Ford: Auto Sales Declined 9.2% in December
Submitted by
CalculatedRisk on Thu, 01/03/2008 - 9:30am (76 comments)
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I still dont know whats scarier; to be smart in a room full of dumb people or to be a victim of the action of those dumb people. In either case, I think the individuals on this blog will be subjected to one of the two options above.
Speaking of loan delinquencies (especially in autos), have you seen the ABA quarterly consumer loan DQ figures?
The data on direct auto loans is more benign -- delinquencies are well below their mid-2000s level. But I suspect that this too will rise as the overall consumer credit outlook deteriorates.
I am not going to pay car debt after its life is over. In fact, I will stop paying after the third month. Now, can you find me?
Just to inform you, my mailing address changed, because that house got foreclosed
There is a basic guideline when financing a purchase - match the length of the financing to the life of the asset. Thirty years for a house, maybe 5 years for a car. Then, when the asset becomes worthless, you are no longer paying for it and you can afford to replace the asset. That is the general idea.
Most homes and cars are not worthless after 30 years and 5 years, respectively. Perhaps 5 years was the case with cars in the past.
Question: if I take a home equity loan and buy a car, when I stop paying the house, I can keep the car, right?
No advice from Robyn needed however.
the least since 1998
Hmmm, now why would that be? LOL!
I don't think a car is worthless at 5 years. I tend to buy used cars, the last one (Subaru Outback) being almost 10 years old when I bought. I paid $4,500, and that was MUCH lower than the going price for that year/model in my area.
Then again, I don't understand the need some people have to trade cars every 2-4 years. And just with houses, people tend to buy more car/SUV/truck than they need.
... the buyers in the LA Times story are violating this guideline - they are still paying for the automobile after they sell it (by rolling the debt into their new car), and eventually this will lead to more consumer loan delinquencies and probably fewer car sales.
I don't see the big problem here. We could simply enact a policy whereby people with shorter-term loans, or those who have paid off their car altogether, contribute to the payments of those who've taken out these longer-term loans.
That should solve the problem of solvency in the auto market for the forseeable future.
Most homes and cars are not worthless after 30 years and 5 years, respectively. Perhaps 5 years was the case with cars in the past.
Yeah, we have a 7-year-old Honda Civic that I imagine is still worth a few grand. In some places in Europe (Switzerland?), mortgages are essentially perpetual interest-only loans. I guess the problem for Americans would be that home value has been a traditional, and important, source of wealth.
No matter how long the leash, a dog will run to the end of it. Just human nature... um, dog nature.
Here's reuters take on what Mike in Fls talkin about:
Consumers late payers on most loans since recession
| Reuters
Hocky new year!
One of my favorite terms learned on CR:
Mr. and Mrs. Howmuchamonth.
How much are the payments per month? That is all that matters to the modern American 'consumer'. Buy a house at 5-10 times income? Not a concern if the MONTHLY payment is doable at current or hoped-for monthly income levels. Buy a car that costs more than your yearly salary? You bet, if the monthly payment is doable.
I still wonder what can bring this mentality to and end, barring massive unemployment.
Is adding debt on an old car to a new car's loan really legitimate? That just seems absurd. It's even more absurd than no-money-down mortgages. Though, I guess it's on par with Option ARMs.
Do the finance companies owned by the car makers give loans like this, or is it the equivalent of the pure-play subprime lenders?
My car is a level 3 asset unobserved by any rating agency; anybody wanna a piece of this pie? Im selling futures!
Ford's truck sales would decline even if the economy were to remain flat (since contractors have started a massive shift to other platforms). The recession that we have now entered only exasperates Ford's problems.
Ford should be very thankful for the Mustang (and Carrol Shelby), it's the only thing keeping them solvent.
My car is a level 3 asset unobserved by any rating agency; anybody wanna a piece of this pie? Im selling futures!
No, but I'm willing to offer a AAA rating on the issue, for a fee of course...
"They are still paying for the automobile after they sell it (by rolling the debt into their new car), and eventually this will lead to more consumer loan delinquencies and probably fewer car sales."
Fewer car sales? How could that be? The more money I borrow, the more stuff I can get, right? Surely you are not questioning that fundamental truth that underlies everyone's economic thinking?
and I am willing to insure you AAA rating....hell...I'll insure every car loan(bond) in the country. I've got $50 in my pocket(capital), so we're good to go.
allegorical story:
I've been looking for a car lately. I buy used (2-4 years old on average). It usually takes me a year to find a car.
I went to a very reputable used car dealer here in MN that mainly sells higher end cars (lexus, volvo, BMW audi, etc)
there was a Lexus RX330 (suv) that arrived while I was there. It was sold in less than 5 minutes after it got off the semi truck (they're hard to get here for a good price).
The woman who bought it drove up in a late model Mercedes S class and had big diamond earrings and looked quite affluent.
I was behind her in line, when she decided to sign the papers. The dealer said:
"so, we're going to trade in your old car and roll the remaining balance into the Lexus, and then you can finance over 72 months."
I was just floored. (FWIW, I pay cash for cars unless the interest rate on the auto loan is lower than a comparable termed Treasury... in which case I take the loan and put the full purchase price in Treasurys)
"Consumers late payers on most loans since recession"
In its quarterly study of consumer borrowing, the American Bankers Association said the percentage of loans at least 30 days past due rose to 2.44 percent in the July-to-September period from 2.27 percent in the previous quarter.
The delinquency rate, which covers eight loan categories, was the highest since a 2.51 percent rate in the second quarter of 2001. Late payments on some types of loans rose to levels not seen since the 1990s
Consumers late payers on most loans since recession
| Reuters
Yearning:
That's what's referred to as "Big Hat, No Cattle". She puts up the appearance of wealth, but that appearance is not backed up by capital. See "The Millionaire Next Door" for details. That book was a life changing experience for me. I too only buy cars with cash. My last purchase was a new 2002 VW Jetta TDI in Aug 2001. 46mpg & the engine will likely run forever with proper maintenance. The diesels also tend to hold value much better than the gas models.
"Mr. and Mrs. Howmuchamonth"
There is nothing wrong with that approach... it is just a different way of looking at it. Some corporations take this approach, too: own nothing, pay as you go.
The question is: do the individuals include savings and retirement planning in tht monthly budget? (Of course, we level those items with insurance, 401Ks and other tools).
In many ways we would be better off if Ford, or whomever, leased all their cars and, when they took them back, recycled them.
Ironically, I am writing this from the car dealership--getting service on my 2000 Subaru that was bought new with a 3 year loan. It should be good for another 100,000 miles--that my goal.
being from metro Detroit and having a decent amount of knowledge of the inner workings of the former big 3, I can tell you that Ford pays the bills via its finance arm. Ford/GM sell loans, not cars. If consumers start to turn on their auto loans...
tedb - A rule of thumb: The amount of wealth is inveresly preportional to the amount that is flaunted
iceman, yeah, I guess I should say "worth less" than the amount owed.
If you can sell the car for $5,000 in five years - but owe $10,000, you are falling behind.
Best Wishes.
CR - I might argue that the longer term financial aspects of an auto purchase mean little to Mr. and Ms. Sixpack.
I was raised to pay cash for cars and manage to still do that. Of course that might be what keeps me below median new car price (my $22K Prius rather than the $28K average).
I suppose we could get tricky with interest rates and inflation rates ... but the reality seems to be (given those 6, 7, 8 year loans) is that too many people start down the financing road and don't know where to stop.
Behavioral economics indeed.
Oh, by the way. The diamond mercedes lexus lady is the reason I gave up on competing in conspicuous consumption.
No one is competing on wealth, it is all based on debt.
O/T - Here come the regulators!
"Switzerland's Federal Banking Commission (SFBC) is to investigate who was ultimately responsible at banking giant UBS for writedowns of $13.5 billion in bad debts linked to U.S. subprime mortgages, a spokesperson told CEP News on Thursday"
Is adding debt on an old car to a new car's loan really legitimate? That just seems absurd.
Jeez! Now that the Housing ATM isn't spitting out $100 bills any longer, how else is the McMansion family supposed to afford our new Beemer X5?
I mean, it's been almost two whole years since our last new car purchase. This old piece of junk doesn't even have ventilated seats! How can any self-respecting exurbian live without those?
And don't tell me "use the credit card", either, 'cause we've already maxed it out for our upcoming excursion to Fiji. Besides, the sales guy worked it out for us, and our new payments are only gonna be $100 more a month than the old ones! A hundred bucks ... that's not even, like, a night of cocktails at the place we're headed after work.
See you there! Right?
That article says the rate of credit card delinquencies is lower, but apparently the value of delinquencies is much higher.
I find this quote really strange: "With cheap money at hand for more-affordable cars, the temptation to keep buying became huge."
This article seems determined not to state the obvious. Its not that people have become more financially irresponsible, its that affordable cars tempted them into spending more than they can afford.
Most homes and cars are not worthless after 30 years and 5 years, respectively. Perhaps 5 years was the case with cars in the past.
iceman
It's odd, while car build quality has gone up, while home build quality has gone down.
A lot of these houses in the bubble states will be lucky to make it 20 years without a major rebuild.
Is it just Texas or do other states have "title loan" companies? I saw for the first time a late night tv commercial for a title loan company a couple of weeks ago. I should have known such an industry exists, but was still surprised. It seems like the car is destined to be the atm of last resort via a couple of methods.
This article seems determined not to state the obvious.
Well, newspapers would be doing even worse if they regularly insulted large groups of readers. Usually they find somebody who produces an insulting quote instead of making the point directly.
F. Federson ... not to mention the folks that take out all those auto ads?
Heh, no doubt a "Money" piece is pending about the value in 9 year car loans.
Borrowers are not more irresponsible. Lenders are (were).
A friend of mine in FL actually rec'd a phone call from one of the big banks (can't remember which one), which urged him to re-fi his car and take cash out. No kidding!!
They were going to extend the life of his loan, and up the interest rate of course and he could take out $1,500 cash. This was a completely unsolicited offer on their part.
I spoke with the gentleman on his behalf, and told him "No Way" of course.
Can you imagine they are offering cash out re-fi's on used Hyundais?
Sad but true. Oh, this happened about 6 weeks ago.
I have to say, I've been reading this blog regularly for almost a year, and this is the first thing I've read that's truly shocked me. I can't believe they let people roll over auto loans this way.
On the upside, this should cause serious downward pressure in the used car market in a few years, when all these loans default. Maybe I'll be able to move up in life...
1997 Mercury Grand Marquis - 93,000 miles.
yeah, I guess I should say "worth less" than the amount owed.
I'll agree with you there. Great blog, keep up the great work.
Clyde, with that collateral I'd like to offer you a cash out loan for $12. Twelve monthly payments of $1.09.
In AZ(according to I guy I know who works for 5th/3rd), used car values are down 40% YoY as the 50 cent millionaires trade down.
w,
A songwriter's reply to your kind offer: It's cheaper to keep her.
I'm surprised the rate of auto loans going bad isn't higher. You practically have to TRY to get turned down. Take a look at the auto loan section at creditboards.com/forums/ for a real eye opener... Here is a sample:
"-I got a car loan with a 380 credit score - didn't know they went that low-
2 1/2 years ago I traded in my 2000 Toyota Camry (with $5,000 negative equity) on a 2004 Mazda 6s. The Mazda was selling for $18,000, but all in the end, I ended up paying $23,000. Apparently my credit score was super low, like under 400, I think 380 if I remember - the salesman even showed me my credit report with the score on top. I didn't even know they went that low, score wise."
This isn't entirely a bad plan - for a very selected group of vehicles.
I got a new car the Friday before I started my first job.. a Honda CR-V. Because I bought off the Internet, I was able to get it for 1500 under blue book.
Come 1/15, I'll have made 3 years of payments and have not had to do a single piece of maintenance other than typical upkeep. Runs like a dream, I'll drive it until 300,000 miles. At this rate, only 15 years to go!
Publius, if they could go lower, I'd be right there with you. The grad student stipend does not a good credit score make.
Question on paying off a car:
I have a 2006 PT Cruiser with $9,000 left to pay (~ 3 years, ~7+%). Should I pay it off (I can afford it now) or just keep paying (~$290/month)?
It was financed at CarMax, where I got it.
Does the financial instability of Chrysler affect my decision?
Thanks.
When my wife bought her first house she was a student. No salary. So they asked "what are you qualified to do?" She said "Oh, schoolteacher I suppose". Right, they said, we shall deem you to have a schoolteacher's salary. Moreover, her mortgage company was from the English midlands and wouldn't lend on property older than 90 years. But her house was in Edinburgh, so they completed the form thus: Year of Construction - 1820. Age of Property - 90 years. That was in 1972.
I was tempted by the Subaru year-end close-out but figure the model-year closeouts later this year will be a lot more . . . interesting . . . I loove 0% interest offers . . .
martin, the answer is:
a) are your tax-deferred savings plans (401K, IRA, Roth) maxed out?
b) if so, then if you can get greater than 10% in the market then don't pay off, otherwise pay the 7% note off. SRS went up 7.8% today so it is possible, but you gotta be good . . .
c) if not, put the money in tax-deferred savings first.
" martin, the answer is:"
And run an amortization table to see how much more interest you have to pay.
Those things do amortize don't they?
Ford credit is constantly sending me mail solicitations trying to get me to trade in my 2 year old truck on a new one insisting that my monthly note can be lower if I bought a new one!
Encouraging borrowers to trade in something they are already upside down on, rolling the negative am into another bigger loan under a longer term and a higher rate SHOULD BE A CRIMINAL OFFENSE.
Clyde,
You're polluting the earth with that thing. Time to clean up.
wally, undoubtedly I spew more than you (although I must say Mr. Gore is sensitizing me to the cause). But I am about to be "rationalized" right out of the mortgage industry and career change is mighty costly.
There is one element of auto industry financing's nosedive that makes me positively giddy.
GMAC is abusing KKR like a red-headed stepchild.
As I ruminate about that, I picture myself skipping through daisies sipping on pina coladas. It's so much fun to watch those bastids twist in the wind.
This is clearly a bomb ready to go off. The next problem in commercial paper. Ford has made some smart moves over the past year or so, but they are probably 10 years too late. Maybe they put Chrysler out of business so the others can have a chance. In any case, my mother is rich or at least well to do, (net worth over $5 million with a $200K cashflow and no debt)and when her car got stolen, she wouldn't replace it. Instead of a new Cadillac, she bought a friends used Nissan with 25,000 miles on it. Cars are too expensive for her, how does the general public go buy one after another?
I posted without reading. I think what people fail to realize is that the purchase of cars has been moved up by this action, not backwards. I read a history of installment sales that focused on the 1920's. What I drew from it was that the advent of installment sales did away with the need to save and moved up the timing of purchases, giving the picture of a better economy than there was. They are offering longer fuses to keep selling cars. I haven't driven a car that was less than 7 years old since the early 1990's. But that is besides the point. My 1988 Mercedes 420 I bought in 1997 cost $60,000 new. I paid $15,000. That car after 3 years probably doesn't bring $35,000. What do you think was owed against it if the entire $60K was financed? The point here is that older cars don't bring much and the industry has to either keep adding years to the note or the business model collapses.
Fools are so easily parted from their money.
Throw in some shiny rims and some leather bucket seats and they'll sign on the dotted line for $45,000.
hiker90, they're here in the burbs of Birmingham, Alabama too. one of 'em - TitleMax - has this idiotic commercial where yahoos exult that they "got their title back with TitleMax".
right, after paying usurious rates for a short term loan.
In the industry and dealers made a lot of money over the last 6 years. O% credit came along right after 9/11.
They moved people off the fence into the showroom. They actually moved buyers who would be looking now up a cple years.
Dealers are not selling a lot of cars and they are cutting back on everything! Sales people used to making 60-75k a year staring at 30-45K or worse.
People will be looking to the net to get pre approved in seconds before going to dealerships.
Woah, arent we the self-righteous bunch. Keep patting yourselves on the back for being so freakin superior to the "common man."
Why do people roll over the amount? Because in many cases they have no choice. The way the system is designed they need a car to get to work. I bet some of these people find it cheaper to roll it over than repair it.
You can do the long term calculations but when you are looking at a budget built around $14.00 an hour you do what you have to do. Joe knows he is on a treadmill that is speading up. He just does not have a lot of options.
Nova,
Why should there be sympathy for those who roll over car loans that they could not afford in the first place? While I feel that the problems we are beginning to experience today are the result of lowering borrowing standards by lenders or lenders' agents in all arenas, there simply is no excuse for buying more car than one can afford. If you are making $14/hour you can just as easily finance a used car as you could a new car.
This has been going on in one form or another more or less forever.
It used to be leasing. All sales geared to the payment. There were significant losses when the residuals turned out to be inflated. The buyers actually made out on the imbedded put option.
Leasing is at least a pay as you go proposition. I suppose the payments on a 7 year loan must be lower then a lease.
i bought a 2000 honda accord ex last year for $9500 and it was 6 years old at the time. value depends on the vehicle.
No, but I'm willing to offer a AAA rating on the issue, for a fee of course...
Let's do a derivative swap just cuz we ca
Personally I am waiting for the new Tata lakh model to come out. I want to be the first on my street to have the latest import.
Ford Looks to Tata as Bidder - WSJ.com
The signaled progress in talks between Ford and Tata would come only days before Tata unveils its highly anticipated "one-lakh" car at an auto show in New Dehli. The car, which has been under development for several years, is expected to sell for an Indian lakh, or about $2,500.
There are a billion Indians just waiting to get upside down on he lakh.
What gets me is the loan-to-value figure on the G.20, which has been AVERAGING 102-103%... Average... Does anyone know when the LaHaye Argegeddon-now series of books started getting published? Because sometimes I really wonder whether what we're seeing is a significant proportion of the population spending like there's no tomorrow because, well, they believe won't be a tomorrow. At least not one that lenders are invited to.
That's the loan-to-value for used cars, by the way.
When it comes to consumables (and a car IS) if you can't afford to pay cash for it....then you can't afford it. My rule....it's never failed me yet.
I don't know about the cash for it, but I think you should have a way to have it paid for before you are done with it. I don't know how working people even put gas in the things if they drive very far.
You can buy a car that runs for the price of a new big hdtv set.
About 25 years ago I saw ads for loans for stereos.
About 15 years ago I was criticized by a car salesman for not taking out a loan, because I could write off the interest on my taxes. He assumed everyone was in debt.
This has been coming for awhile.
If the Fed inflates to prevent the contraction, then those holding assets will be penalized for awhile. Those in debt will be saved, for awhile at least, until the system collapses from lack of confidence.
Got out of grad school in 1992.
No car after that.
Bought a Harley for $13,000 in 1999.
Sold the Harley for $14,000 in 2004.
Bought a 2 year old PT Cruiser with 8,000 miles for $10,000 cash in 2004 and still have it. It now has 15,000 miles on it.
But then again, I live in Hong Kong and didn't buy a car until the little ones came along. (Couldn't convince the wife to put a side car on the Harley to transport the kids).
Someone made the interesting observation regarding current build quality on cars and useful service life. It's very true. I have a 5 year old Subaru (fully paid off) with 70,000 miles on it and I have only paid for scheduled maintenance, tires, a battery and drive belt. Amazing.
Ironically, the folks who are looking for more leverage are probably not those who are going to drive their car for 10 years. They will get new cars in 3-5 years because they want to, not because they need to.
My Dad's accountant and financial planner holds the belief that if you want to drive a car worth more than $45K, you should lease it for three years. That way you'll always have a new car, and not suffer the depreciation loss. If you want a new car every 3 years, it makes sense.
My Dad's accountant and financial planner holds the belief that if you want to drive a car worth more than $45K ...
... you should have a gross income of at least $220,000 per year - even more if you keep revolving debt on credit cards as well.
Not so long ago, lenders considered anyone with more than 6% of their income going to non-mortgage debt an unacceptable credit risk. Thus the "22/28" and later "28/36" rule.
A $45K car financed over 4 years at 7% works out to $1,100 a month, give or take. Divide that by .06 and you arrive at $220K a year.
Which would restrict it to the top 2% or so of income earners in this country. And you'll notice how seriously BMW and Mercedes take this guidance by how strictly they limit their advertising to channels likely to target that top 2 percent! rolls eyes
(BTW, I've got everyone who's posted beat so far, at least from a mileage perspective. My 1997 Lexus ES300 has 171,700 miles and counting - and still runs like a Swiss watch.)
Sorry, Mook. Mine is a 1995 Honda Civic with 189,000+ miles. Gets 40 mpg. Never replaced anything but the normal stuff--tires, battery, brakes, etc regular scheduled maint. & oil changes. Of course, the radio doesn't work so well anymore...
My next vehicle will be a Toyota/Lexus or Honda/Acura -- can't beat their quality.