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This is the greatest story never told.
What the numbers don't say is how many cars were purchased with credit from other than home equity, with the credit rolled into the HELOC at a later date. Ditto for credit cards; many a credit card has been rolled into many a home equity line of credit, but that trick will no longer be available to many.
Ford and GM are lucky to sruvive this business cycle!
Nice. Nothing like paying for your car for the next 30 years.
Scott, yeah, that was my thought too. Of course these borrowers will argue they are just using the money for 3, 5 or 7 years - and will have paid it back by the time they buy another car. But I doubt most people actually pay back their HELOC and instead they end up with a 30 year car loan.
Best Wishes.
I can sleep in a car but I can't drive a house to work.
I guess trickle-down economics works after all
I was waiting for higher education, which was also "subsidized" by HELOCs, to also correct, but of course, Congress would not let that happen.
first....
I need to get a life...
Meh...cars and kitchens. I still think making the house payment is the best use. I mean,what could actually go wrong?
Chris
Frist
oops. Not (darn haloscan)
me too....oops.....this decietful nature of haloscan is not good, considering last holiday's evening.
In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars
No they didn't. All they did was borrow money, and they're going to have to pay it back.
CR,
That article made no mention about the way people have been allowed to roll old loans into new ones for new cars, so someone trades in a car they owed $5,000 on and ends up with a new $20,000 car and a $25,000 loan. I think I read Americredit's average loan was for 100%+ the value of the underlying car.
Have you seen any real stats on those loans starting with negative equity, because of previous balance rollovers?
Good post about why Gm won't last more than 12 months. Who wants to start a GM death watch. Too bad though.
On the Sorry State of General Motors « naked capitalism
Is this good news for HELOC default rates? Does this mean the people who used their HELOC to buy a car would actually get that car repossed if they didn't pay? That sounds better than having the entire amount written down due to a foreclosure on the first mortgage. Does it mean the HELOC has different collateral than the first mortgage?
In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research. In Florida, about 20 percent used home equity loans. New car sales in both states are down about 7 percent.
Ah how history repeats:
But these evils, though great, were small compared to those far more
deep-seated signs of disease which now showed themselves throughout
the country. One of these was the obliteration of thrift from the
minds of the French people. The French are naturally thrifty; but,
with such masses of money and with such uncertainty as to its future
value, the ordinary motives for saving and care diminished, And a
loose luxury spread throughout the country.
So many Hummers.
So little credit.
What about paying off credit cards? The temptation of the lower rate and, sometimes, the tax benefit must have outweighed the risk to lose the house in many cases. And off they went to a new card charging cycle.
The next NYT graphic will be "Mortgaging the House to Buy Gas for the Car that was Bought by Mortgaging the House."
I remember seeing some pix from Havana of a horse pulling a car with the engine and everything in front of the firewall removed. Enter the 2011 Chevy Malibu!! 1 HP and meets all Congressional standards for horseshit emissions.
cd
first....
I need to get a wife...
The HELOC auto loan makes sense when real estate prices are rising and refinances or moving to a new home is common. Say every 5 years.
Once the downturn happens, then not only are new sources of funds for spending gone, but the ability to extinguish old loans vanish.
Call it a double whammy on the whoever was depending on the HELOCs for sales.
That jibes with what I've been seeing in the bay area, granted there are lots of people with serious money, but it seems like way too many nice cars than incomes to support them.
Tim, thanks for the GM "CEO shareholder letter" link. I had no idea GMAC made residential home loans.
strongbad
GMAC made residential home loans. Thats just the start. Watch out this summer when subprime resets peak.
Jas Jain is at half right. Americans are bred to be dopes. Honestly, what they F were they thinking? Was it not obvious for years--decades!--that a day of reckoning was coming, with the trade deficit and the federal gov't deficit each approaching a trillion dollars? Was it not obvious that the median person in the US was running a deficit of over six thousand dollars a year? And that sooner or later it would have to be paid off?
The rampant delusion of Americans comes from watching commercial television. People who watch tv believe that what they see there is a reflection of reality, like an electronic mirror.
I desperately hope that when our society finally scrapes along the bottom, the grotesquery of commercial media will be disavowed forevermore.
Slightly OT: What's happening in the minds of realtors...sticky, sticky, stuck. From Ben Jones' The Housing Bubble Blog
today.
=Donna Gold knows something about the roller-coaster ride thats Las Vegas real estate. After moving from California to Las Vegas in 2000, Gold thought she had come to the land of milk and honey.
A year after moving here, Gold got a license to sell real estate just like she once had California before quitting the business about 1985.
Gold bought nine homes and two condominiums in Las Vegas and four homes out of state. She couldnt believe her timing: When she started buying homes in 2001 and 2002, the median price of existing homes was $136,500. The price rose to $275,000 by 2005, and Golds wealth grew to $4.5 million, not counting the six figures she earned a year as a Realtor.
She planned to sell a couple of properties and cash out on the appreciation and keep the others as rentals to produce income. She wasnt buying real estate as a flipper, she says.
I came here in the golden age and realized this is a perfect time to make money. I felt for the first time that God blessed us, Gold says. I was trying to create a future.
But the market changed and with it Golds fortunes. She sold one of her Las Vegas homes, but the change in the real estate market made it difficult for her to sell any other properties at the end of 2006 and beginning of 2007.
She was able to refinance out of six adjustable rate mortgages, but found herself burdened by two others she was talked into by her mortgage brokers with the mistaken belief she could easily refinance them as she had the others.
After being able to make all her mortgage payments in the past through the end of 2007, Gold says she has fallen about $22,000 short each month on mortgage payments and is as much as four months behind on some payments. She lost access to her line of credit even though she is still paying it down. She also has to deal with some of her tenants inability to pay rent.
The real estate market was hurting her income as a Realtor. Her once six-figure income fell to nothing because of no commissions in 2007. Gold said she worries about prospect of foreclosure, but has no plans to file for bankruptcy. She remains adamant that she will survive these tough times.
I am going to come through this fine, Gold says. I dont blame anybody. I take responsibility, but I am going to forge on. I am going to dust myself off and keep going forward.
Posted By: Ben Jones
Bob, here ya go. fresh data
According to Edmunds.com, one in four people who traded in a vehicle in March was upside down owing more on the vehicle than it was worth. On average, the negative equity the amount by which the balance owed on the trade-in vehicle exceeds the vehicle's value was $4,305. The figure measures only shoppers who bought vehicles, says Jesse Toprak, Edmunds.com's executive director of industry analysis.
The amount of negative equity per vehicle reached $4,342 in February the highest recorded by Edmunds. Sales with negative equity fell slightly between February and March to 26.5 percent far from its peak of 33.5 percent in September 2003.
very reliable numbers..
More auto loan-equity news...
Average auto loan terms have risen from 57 months in January 2002 to 64 months in March, according to Edmunds.com data. But some banks, credit unions and captives such as Toyota Motor Credit and GMAC Financial Services offer loan terms of 84 months or more.
According to media reports, Volkswagen also is considering a 108-month loan.
At the same time, in February the average negative equity the amount by which the balance owed on the trade-in vehicle exceeds the vehicle's value reached $4,342, the highest recorded by Edmunds.com.
"I felt for the first time that God blessed us"
Yeah, think of this correction as divine intervention. And a congressional bailout shall set ye free.
The message? When Donna's gone, and the millions like her, then we'll see bottom. Meanwhile, talking about the health of the auto industry is a ludicrous proposition.
For all those who didn't see it, this weekend has been stunningly bad for retailers in tourist destinations. It was bad last weekend; but this weekend, the boom has now fizzled.
What's next? CRE BK's which will collapse regional banks. Oh, the FedRes will paint this pig too; in fact, they're ordering more digits at their electronic printer 'cause they don't have enough red to last this round of painting.
At least painters will have jobs for the foreseeable future, eh?
Soros' deleveraging is coming into full bloom. Kewl. However, commodity prices in USD's will continue to rise imo because there's no way the ROW will stand idly by and eat this dimunition of value in the portions it's about to be served out, even if every pig has been dolled up. Holding USD's is imo oh say, risky?
G-Ray,
I hope not...and hope still has a chance here...for are youth..
I'm betting that your right though!
It's worse than this IMHO...
One of the serious issues of easy credit (HELOCs / Credit cards / Everyone approved weekends at car dealers) is that nobody really has to have a budget.. End up a little short at the end of the month? Just keep it on the Visa..
Visa getting a little high? HELOC that sucker! Car getting a little old? Re-fi cash out, buy a new car!
I would bet many people are buying cars on their Visa. They sign up for a $400 car payment and end every month with $400+ additional on the Visa.
How many people do you know that could sit down and tell you if they can afford a car payment and back it up with real data?
Was it not obvious for years--decades!--that a day of reckoning was coming,
Yes, but the problem is that the greatest profit is just before the bubble pops, so even when you see the end must come, you also see incredible lost opportunities. Which is why I wish had more of that bullish spirit.
I'm amazed car sales are only down 7%.
Like the danceman, who left Citi with a fortune in tow, said?
There are bulls, bears and pigs. Dancey got the boot; J6P is getting the boot, too, but he's getting booted into the pay-up line.
The reality for those who keep their money, who aren't the swiftest, is this, from Bernard Baruch, "2 + 2 = 4". Remember the story of the monkey who stuck his hand out of the cage to grab the banana but couldn't get it back in because to do so he'd have to drop the banana? Well, Mrs. Gold, and the millions like her, are the human equivalent. However, now the banana's rotten and they still won't let go; chimera has them mesmerized.
believe it or not there are ambac type re-innsurance companies against auto loan negative equity..
California's getting so bad, one town wants to secede from the state.
Don't let the door hit you on the way out Needles.
In fact, can you take Barstow with you?
Ah, but they're the "homeowners" and they should be pitied and supported in their All-American activities. Humbug.
We ain't seen nuthin' yet.
As an aside, Indiana Jones did land office (during the rush, that is) biz this weekend. During the Depression, it was miniature golf. This time, it'll be movie matinee's, with some staying around for the next flick or 2. They're broke, and they know it.
Gasoline stocks will have risen, and prices will not be coming down. Hmmm.
California was definitely the poster child for this behavior.
SoCal was always the land of pricey German rides, but the RE boom brought forth an absolute tsunami of them.
It's so weird to drive down SFV streets of 50's era 2+1's and see brand new M3s, AMGs, etc. in so many driveways.
1.6 million cars at $20K a piece...
Car dealers should 'demand' a bailout package.
What an opportunity for Countrywide. Step in with a HELOC gas card. Just finance your fuel for thirty years on an ARM. What a great country!
Good post about why Gm won't last more than 12 months. Who wants to start a GM death watch. Too bad though.
There is already a GM Deathwatch on one of the auto blogs. Google should turn them up. They've been predicting GM's, and Ford's and Chrysler's, death for years now.
The auto industry -- at least US manufacturers -- have been 'feeling the pain' for quite some time.
Scott writes:
Nice. Nothing like paying for your car for the next 30 years.
Let's not pretend that 99% of the people who did this had the discipline to pay off the HELOC. Oh... some left early and retired in Costa Rica or somewhere else where they could cash out their bubble gains.
I doubt we'll see 20% down requirements for automobiles, but obviously the credit crunch has a long way to go.
Got Popcorn?
Neil
There have been two walk aways on my street. One guy had a Hummer H2 and the other had a Ford F250 crew cab diesel. Anyone with an ounce of financial sense would be dragged kicking and screaming to sign a purchase contract on these vehicles.
Disempowered Paper Pusher
Cheap credit delayed the day of reckoning. With the stock at new lows, this time sorry to say is real.
Truth about cars has death watch at day 177. When it happens lets bring together all the Iroc camaros and tell all these guys that they are indeed worthless.
General Motors Death Watch 177: The World is Not Enough | The Truth About Cars
I doubt we'll see 20% down requirements for automobiles
I'm not so sure.
when it comes to borrowing money against the old homestead to buy that H2 or whatever....clyde at 10:43 nailed it
"I can sleep in a car but I can't drive a house to work."
circling the drain at 11:45 puts the icing on the cake:
"Mortgaging the House to Buy Gas for the Car that was Bought by Mortgaging the House."
i can't improve on any of that
"Mortgaging the House to Buy Gas for the Car that was Bought by Mortgaging the House."
i can't improve on any of that
Mortgage the car with an auto title loan to pay off the credit card that was used to buy gas for the car that was bought by mortgaging the house.
My mother called today and was telling me a small town called Decatur Texas only sold 62 vehicles last month, the average is 350-400.
Mortgage the car with an auto title loan to pay off the credit card that was used to buy gas for the car that was bought by mortgaging the house.
This is the economy that easy jack built.
Secession is a likely outcry stemming from California's woes. In addition to the fairness of a State capitol 6+ hours away from 15+ million citizens there's just lots of California that isn't interested the rest anymore. That said there's no way the State will be allowed to break up. Still a lot of dirty laundry will come out of the complaints.
Rob Dawg,
Heck, SFV wasn't even allowed to break from L.A. Love to hear your thoughts on that one.
CR- "But I doubt most people actually pay back their HELOC and instead they end up with a 30 year car loan."
Kind of like the thirty-year hamburger?
CR, Conjure Bag and I thank you and Tanta yet again for your terrific commentary and insights. This informative and thought-provoking blog just keeps getting better and better.
In unison, mp and Conjure Bag say, "CR and Tanta ROCK!"
Conjure, by the way, was drooling over that scatter graph.
Is the IRS looking into people who used their HELOC to buy a car and then wrote off the interest?
Does this mean the people who used their HELOC to buy a car would actually get that car repossed if they didn't pay?
No. The house is the security for the loan, not the car. It doesn't matter what you spent it on.
Cars have gotten so far away from being basic transportation during the bubble era. $50,000 pickup trucks with rear view cameras, etc. Its laughable.
I havent had a car payment in 8 years. I never want another. I wish they would just make a car that lasts forever, or at least that can be maintained economically to do so.
Subscription renewed!
Burn, baby, burn.
While the tightening of credit and the HELOC situation are clearly having an impact on the car market, these phenomena hide the real long term trend. Peak oil and the prospect of more steeply rising fuel costs is the real driver of the transformation of the car industry in the US.
No one, not consumers, not car makers, not politicians, has wanted to face the reality that the world of cheap transportation is over in the US.
The long term trends in the energy markets are tied to the collapse of easy consumer credit, but the US media is as unwilling to face the music as everyone else in our country. While credit tightening is real, it is only a symptom of the underlying revolution created by the permanent upward trend in energy costs.
It's very difficult to see from here how the consumer reliquifies again.
John Hussman takes up the matter of speculation as against convention in the oil futures market about mid-way through his weekly comment this morning. A decent read, I thought.
Hussman Funds - Weekly Market Comment: A Clue from Contango - May 27, 2008
He also calls attention to deterioration in CDO spreads, with examples at Lehman and at Merrill, indicating the recent (comparative) stability in financials may be nearing an end.
Circling the Drain --
Enter the 2011 Chevy Malibu!! 1 HP and meets all Congressional standards for horseshit emissions.
Standards which somehow get lower every election cycle...
(I am surprised you did not go with "Mustang" or "Bronco" or "Colt" in your example.)
Great post.
I doubt we'll see 20% down requirements for automobiles
I'd be surprised if we didn't when this crunch is all over with.
And it only makes sense: house prices falling 20% is a once-in-a-generation thing, but a new car loses 20% of its value the minute you drive it off the lot.
Any financial institution that ever made a loan for 100%+ LTV against an asset on which, in the absolute best case, they'd only be able to recover 70-75 cents on the dollar richly deserves whatever they have coming.
CD, thanks for the auto loan data. I first heard about this (allowing people to roll over a balance to a new loan) six months ago, and still can't get my head around it. I guess these lenders are betting on the "great moderation" the same way the mortgage lenders were. Seems pretty foolish. And to keep doing it during a downturn? WTF!
"tj & the bear writes:
California was definitely the poster child for this behavior.
SoCal was always the land of pricey German rides, but the RE boom brought forth an absolute tsunami of them.
It's so weird to drive down SFV streets of 50's era 2+1's and see brand new M3s, AMGs, etc. in so many driveways."
... and carports. I lived in a so-so apartment in a nice part of LA a few years back where everyone (except me) had a nice car. The roofer who lived next door had a 7-series BMW, a new 4X4, and his student girlfriend drove a Lexus. Oh, and he had a little off-road thing. No HELOC, just overextension. I was the only non-Latino in West LA driving a Corolla.
Kinda surprised to see Illinois on that list at number 3. I thought we were conservative here in the Midwest.
30 year car loans...
Oh well...I love the CTA and walking to work keeps me trim.
Regards,
NEW YORK (Reuters) - Prices of U.S. single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession...
Home prices fell at record pace in first quarter: S&P
| Reuters
In UK things are getting so bad that some low income families have stopped taking credit for major purchases. Instead people are paying for things like rent on credit cards! Consequently the government is blamed for almost everything and is facing a popularity meltdown. I currently work for a compnay that promotes medical equipment such as blood pressure monitors and it is quite clear to most of us that the credit crunch will bite very severely especially seeing that manufacturing is almost extinct in this economy.
She financed a spider to re-fi the fly... I dont' know why she re-fied the fly... perhaps she'll die.
She re-fied the house to buy the condo and HELOCed the condo to buy the car, that drove to the RE job, that paid for the flat panel, that showed her the Ditech ad that allowed to refi the house... I don't now why she bought that house... Perhaps she'll die.
The last vehicle we bought was financed through a re-fi. It made sense since we were getting a 15 year fixed at 4.375% and this was much lower than the interest on a car loan.
Are we still paying off our car? Maybe. We haven't paid off the mortgage yet, but we have paid off more principal than we paid for the car, so it depends on how you do accounting.
The end result was our mortgage payment increased by something like $125/mo for 15 years as opposed to making something like a $500/mo car payment for 5 years. Plus I can deduct the interest on the mortgage. If I had to do it over again, I would have done the same thing.
I didn't re-fi for the strict purpose of buying a car. I was going to re-fi anyway and thought, why not take out a little extra for a car that we need.
The end result was our mortgage payment increased by something like $125/mo for 15 years as opposed to making something like a $500/mo car payment for 5 years. Plus I can deduct the interest on the mortgage. If I had to do it over again, I would have done the same thing.
I would have, too.
But here's the issue: These sorts of arbitrages and de facto tax shelters built into things like HELOCs and 80-20% piggybacks make a lot of sense for about 10% of the population ... those who could easily make the payments over a shorter term, but have other, better places to invest money today (and often are in a high enough tax bracket where the tax-deductability really makes a difference to returns).
But they haven't been marketed that way. Instead they've been flogged to the "other" 90% as a quick source of ready cash, something to tap to afford that $50K car or $20K vacation that your income wouldn't otherwise provide - an asset-backed credit card, if you will.
It's been a years-long study in the "off-label use" of a number of financing schemes that were originally designed for the well-off and tax-savvy, and its results have been sadly predictable.
Finally the last 5 years makes sense! Sheesh. For several years there, my husband and I were looking at our neighbors a few blocks away, in the new development (where a lot of late comers were paying $400 -500k for their homes). And we were scratching our heads: How are all these young couples willing and able to afford those new houses for THOSE prices?? And then we'd walk by their homes and see a new Acura, Lexus, or whatever brand new SUV parked in the compact two car garages ---and we'd scratch our heads and ask each other "What jobs do all these young couples have that they can pay almost half a million for a home, and drive a brand new Lexus???"
Now it all makes sense to me!! I guess at the time I just didn't believe that so many people could be so deeply in debt. I predict the next 10 years antidepressants and sleep aids will gain in popularity. Because I don't know how all these people can sleep at night.
Burnside
Interesting link.
Sadly, the guy fucks up big time when he suggests that non-Opec is going to increase supply by 600 million barrels in the coming months.
It's possible that he meant to write that 600kbpd of non-Opec supply is going to come onto the market in the coming months, which would be, to be blunt, little short of a miracle unless it was going to come out of the SPR and OECD buffer stocks.
Ugh.
"You could also consider paying off your credit card balance with a home equity line of credit that has low closing costs, assuming you qualify for one. Aside from probably lowering your rate, switching to a home equity line would also likely make your interest tax deductible."
Advice from 'Ask the Expert'
Ask the Expert - Personal Finance blog - Money Magazine's More Money
Drove through the MD Eastern Shore over the long weekend (a trip I take often).
AMAZING how many vehicles were parked by the road with 'For Sale' signs on them. Cars, trucks, motorcycles, boats, waverunners -- sometimes three or four adajacent. Some homes seemed to be displaying for sale every vehicle they had!
Never seen anything like it.
" . . switching to a home equity line would also likely make your interest tax deductible."
Maybe someone can correct me, but I thought when we were doing our taxes that we only got a certain percentage of the interest payment back from our house? So it's not like all or even most of the interest is taken off your taxes. I can see carrying long term payments on a house --which in normal times should increase in value by the time you finish payments.
I had heard before that if you don't plan on keeping a car for more than 10 years, you're better of leasing. Isn't it also more sensible to lease a car --rather than pay interest on a rapidly depreciating item for the next 30 years?