Key Highlights

  • Auto industry already fraught with factory shutdowns and lack of demand for new vehicles
  • Industry beginning to sound alarm about used-car price collapse
  • Used-car price collapse could impact manufacturers, lenders and rental companies

Car lots and auctions are virtually paralyzed, like much of the American economy. Dale Pollack, an executive vice president of Cox Automotive, the owner of North America’s largest auto auction company, recently said, “Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market. Cars are coming in but they’re not selling.”

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People are driving so little that auto insurers are giving their customers discounts/rebates; people are not going on car trips over spring break because spring break has been cancelled; people are not trading in their old cars for newer ones and people are not renting cars for business trips because there aren’t any business trips.

Automakers are doing what they can in hopes of mitigating damage by offering customers one-month or more lease extensions and/or flat out payment deferrals. Industry experts fear this asymmetry between auto supply and demand is likely to last quite awhile.

Used-car sales fell -64% during the last week in March and prices on auction company autos have fallen -10%.

Ford Motor Company reported a preliminary -$600M loss in Q1 2020. General Motors assumed a -4% decline in residual values this year. Rental-car companies such as Avis Budget Group, Enterprise Holdings and Hertz Global Holdings are all trying to find ways to unload cars that won’t cost them too much money.

Remember that lower residual values translate into higher maintenance costs. Also remember that lower residual values translate into higher lending costs.

Does any of this sound familiar? Could new and used auto-sales translate into new and existing housing sales? Could new and used auto-sales be the canaries in the coalmine for new and existing home sales?

What is playing out in new and used automobile sales could well play out in new and existing home sales once potential home buyers and sellers feel safe going outside again. Housing markets, both new and existing, have been plagued by tight inventories for the past several years but all that could change in a heartbeat just as the impact of the coronavirus changed our economy in a heartbeat.

Perhaps the asymmetry in car supply and demand that currently exists today translates into an asymmetry in home supply and demand next month or the months after?

Will the already 17M people who have filed for unemployment insurance benefits in the last three weeks have any savings left to put down any money on a house? Will potential sellers who have waited for the market to improve really want to take their chances on selling or buying another home during a time of massive unemployment? Will anyone with credit scores under 700 be able to even qualify for a home or car loan?

It’s all up in the air for the moment.

 

Thanks to BloombergNews.

Also read: Low Interest Rates Bolster August Existing Home Sales and Refinancings, Banks Earned $10B in Fees for Handling Small Business Loan Program, Podcast: Breaking News, SBA PPP Program | 12 Mortgage Forbearance