Is an Auto Crisis the Next Housing Crisis Jr?
I had a 2003 Suburban, loved it but we'd replaced it with a newer one. The KBB value on the car was $3,500 and that's what the dealer offered us on a trade, but we sold it in one day on Craigslist for $14,500 and had two offer above my asking of $13,500. This felt a lot like the former housing crisis, but in the form of irrational exuberance in the car market fueled by low rates and inflation.
The average new car in 2020 was $38,000 and last month if was $50,000 for the first time ever. The average used car price in 2020 was $20,000 and last month it was $31,000 for the first time ever. That lead to a first ever print of the average payment for a new car toping $1,000 for a standard 60 month car loan in June of this year... that is a great deal more than my first house payment in 1991.
What does this have to do with housing?
We all have one wallet, and that cash flow is coming from somewhere. A $1,000 car payment will buy you a $50,000 car, that depreciates when you drive it off the lot (see below). That same $1,000 payment will buy you a $150,000 house (ROUGH estimate) that is likely to appreciate and you can refinance it to a lower rate (most likely) in the future. You may say that's not a not a lot of house, but heck $50,000 is not a lot of car in some cases.
Why could this be the next housing crisis jr?
Those rates are starting to go up and a lot of people financed these cars at lower rates, they bought $40,000 cars for $48,000 because of dealer markups based on supply chain issues. What happens when the dealers start providing more inventory, people slow down buying cars, inflation erodes other spending, and the values of those cars with 'catch down' and consumers have negative equity in their car? That $48,000 car which wasn't worth $40,000 could suddenly be worth $30,000 and your $1,000 payment won't feel worth it (like in 2008 when consumers didn't want to pay for a house that was $50,000 in negative equity).
Like in the former housing dynamic in 2008, you could see people in a recession walking away from their car payments, they'll do that long before they walk away from their house payments. You can see the same 20 years for typical car prices (figure 1) versus house price (figure 2).
This could lead to more cars flooding the market at cheaper prices... and feel a lot like the 2008 housing drop.
TIP: If you are thinking about buying a new car, wait a year and you'll likely get a much better deal as dealers start to tighten up. That same money you save could fund an addition or remodel of your house that will likely increase your value over time.