. I think that around here they ask that much per WEEK.

      • 0 avatar
        CJinSD

        I’m guessing the fine print must contain a reference to a $3,000+ cap cost reduction or other up-front fees. Unfortunately, the dealers that run the ads on the radio and on windshield banners on their lot won’t give me the details online without giving them contact information.

    • 0 avatar
      Toad

      Banks are still in the business of banking, just not loaning money to anybody who can fog a mirror. Allowing community banks to make the mistakes that the big banks are just beginning to dig out from will not solve any problems, just create new bad loans from new sources.

      The lending standards will probably never get back to where they were in 1992, much less 2002. 1962 may be more like it. More money down and shorter terms will ultimately make for a healthier if more boring economy.

      • 0 avatar
        fvfvsix

        True, but the other side of the coin is that deflation in finished goods prices is also certain. The prices cannot stay at 2011 levels, while customers are asked to finance shorter terms and put more money down.

        Look at the housing market for an indication of things to come.

      • 0 avatar
        Zarba

        I work at a Credit Union, and all I can say is that we would love to make more loans.

        What I’m seeing is that people with good credit and the ability to pay are sitting on their wallets unless they NEED to buy.

        Unfortunately, we aren’t making loans to people who can’t pay it back; we’re funny like that. We’ve kept the same lending guidelines throughout the boom and bust. Either you can pay or you can’t.

        It was the captives and subprime lenders that created the credit bubble, and now many of those subprime players are gone.

        Lending money’s really not that complicated; I’ve been doing it for 28 years.

        Character: Have you demonstrated that you pay your debts?

        Capacity: Can you make the payment?

        Collateral: Is that vehicle worth it?

      • 0 avatar
        Educator(of teachers)Dan

        @Zarba, +1 I could afford something different and am itching for something different, but I don’t HAVE to buy yet. I’m sitting on my wallet till after my wedding in July 2012.

      • 0 avatar
        Brad2971

        No, we’ll go back to the lending standards of 2002 at some point and time. You are aware that the banks have up to $1.5 TRILLION in reserves sitting at the Fed, waiting for the right moment to put it to use, right?

        With people still deleveraging, and with the savings rate still in the 5-6% range (compared to near 0% in early 2008), it’s going to be awhile before there’s sufficient demand.

  • avatar
    mike978

    Interesting. Steve wrote this article on TTAc http://www.thetruthaboutcars.com/2011/07/hammer-time-sell/#more-402380 3 weeks ago about how the used car market was becoming a bubble and that if you had any old cars to get rid of now was the time. This seems to conflict with the article above. I hope Steve is right now as I don`t plan on trading my 2006 Subaru in until end of next year.

    • 0 avatar
      aristurtle

      Like the housing bubble, you can only make money off of the used car bubble if you have a way of getting by between selling now and buying much later.

    • 0 avatar
      fincar1

      I am reminded of another used car bubble that happened long ago, specifically in about 1947, while cars were scarce right after WWII. My father had this 1935 Ford sedan that had a lot of miles on it including prospecting miles in the Nevada backwoods. He had big 17-inch wheels off a Pierce-Arrow (I think he said) on it. Well, busy as he was with the land clearing and earth moving business he wasn’t following the used car market very closely, and when a guy offered him $300 for the Ford he sold it. Then when he went looking for a replacement he found out why the good offer…I remember looking at Model A coupes with little pickup boxes in place of the decklids and stuff like that. He finally found a 1934 LaSalle that was priced pretty low because no one wanted such a big old clunk. He had to fix a lot of stuff on it – I remember exhaust coming up through the floor etc.

      I wish we’d somehow been able to stash it somewhere, because it was a four-window four-door sedan, and since he traded it in on a new 1950 Packard I have never seen another one.

    • 0 avatar
      Steven Lang

      The article I wrote a month ago encouraged folks to sell their ‘extra’ car. You can argue that the price difference between used cars and new cars is narrowed. But I still would advocate being a ‘keeper’ instead of a ‘trader’ unless there is some compelling reason to sell your ride.

      Also you need to keep in mind that most bubbles take years to pop. I have no idea how long it will last.

      • 0 avatar
        mike978

        Steven – thanks for the clarification. I enjoy and value reading your articles because they provide an insight into a business I have little knowledge of.

      • 0 avatar
        Robstar

        Is this for only lightly used cars?

        I put our 2000 neon with 203k on it (3 speed auto — and the first year with the headgasket issues fix) that runs like a top up on craigs list for $2500 and didn’t get a single bite….It burns a little oil but I wouldn’t be hesitant to take it cross country tomorrow. Adding 1/3-1/2 quart every 1000 miles keeps the oil level OK.

        The only downsides are AC not working & trunk lock not working….the AC has been looked at and the leak is somewhere behind the dash (5 hours+ of rip off/chasedown time according to my indie mechanic). The trunk lock could probably be fixed for $200 or less…not exactly huge issues.

        In “new” ratings our car is rated 22/28 and we consistently pull 29-30 with 20-30% city, 70-80% highway. That is calculated as “miles/# gallons” not some computer reading…

        In any case, I just don’t see anyone interested in a reliable, well maintained (but slightly rusting — it is a midwest car), older “high mileage” car.

  • avatar
    SunnyvaleCA

    Did cash-for-clunkers reduce inventory of used vehicles? I’m thinking 3 years ago that plenty of $2k and $4k trucks were clunked, but if they were still on the road today the would make up the large number of $0.5k to $2k used vehicles to fill out the bottom of the market. Vehicles worth only $0.5k 3 years ago that were clunked would probably be off the road by now anyway, no matter what.

    • 0 avatar
      aristurtle

      Only cars that got 18mpg or lower could be clunked (otherwise I would have participated myself). I don’t think that C4C would have too much of an effect on the market for used cars that get 25+ mpg, but I could be wrong.

      • 0 avatar
        SunnyvaleCA

        You’re right with the MPG requirements, but when low-MPG vehicles are missing from the market, people willing to buy them are forced to buy the high-MPG vehicles as a substitute, pushing up prices of high-MPG vehicles.

      • 0 avatar
        aristurtle

        That’s fair. I just figured that many of the clunked 1995 Explorers and such would have gotten scrapped for their high scrap metal content when gas hit $4/gal again earlier this year anyway. The Crusher presents an unyielding and ever-rising price floor.

    • 0 avatar
      Pch101

      Did cash-for-clunkers reduce inventory of used vehicles?

      Cash for clunkers involved under 700,000 vehicles.

      Used vehicle sales in 2009 were just under 35.5 million units. http://www.bts.gov/publications/national_transportation_statistics/html/table_01_17.html

      The program wasn’t large enough to make much of a difference.

  • avatar
    ajla

    That new Saturn a few years back has been replaced with a five year loan on a six year old Chrysler PT Cruiser.

    What happened to the Saturn in your scenario? Repossession from unemployment and being so underwater on the loan? Taking out a loan on a six year old economy vehicle must require some extreme desperation.

    • 0 avatar
      CJinSD

      I think what he means is that someone who would have been a buyer for an undesirable new car with a subsidized sub-prime loan would now be stuck buying a used clunker from a buy-here-pay-here usury lot. It isn’t that any particular customer would trade in their 4 year old, bought new econobox for a 6 year old econobox, just that a member of the working poor with crummy credit can no longer get financed on a second rate new car.

  • avatar
    friedclams

    It’s funny. I keep thinking about selling my low-mileage 10-year old Mazda and getting a newer car, but I still don’t see the economic sense of it. Bubble or not, I’m going to drive it into the ground, as my instinct dictates. (Plus my wife loves the car.)

  • avatar
    Autobraz

    What if I want to pay cash for a used car? How can I get a good deal? Am I limited to dealing directly with owners? Or will dealerships and used car lots be willing to negotiate the price a little to get one big lump of cash?

    • 0 avatar
      geeber

      That’s a good question. I do know that my friend saw a clean Olds Custom Cruiser on a “buy here, pay here” lot in Philadelphia, and offered to buy it outright for cash. The lot owner said, “No way.”

      • 0 avatar
        aristurtle

        BHPH lot owners don’t want cash customers. Cash customers buy the car and leave. BHPH customers pay it halfway off and then default, so the lot owner can repossess it and clean it up a bit and then loan it out to someone else.

    • 0 avatar
      NulloModo

      Generally there is no price benefit for the customer by offering to pay cash to a dealer. BHPH places make most of their money off the interest charges, and traditional dealerships can still make some money off of the finance side of a purchase. Even if the dealer doesn’t bump the rate any, when you finance the bank sends the funds to pay for the vehicle in full to the dealer quickly, so the net result is the same as offering to pay in cash.

      Now, if you do have a lot of cash available for a down payment it can help you get a better rate especially if you have less than perfect credit. There are secondary banks that buy based on equity moreso than credit score, which can help someone who would otherwise have to go to a BHPH to get a more traditional loan and start building positive credit back.

  • avatar
    gslippy

    This makes the hope of a resurgent new car market seem untenable for a while, not to mention the pipedream of gazillions of new Volts plying the roads (and to be fair, Leafs).

  • avatar
    NormSV650

    Technology probably played a bigger role than anything with late model stripper cars getting similar mpg in a nicer overall riding car. You can’t standd behind technology from a prior decade to pull a premium the next decade.

    Most BHPH that I see are lots of sub $3,000 cars.

  • avatar
    Philosophil

    Great piece, Steven. Some excellent insights here, but the overall picture is quite disheartening. Many might say this kind of turn was pretty much inevitable given the way things were going (with the crazy mortgages and such), nonetheless it’s still incredibly difficult to see the results when they actually begin to hit home (and bad credit is only the surface here, because these kinds of economic pressures often play themselves out in bad ways in social and family life as well). The really sad part is that all this may be far from over yet.

  • avatar
    threeer

    Steven,

    I’ve been trying to discuss with my 67-year old mother that she should really consider selling her 2003 Corolla LE (only 85k, leather, sunroof, alloys) now versus waiting for two more years. She usually runs a ten-year cycle on cars, but with the bubble right now, her car is worth more this year than it was last year. And the next car she buys will be her “last” car, so she’ll most likely look for something nice to drive over the next 6 or 7 years before she starts slowing down (she’s already not driving anywhere near as much, and would probably wind up with around 5-7,000 miles a year). Ordinarily, her plan of keeping a car for 10 years would be sound, but she has well over $28,000 set back…that, plus what we could sell the Corolla for would set her up very, very nicely for her pinnacle ride, and I’d prefer she take advantage of the market now and also get a few more years of true enjoyment out of her reward car before she turns into “Driving Ms. Daisy.” I’ve mentioned the market bubble to her…any other insights into the market that would help explain this to her?

  • avatar
    Steven Lang

    The article I wrote a month ago encouraged folks to sell their ‘extra’ car.

    If she is happy with what she has… keep it. Older folks always prefer to keep their old habits rather than try new ones.

    I know you know that already. But that Corolla is not going to be much trouble. In fact having her drive such a simple car with leather may make it an optimal fit.

  • avatar
    jerseydevil

    I am trying to arrange my life so I dont need a car. I am almost there, then its zip car for me.

  • avatar
    AC

    I know it’s just one case, but with a late model Subaru that practically looks new, priced slightly below KBB trade in, and no takers on just about every major automotive site on the internet, I’m starting to have my doubts about this used car bubble. When I saw where NADA, KBB and other values where, I thought I might price it to sell and get something new. I know I could trade it in, but it just makes it too easy to shuffle the numbers around and complicates the deal. Having maintained the car like I planned to keep it till the wheels fell off, I may just do that instead.

    • 0 avatar
      Steven Lang

      KBB overprices late model vehicles and underprices older vehicles.

      I would suggest Edmunds so long as you don’t rank an average car as clean.

    • 0 avatar
      ExPatBrit

      There is a used car bubble at the dealers and independents, not so much for private sellers with newer vehicles as the buyers have to come up with their own financing.

      If you are selling a car privately for under $5000, much less of a problem.

  • avatar
    Dukeboy01

    Steve,

    Out of curiousity, how many miles did the Civic have on it? I’m guessing around 130K, based on what I’ve seen for sale on Autotrader.

  • avatar
    Brad2971

    Does this example from South Dakota count as being part of a used car bubble:

    http://www.murdofordmercury.com/show.aspx?vid=1780904

    I didn’t even know you could get financing on vehicles the dealer got for next to nothing.


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