By on May 22, 2008

i-want.jpgAccording to the (appropriately-named) SubPrime Auto Finance News, you can blame the cratering housing market for collapsing new-car sales. "Lower equity translates into an inability to borrow against the house to buy a car," opines Art Spinella of CNW Research. This is especially true in California and Florida, where new car buyers lead the league table for tapping into their home equity to finance a new whip. As of six months ago, California's supply of unsold new houses was running in excess of 80 months. Spinella reckons the Golden State's (and thus America's) auto sales recovery depends on reducing the staggering inventory of unsold new homes. So, Art, when? "Probably not until the final quarter of this year or the first quarter of next, but in either case a California turnaround will benefit all auto sales in 2009." Meanwhile, the number of homeowners who are "upside down" on their home loans is adding more fuel to the pyre. In fact, some  68 percent of those who bought homes in 2005 owe more than the house is worth. Ouch.

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17 Comments on “Home Sales Drive Car Sales...”


  • avatar
    jthorner

    Borrowing against your house to buy a car is stupid, but apparently there are a lot of stupid people.

    “In 2006, about 24 percent of homeowners used a home equity line of credit to purchase a car or truck, according to Synergistics Research, a financial services market research company based in Chamblee, Ga. About 8 percent of homeowners took out a second mortgage specifically to buy a vehicle, says William H. McCracken, chief executive of Synergistics”

    http://www.washingtonpost.com/wp-dyn/content/article/2007/03/17/AR2007031700104.html

    Taking cash out of your major asset, which also happens to be the roof over your head, to fund short term consumption is mind bogglingly dumb. Now I know how so many people here in Northern California were able to “afford” to buy $60,000 Cayennes and tricked out Escalades. One of the administrators at the local community college drives one of those stupid things. The roads around here are clogged with $50k-$150k vehicles.

    People seem to think that buying expensive stuff is going to make them feel good, but the feeling is always temporary.

  • avatar
    dwford

    So if these people are so dumb, why are all the politicians tripping over themselves to “save” them????

    Hey, if these morons lose their houses, at least they’ll have their fancy cars to sleep in.

  • avatar

    The idea behind borrowing against your home is the greatly improved interest rates. At this current moment rates are low enough not to matter

  • avatar
    John Horner

    Not everyone caught up short by the housing price crash got into trouble by mortgaging the home to buy and Escalade.

    But to answer the question, Politicians mostly troll for votes. I love the old Adlai Stevenson story:

    During his 1956 presidential campaign, a woman called out to Adlai E Stevenson ‘Senator, you have the vote of every thinking person!’ Stevenson called back ‘That’s not enough, madam, we need a majority!’

    http://home.att.net/~jrhsc/ad.html

  • avatar
    miked

    I wonder how much of the new car sales was funded by the sell and purchase of a new house. E.g., when I bought my first house, the sellers showed up to the closing in a brand new 4runner. That made me a little mad because I was effectively buying them a 4Runner when I purchased the house. Of course, this is equivalent to taking equity out of your house to buy a car because they could have made a bigger down payment on their new house had they not gotten the car, but it feels different and I bet most people wouldn’t feel as bad about buying the car that way. Now that fewer houses are trading hands people don’t have the “free” cash to buy a car.

  • avatar
    jaje

    Borrowing against the equity in your house makes sense if you use the funds to roll over other higher interest rate and non tax deductable debt (like student loans if you make too much or credit card debt). The best scenario is when your in a growing market for houses (meaning prices are rising) – meaning you gap the debt in the house over time and payments – 2 good things).

    Those that take out a loan to buy a car – can make sense if they spend wisely. Borrowing $20k to buy a new fuel efficient car is not so much a bad idea versus borrowing from a bank where interest rates are higher and you cannot deduct against your taxes. If the car you go rid of was a gas hog you save money by paying less on consummables (i.e. gasoline).

    But borrowing to buy a car that you can’t afford to buy outright is unwise in any decision (that’s 50% of car buyers out there today – leading to the record # of foreclosures and boom for Repo men.)

  • avatar

    What it sounds like to me is that the auto industry is propped up by people buying cars they really shouldn’t. So according to Jaje’s statistic above, the auto industry should probably be about half its current size. If that ever became reality, it would make it easier for the big 2.8 to shed brands! (they would shed alot more than just brands!)

  • avatar

    Wow, just wow. Next, they’ll have some easy way for folks to borrow against their 401k in order to get vehicles beyond their earning power. Sheesh.

  • avatar
    Kevin

    miked: the sellers showed up to the closing in a brand new 4runner. That made me a little mad because I was effectively buying them a 4Runner when I purchased the house.

    – If you “bought” them a 4Runner, than that means they gave you the equity they’d accrued in the house for free. Very generous of them!

    Of course, this is equivalent to taking equity out of your house to buy a car because they could have made a bigger down payment on their new house had they not gotten the car

    Not equivalent at all — they obviously didn’t use use the proceeds from the house to buy the SUV, you hadn’t closed on it yet. If they bought the car with a loan and then collected the proceeds, all that money was available for a down payment.

    Spending cash you’ve made on capital gains profits you’ve realized is not equal to borrowing. No need to confuse the issue.

  • avatar
    Busbodger

    This will all make for a bumpy retirement someday. 70 year olds paying off mortgages, living like paupers b/c they spent it all when they were 35 years old. We’ve seen exmaples of that around us too.

    Meanwhile though I know we are doing the right thing we feel like losers b/c we can’t (won’t) keep up with the Jones’s. In some cases we get that “look” that says “you’re still driving THAT old thing?”. Your’re still watching that old TV or wearing those old clothes?

    We tend to keep our cars and stuff forever. The Honda is 9 and the VW is 11 years old. I work hard to keep them in reasonably good condition cosmetically and in excellent shape mechanically and do all my own work to save money.

    This is why I think $6 gas would do America some good. i don’t want to pay for it or the collateral prices that come with high fuel costs either -BUT- I think America would then re-evaluate it’s priorities and alot of people would come their senses about their finances and priorities.

    I really think it would take a real honest too goodness economic depression to wake up some people though.

  • avatar
    factotum

    In 2003, I was temping at a call center making a whole $10 an hour. A full-time employee kept pestering me to use his cousin’s mortgage company to get a loan for a house. When I asked how I could possibly qualify, he said all I had to do was get three friends to agree to rent the rooms out and use that as income on the loan app.

    I knew even then that it would turn out badly one day. I didn’t give in to him and left the place thereafter.

    I continue to rent from a nice old lady who owns the house outright, drive my 12-year-old car, pay $600 a year for insurance, and save money for a nice piece of land I hope to acquire some day.

  • avatar
    zerofoo

    I bought a car a few months ago and I used a home equity loan to do it.

    Why?

    A traditional car loan was about 2 percent more expensive. I can also deduct the interest on my home equity loan from my income taxes.

    I also put down a third of the price of the car in cash and financed the remaining amount. I also only financed for 36 months. I like to pay off my cars in three years or less.

    Lower rate and tax benefit – that’s why you borrow against your house.

    -ted

  • avatar
    John Horner

    I guess I’m just an old fashioned guy. If I can’t pay cash, I don’t buy the car. I hate debt and I hate having payments hanging over my head. A few more years and the house will be paid off as well.

    There is no freedom like not owing anyone money.

  • avatar
    Airhen

    I personally have no credit card debt after once having a lot of it, and I’m on schedule to pay off my 30-year mortgage 13 years early.

    I do have several car loans. One is is interest free (thank you Chrysler), and the other is a low-rate through a credit union. As with credit cards, I just got tired of paying interest and now I have that money to put towards my mortgage. :)

  • avatar
    jaje

    I don’t mind having a mortagage (we are still young ) b/c if we didn’t our income taxes would be horrendous as the standard deduction is way too low (capped at ~$18k).

    Then there’s the local story (waiting in line for the cheap gas in the area) about this local guy with a recently purchased Hummer living in an apartment. He had to take a 2nd job in order to afford the payment for the truck. Now he’s SOL b/c he can’t afford to fill the tank half the time and drive the 60 mile roundtrip to work. He’s so enamored with being noticed while driving than to save money. He notes that he should drive what he wants and needs the Gov’t to reduce the gas prices. Guy is single, no family and doesn’t off road or tow anything. Just has the Hummer to feel better about himself – then eat ramen or mac & cheese for dinner. I’ll let go of this cliche – can’t have your cake and eat it too!

  • avatar
    Airhen

    jaje :
    May 23rd, 2008 at 9:40 am

    Then there’s the local story (waiting in line for the cheap gas in the area) about this local guy with a recently purchased Hummer living in an apartment. He had to take a 2nd job in order to afford the payment for the truck. Now he’s SOL b/c he can’t afford to fill the tank half the time and drive the 60 mile roundtrip to work. He’s so enamored with being noticed while driving than to save money. He notes that he should drive what he wants and needs the Gov’t to reduce the gas prices.

    Wow, that guy voting scares me as he would have no problem having politicians raise my taxes to pay for his gas. Yikes!

  • avatar
    akitadog

    When my fiance sold her condo (early ’06, right before the market went South), she ended up buying a car with some of the profits. It was a new Mazda3 5-door, nothing expensive, but is the best all-rounder of the compacts, in my opinion.

    Was it a stupid move? I don’t think so. She needed a car, and, due to my MINI woes, we made sure she got a fun, practical car w/ a warranty! The best part was not having a car payment. As well, she paid off 90% of her credit card debt, the rest of my car payment, and we used most of the money to pay off an apartment we bought about 6 months before (yes, we made a killing on the sell). Oh, and we still had a decent amount of money left over as part of a down payment on a 2nd apartment 1 year later!

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