The Car Market Bubble Just Popped

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As supply chain constraints, production, and chip manufacturing begin to improve…used car prices are beginning to drop, down 6.4% since the record high in January. This also marks the FOURTH consecutive month that auto prices have fallen…and, the FIRST month that sales declined 17%.

Even though this is certainly GOOD NEWS if you want to buy a car…it’s a NIGHTMARE for banks who have LENT MONEY on those cars, at a value that’s rapidly beginning to fall.

Right now, “investors are willing to bet that consumers will keep paying their loans in the near term” - because, after all, a car is an essential purchase that allows them to go to and from work, or be used as a way to make money…although, that might not necessarily continue.

A survey from Fannie Mae found that: “16% of consumers said they expected to lose their job in the next 12 months.” - and, THAT is generally the time where finances get tight, and people cut back on the items that might be costing them too much money…or, in this case, certain Auto Loans.

The WallStreetJournal even found that “more subprime borrowers have start missing payments” as rising prices force households to choose between paying for essentials and paying their monthly loans. NOW, the government is warning of a surge in CAR REPOS, and that “the problems could get much worse unless we stay ahead of it.”

The reality is - lenders have given potentially unaffordable loans to buyers, without verifying their finances, on cars with overinflated values that can’t be sustained without a chip shortage…and, it’s only a matter of time until - EVENTUALLY - things have to come back down and return to normal….after all, used cars can’t sell for more than NEW, FOREVER.

ON THE BRIGHT SIDE….logistically, don’t expect this to be ANYWHERE NEAR the size of the housing market collapse…because, loan sizes are SIGNIFICANTLY SMALLER, and it’s MUCH easier to repo and auction a car than it is to foreclose on a home.

In addition to that, most auto loans have a fixed interest rate…so, even though a buyer may owe WAY MORE than what the car is worth…as long as they can continue making that monthly payment…the solution is to simply hold on to the car longer than you expected, and keep driving it until - eventually - you break even.

The best strategy, in this case…is to simply recognize that 40% year-over-year price appreciation is by no means normal, or to be expected…and, if you find yourself with a loan that MIGHT not be affordable….NOW would be a good time to either lower your interest rate, or drive something in a more affordable price point to save the extra money.

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