The Car Loan Bubble Just Popped (HUGE Recession Indicator)

hi uh quick question i'm working on a project um and i'm reading all these headlines about like repo rates like increasing and skyrocketing because the stimulus checks and all that i live in the area i just wanted to see if you guys are seeing a spike as well well we don't do repossessions we're private so if we do private towing we do not do repositioning oh it's just calling okay sitting with a guy that does do him you can ask him those questions hold on okay he is a repo agent thank you hi a quick question sir this i know this is random but i'm working on a project right now and i'm seeing like all these headlines that are like you know repo rates are skyrocketing this and this uh i live in the area i was just trying to get a quick uh gut check are you seeing that and is that the case yeah what is the fuel cost that's why so usually everybody's jumping at prices about 20 bucks uh a unit now because of fuel costs so you think because of like inflation in other areas of life people can't afford the payment on the car note that they created right i don't know about that but yeah i would i would imagine that because we're our we're getting orders through the roof right now it's crazy usually this is our slow time and it's we're getting we can't keep up with all the orders that are coming in for repossessions so are you a survey guy or what are you no so i i i work uh in finance and i was actually doing research because yeah cause usually these things are like a uh a leading indicator of a recession and when people started getting their cars wow okay yeah yeah you can thank you can thank the current administration for that so yeah the problem is it's costing all the repo companies dipping into all their their their net profit because it's the fuel costs are just outrageous right now it's just crazy yeah to actually get the cars and take them to the tow yard and all that yeah okay wow okay thank you thank you for your time sir bye hey everybody welcome back to whiteboard finance my name is marco and i'm here to help you master your money and build your wealth in today's video we're going to be talking about how the auto loan bubble just popped we're talking about a 1.4 trillion dollar industry and it is essentially a ticking time bomb as we speak so this is a presentation that my research analyst and i put together my research analyst is joe consorti if you don't know joe go follow him on twitter his work is excellent so let's talk about what's going on right now so the first indicator are auto repos repossessions and these are exploding so car repos are exploding and that's a bad sign this article just came out a couple days ago and it's essentially talking about how loan to value ratios or the amount of money financed relative to the value of the vehicle is around 140 percent versus typically a 80 scenario so we're seeing this in the caption down here if you can't see that this is crazy you guys this is basically showing the entire uh 1.42 trillion dollar auto loan debt market and you can see since basically 2010 we were sitting at 0.7 trillion fast forward essentially 11 or 10 years later we're sitting at double that 1.42 trillion so why is that so this basically doubled in 10 years making it the third largest consumer credit market in the world uh interest rates have skyrocketed as high as 25 apy that's annual percentage per year uh and then americans are definitely overpaying for cars so we're seeing 46 percent of loans uh being under water this means that people owe more than the car is actually worth so uh this is a figure showing why this is happening okay so new loans skyrocketed after rounds of stimulus so if you take a look at this this is basically showing you quarterly numbers in billions of dollars so you can see here every four little steps is one year so one two three four new year one two three four new year etcetera etcetera so this has typically been around 180 billion dollars you can see sometimes it's a little bit lower sometimes it's right online sometimes it's lower because of cerveza however after the money printing and after stimulus you can see that these exploded to 40 billion dollars more typically per quarter if you look at these numbers coming from quarter two of uh 2021 so why is this so fiscal stimulus allowed people to borrow above and beyond their actual income would allow they're using too much leverage aka too much debt so lenders are feeling comfortable lending at extremely high loan of values based on the amount of money people are putting down versus what the car is worth based on borrowers stimulus inflated income okay so inflation has now pushed uh monthly expenses up and that car loan made possible by stimulus is becoming too expensive to bear so let's take a look at credit worthiness and how we define basically subprime all the way to super prime if you will so uh if you look at this category this is your credit score if you look at this this is the category in which you sit in and then you can see the average loan rate for a new car purchase is anywhere from 2.47 if you're super prime all the way down to 12.53 if you're subprime and then also for used cars obviously it's a used vehicle so it's going to be a little bit more risky to the lender so interest rates are going to be higher so we have six one for super prime almost twenty percent for deep subprime so the average credit of borrowers has declined which creates a higher uh risk for default meaning they can't repay the loan so every one percent increase in the loan rate causes a three percent rise in the monthly payment of the vehicle and cheap credit essentially propped up this auto market uh during the pandemic so uh what's going on right now this is the meat of the presentation so we are entering an automotive recession so what is going on so stimulus spenders have financed themselves into a corner with 1 in 12 americans more than 90 days late on a car payment and not only that car prices have accelerated so we're seeing almost eighteen hundred dollars in twenty nineteen thirty three hundred dollars in twenty twenty and sixty two hundred dollars in twenty twenty one that is a twenty five percent increase in just three years so what is going to happen now what is the point of this video so demand destruction is imminent meaning people will not be able to afford uh newer or used cars because prices and rates are both prohibitively high with inflation making everything else more expensive such as groceries and day-to-day living so buyers are getting exhausted and defaults will continue we're going to get into a really cool chart here in just a second but the sponsor of this video is policy genius and here's a few words from them mortgage payments private student loans and other types of debt don't just disappear if something happens to you a life insurance policy can provide your loved ones with a financial cushion they can use to cover these costs and it can also 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for free head to policygenius.com whiteboard finance to get your free life insurance quotes and see how much you could save so this is good news for the potential buyer you just have to be a little bit patient here so car prices will roll over so we're sitting at near all-time highs for new and used automobile prices at forty six thousand five hundred dollars and thirty thousand eight hundred dollars for use respectively an estimated monthly payment has risen to a record of seven hundred and twelve dollars per month that used to be a good mortgage okay that used to be a healthy mortgage now that's a car payment you are literally driving around your mortgage on your four wheels so as rates rise and defaults and sue eventually car prices will go down as well so if you look at this chart we have on the y-axis the price in dollars on the x-axis we have time uh you can see we're starting in july of 2019 uh and basically this is the index price okay so you have the first coveted stimulus hitting right around right here and you can see what happened to prices yes some of this was due to logistics yes some of this was due to chip shortages i have a video about this i made it about a year ago now that chip shortages are starting to um not exist as much as they did back then when prices were going crazy we're going to start to see an equilibrium over here in this chart so the next slide is going to be talking about affordability with defaults to follow so car affordability has exploded to 41.3 weeks of income so this is bad credit being pervasive in the car industry we're seeing subprime defaults mooning to a record 8.5 percent since the cars are the collateral meaning what they're putting up if you can't make your payments repos have skyrocketed as well um i used to sell cars you guys i knew all the buy here pay here a lot uh it's people that have really bad credit you know they'll take the car and basically default on it and get it repo'd and that dealer just keeps churning that same car over and over again so you can see here this is cox automotive and moody's analytics this is the vehicle affordability index we're starting over here in january of 2012. and it's been relatively flat for about nine years or so and then once you get up into the chart that we just saw from the previous slide you can see here that it's about 41.3 weeks of income as opposed to historical low to mid 30s as you can see right here so this is a chart from kpmg this is talking about fixing supply constraints and when prices will start to come down so semiconductors and other key suppliers are being made more available as i just mentioned same thing with the stuff that i talked about in my previous video with semiconductors and all the chip shortages demand growth is slowing so this also gives supply time to catch up so what we're going to see here and while you're watching this video is prices will reach a new lower equilibrium from quarter four later this year to basically quarter four of later next year so you can see here uh in this dark blue high supply low demand scenario we're looking at october of 2022 if we're looking at a high supply high demand scenario we're looking at basically q1 of 2023 for looking at a low supply low demand scenario which is purple we're looking at middle of the year 2023 q2 if you will and then the low supply high demand scenario we're pushing it all the way out to q4 2023 that's when the estimated new car shortage will start to go back to zero if that makes sense to equilibrium so this slide is talking about how used car prices will ultimately converge with new car prices so we're looking at the y-axis this is the percentage change on the x-axis this is just time you can see here the blue line is the new car index actual the blue dotted line is the new car index assuming a six percent inflation forecast the dotted uh light blue line is the new car index with four percent deflation and the purple line is the used car index in general so if we look at the used and new car index new cars have gone up 11.6 percent okay as time went on from 2020 to 2021 uh we're seeing a projection of 19.6 percent if there is a six percent inflation uh indeed forecasted and then we're looking at a uh six point nine percent uh increase if there is a four percent deflation okay and then uh used cars if you're in the market for a used car we saw skyrocketing prices of 42.4 percent in october of 2021 uh and then we're looking at these scenarios uh over time uh it basically just depends on supply and demand at that point but what this chart is trying to say is at some point there may be you know a rebalancing or converging back with new car prices okay so as always in my videos i try to bring a positive out of something that is perceived to be negative so how can you position yourself so we're gonna play some defense here number one is common sense make sure you can service all of your debt so gen z and millennials have a two percent chance of defaulting on their auto loans in the current environment this is from nbc news number two is make a large down payment to lower your monthly payments uh in an inflationary environment having good debt makes sense if you're getting these car loans for you know zero percent or point nine percent obviously putting down the large down payment may not make sense but if it is something like four or five six percent or like on a used car if you will where you saw the interest rates were higher putting a larger down payment will help you avoid unmanageable monthly payments even at a whole high loan rate number three is weight to buy we just saw in the last two charts that prices will come back down to normal with prices reaching their peak wait until they roll over to make a new or used vehicle purchase so you may end up with a higher rate but a killer deal on a car which you can finance much sooner and then number four is patience i think and my research analyst and i think based on what we've done a recession sale is coming give it about 12 to 24 months as we saw in those charts so as always here are my thoughts so number one americans love to keep up with the joneses american consumerism really is a rampant disease everyone's on social media saying oh melanie got the new kia tell you ride stephanie got the new uh nissan rogue she got the new this they got the new that guys turn off your phone forget social media the only thing you should be using your phone for is to watch whiteboard finance no all joking aside stop keeping up with the joneses okay i'm seeing so many people drive cars that i know they can't afford i know how much people make okay based on their job title i have an idea of how much they make and they're driving way nicer cars than i am and i make significantly more money than them i'm not judgmental that's their choice that's fine i am a car guy but don't do it just to do it don't do it just to keep up with the joneses if that makes sense number two is everything is too expensive now so as we mentioned earlier in the slides with inflation raising the prices of everything such as gas such as groceries such as everyday consumer staples for the middle class that that high car payment that you thought you could afford because of the stimulus checks and things like that is now obviously becoming unaffordable so not only is the price of cars going up as we saw in this presentation the price of everything is going up number three i mentioned this in my last video in the everything bubble which you should go watch if you haven't already everything is related to jobs and the stability of income so right now people can service this debt they can service their high car payment they can service um you know the increase in prices of cpi of everyday staples of the consumer price index they can manage they can live paycheck to paycheck and manage the second these bubbles pops uh pop are when people lose their jobs when they lose their income and then they have to scramble and you know do side jobs you know maybe like a side gig or um you know the delivery economy with delivering pizzas or ubers or whatever this is what happened in 2008 there were ceos literally delivering domino's pizzas right so as long as people have a stable income this isn't going to be a huge problem but we are seeing an increase in the repos and we are seeing an increase in other areas of this car market so i'm getting a million dms maybe i'll share a few screenshots here right now but people are telling me they're seeing way more inventory on auctions there's a guy that follows me on instagram he is a um he runs a repo tow truck and he's saying like repos are through the roof right now this is just anecdotal evidence but we are seeing it nationwide if you will based on the research that i've done so this is always a leading indicator it's not a lagging indicator so this tells me that things are going to get a little bit worse because once people start having their cars repo'ed you know stuff is going to hit the fan later on down the road in other aspects again it all boils down to having a stable income and having a job thank you so much for watching everybody give my research analyst a follow on twitter joe consorty if you don't follow me on twitter you are missing out uh it is whiteboardfin fin and then on instagram whiteboard finance one word spelled correctly there's a lot of scammers out there also in the comments section i will never sell you you know a crypto scam i'll never ask you to reach out to me on whatsapp uh none of that stuff so just just have some common sense you guys thank you so much share the video uh watch the channel give it a like give it a thumbs up we put a lot of time and effort into these videos and we really appreciate it thank you so much and have a prosperous day okay so i'm calling a random repo company in my area i've never spoken to these people before can i help you hi ma'am a quick question i'm working on a project and it has to do with like nationwide repos increasing i actually live in the area so i was just calling to get a gut check are you guys seeing like an increase in repos at all in your business i'm not interested in that conversation thank you oh okay all right sorry damn daniel she straight up shut me down dude hold on let me let me call another one let's call these dudes not interested in that conversation damn okay sorry sally [Music]

Channel: Marko - WhiteBoard Finance

Views: 734,081

Keywords: investing, investing for beginners, investing in your 20s, how to invest, how to invest in real estate, how to invest in stocks, stock market investing, stock market investing for beginners, stock options, robinhood, robinhood app, best stock trading app, how to be a millionaire, how to be a millionaire in 3 years, credit score, credit score explained, credit card, credit cards for beginners, passive income, how to build wealth, how to build wealth in your 20s, real estate 101

Id: qx-SDTYCpDU

Length: 18min 38sec (1118 seconds)

Published: Mon Jul 11 2022