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Lemon Sale

Are consumers getting themselves into trouble by buying expensive new cars at perhaps the worst moment in history? Are they buying the lemons of the future? I do have to wonder.

Consider the following trends.

Like with everything else, such as credit cards, mortgages, and student loans, consumers have been piling into ever more debt courtesy of low rates:

Not only that, but consumers have been taking on ever higher balances per loan:

Sound like a winning formula? Take on more debt and buy more expensive cars? As long as rates remain low and unemployment remains low this may be sustainable. For a while anyways. But signs of trouble are already on the horizon as delinquencies are rising:

And worse, auto loan debt already makes up almost 10% of household debt:

But the kicker will come in the next 5 years as people are sitting on used assets whose resale values are already collapsing:

“Debt issued by Hertz Global Holdings Inc. and Avis Budget Group Inc., which had traded at or above par in recent years, tumbled to new lows earlier this month amid signs that used-vehicle prices are dropping twice as much as expected. That’s bad news for companies that collectively have to dispose of about 400,000 vehicles a year, and especially for Hertz, whose junk-rated debt is teetering close to a downgrade.

“Historically the biggest problem that has hit the industry is when they get over-fleeted and bought too many cars; that isn’t the case this time,” said Bruce Clark, an analyst at Moody’s Investors Service. “Prices are coming down and they’re coming down faster than they had anticipated.

Hertz and Avis are getting squeezed as the U.S. auto industry comes off a record-high year for new car sales that was propelled by cheap credit and easy leases. That’s now feeding a glut of used cars as leases end, while heavy discounting on new models has narrowed the price gap with used cars, putting more pressure on resales for Hertz and Avis. The concern has spread from equity investors to creditors, because lower “residual” prices on used cars translate into less value for the assets backing their loans and bonds.”

And this is all before the new technology cycle really kicks in: Self driving cars. You know they are coming. If you buy a brand new car right now it will be technologically hopelessly outdated 5-10 years from now. In essence people are buying a horse carriage in 1917 as cars are starting to flood the street. And they are loading up on record debt for a premium horse carriage that nobody wants in 5-10 years. Try selling it then. Best of luck.

Nobody wants to buy old lemons.

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