Auction Monday: All! Hail! Mary!
When you have 120 dealers looking at the same exact car on a Monday morning, you have three options if you plan on buying a car.
After I saw a 2003 Infiniti FX35 with 220,558 miles sell for $9100 plus the auction fee, I left for good.
Right now we are in the midst of tax season. A time when millions of consumers get their tax refunds from Uncle Sam and, on average, spend it all within a 72 hour period. A few pay off their debts. A few more buy top of the line televisions, cell phones, and electronics. The rest put a thick down payment on an older used car that is now being financed for anywhere between three to six years.
A luxury SUV like the Infiniti can be sold for stupid money at the moment. We’re talking a $1500 down payment and about $85 a week for 36 months. On the miracle that the buyer makes a full payoff on the loan, you’re looking at about $15 grand in total once you calculate all the tax, tag, title, finance charges and assorted other bogus fees that are usually levied onto that number.
Is it a terrible buy for the consumer? Of course! But in the end, an affordable monthly payment in exchange for the impersonation of wealth is the only thing that will truly matter to them.
You may think this is a suckers bet par excellence, and you would be right.
But there are plenty of other suckers that were down the line last week. Consider these prices…
1999 Lincoln Town Car, Cartier Edition: $3200, 206,789 miles.
2002 Lexus ES300, scraped on one side: $3300, 274,166 miles.
2007 Chevy Tahoe LT, Rough interior: $11,000, 248,804 miles.
Who would finance any vehicle that is already well north of 200k?
A lot of companies will if the potential level of return is attractive enough. Dealerships will keep the riskier deals on their books for a few months, and then sell many of the potential dogs for a pre-determined price to a finance company. That company will, in turn, sell it to a Wall Street firm that will package it into a conglomeration of ‘asset backed securities’, where it will be given a credit rating. Then it will be marketed to a variety of buyers in the finance world far and wide.
Overheating? Why yes it does get hot here in Atlanta! How does $7995 sound?
Does this sound familiar to you? It should. Yes, these are the type of seeds that sprouted the sub-prime mortgage crisis and the near ruin of our economy. But the same mechanism of buying and selling these automotive assets also serves a vital purpose for every automaker that finances or leases their vehicles.
Every automotive manufacturer has one thing in common. They want to sell their ‘paper’ so that they have the financial resources needed to keep building their business. Toyota, GM, Honda, VW, Nissan… even the smaller automakers such as BMW and Mazda require plenty of liquid cash to survive.
They can’t pay their people in IOU’s any more than the consumers who are currently financing their vehicles. So they will sell the paper to those buyers who are willing to accept the risks.
2013 Jeep Wrangler Unlimited Sahara – Built In The USA / Now Financed In China
There is no shortage of takers. This article offers plenty of the basics of the ‘prime’ world of automotive remarketing which historically involves selling far lower risk deals at reasonable returns.
But if you are to get one thing out of an obscure part of the automotive industry, read and dwell on this quote…
“For the most part we have seen a reversion back to the kinds of underwriting standards we saw five years ago, before the crisis, and for that we are not unduly concerned,” says Glenn Costello, senior managing director at Kroll.”
Mr. Costello may know a lot about the fundamentals of this business from a pure numbers perspective. But if I were a buyer of those securities, I would be real careful of buying anything that carries the same type of risk as the vehicles I saw go through the block.
The number of sub-prime deals for automotive asset backed securities has more than doubled in little over a year. The quality of those vehicles has not followed the same path. From what I see at the auctions, they are getting far worse in condition and mileage.
Are you underwater in your car? How about your trunk? $6995! Buy now!
I am not one to recommend shorting specific companies. But if I were to short anything in this business, it wouldn’t be an automaker. Not by a longshot.
I would be looking squarely at those companies that either retail to sub-prime customers, or finance companies that specialize in the higher risk areas of this market. When it comes to late 2014 and all the delinquencies begin to be removed from the credit reports of those who got hit during the last financial storm, you are likely going to see a swarm of new car buyers abandoning the crappy old sleds for new metal that may even cost less on a monthly basis.
Of course the loans will likely run in the six to eight year range by then. But hey! New wheels! And the cycle will begin anew.
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I have excellent credit and had trouble financing a 10 year old vehicle with stupid low miles (only 18k: weekend toy / garage queen). The dealer claimed nobody would take a note on a 10 year old car. I could have paid cash but didn't want to tie up $17K (after trade) on a car that might get wrecked tomorrow and have the insurance company claim its only worth half what I paid due its age (which has nothing to its condition). I can assume what kind of mess financing a 12 year old car with 220K miles is like. Talk about a shady situation, what are the chances that the vehicle will even survive the duration of loan? On a some what related note: all my tax money goes to straight to Bass Pro Shops ;)
From reading these articles, I can see how my broker (from whom I've now purchased four cars, out of a total of about 15 in my immediate family over a 15-year period) and I got screwed on my trade on my old 2006 Accord EXL-V6 NAVI. I was trying to sell it privately throughout the fall and winter, and had knocked my asking price down to $12,200, and would have accepted ~$11,350 as a hard floor. Car was damn near spotless inside and out, and I threw in a couple other things--WeatherTech floor mats and the like. Mostly dealer-serviced with all receipts, and a couple of Blackstone oil analyses showing an engine in great shape mechanically. Newer brakes, tires and battery. Low miles for its age: ** 57,800. ** Well, I couldn't gin up any private sales, so when my new car arrived at the dealer, my broker starts to work a couple angles; he asked me what I was hoping to get, and gave him what I thought was a realistic $10,500, though $10,000 would have worked! First two bids come in--$8,000 and $8,500, respectively. I go with him to the dealer where my new 2013 Accord Touring is waiting for an "acceptance" test and inspection, in order to get paperwork going (the new car stayed at the dealer until I had XPel paint film installed later in the week, after which time I took delivery); we get back to my place, and he states that he'll give a couple more dealers a try, but that I'll need to sign the title over, and that he'll get me a loaner through the dealer. I watch him drive my old car away, hoping for the best. (Hastiest car clean-out ever, such that my OCD didn't kick in, and I forgot to mark a couple radio presets and the final mileage down!) Two hours later, he calls and states that the best I could hope for is *** $8,600! *** So dejectedly, I agree to that amount, and take a good $1,500 more out of my own savings than I would have hoped for a down-payment of $11,000 total; I wanted to put down $13K. A couple days after taking delivery of my new car, I look up my old car on the Web site of the dealer to whom my previous vehicle had been sold. Their asking price: *** $12,900! *** Needless to say, I just about fell out of my chair!!! Obviously, Steve, the high used-car prices aren't reflected in the initial trade-ins; I thought that those of us looking to trade would enjoy a nice surprise, since it seems the entire market is inflated, particularly with low miles and minimal reconditioning needed (according to my broker) on my vehicle. Steve (and the rest of the B&B), what are your thoughts?