Negative Equity Rolled Into New Car Purchases Reaches Record High

Just two weeks ago we noted that a record 25% of vehicles being traded in for used car purchases had negative equity of $3,635.  Now, according to the latest report from Edmunds, the new car market isn’t any better off with 32% of trade-ins having an average negative equity balance of $4,832.  Of course, that’s no problem when you can simply roll that negative equity into a brand new 7-year loan at a 2% interest rate.  Sure, with the average car priced at $33,000, that means your starting principal balance is 115% of your new car’s value but that’s no big deal, right?  That just means you’ll have to roll over even more negative equity in 4 years when you buy your next brand new vehicle.

Through the first three quarters of this year, an estimated 32% of all trade-ins being rolled into a new-vehicle purchase were under water — the highest rate on record, according to Edmunds.com. The amount of negative equity car buyers are rolling has also reached a record high. On average, according to the firm, consumers trading in their vehicles for new cars are rolling $4,832 in negative equity.

 

“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” said Edmunds.com Sr. Analyst Ivan Drury. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.

And that’s how you manufacture this:

Autos

 

Well, that plus artificially low interest rates that force yield-thirsty pension funds to purchase every subprime auto securitization they can get their hands on in return for an extra 25bps of yield. 

Just ignore that $1 trillion auto loan bubble that was created…just a pesky side-effect of the “Obama recovery.”

Auto Loans

 

* * *

For those who missed it, here is what we recently wrote on used cars and negative equity values.

We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, loosening underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield. 

Today, we find that Edmunds’ “Q3 2016 Used Vehicle Market Report” reveals that many of the same problems also afflict the used auto market.  The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values continues to spike and currently stands at an all-time high 25%.  Moreover, the average balance of the negative equity also continues to rise and stood at $3,635 for Q3 2016, up from roughly $2,750 in Q3 2011.

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Meanwhile, the average used car price also continues to rise and stood at $19,200 as of Q3 2016.  This implies that, since most people simply roll their negative equity into their new loans (because, why not?), many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car. 

Autos

 

But wait, there’s more (think weekend CNBC infomercial).  Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011.  Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term.  While interest rates have certainly come down from Q3 2011, they haven’t declined nearly enough to offset a $3,300 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.

Autos

 

Of course, none of this is terribly surprising…just another ponzi scheme, courtesy of accommodative fed policies, which will all come crashing down at some point.  And while timing when bubbles will burst is always tricky, with terms already maxed out, treasury yields spiking and used car purchasers extremely sensitive to monthly payments we suspect the time could very well be near.


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