Used car prices predicted to drop 30% - Fairview Commercial Lending

Who would have ever thought that used car prices would increase? A 10 year old car has appreciated 94% since the pandemic supply chain woes occurred. Unfortunately, what goes up will come down. When will the used car bubble pop? Why is the outcome of the auto industry so important to real estate? What can we learn from 2008 in homes that could occur in Autos?

What has happened in the used car market?

Car prices have reached an all-time high since the COVID-19 pandemic began. In fact, in November 2021, the average used car cost 41% more than pre-pandemic prices. Here are some more details on the amazing appreciation of cars.

In December 2019, a three-year-old used vehicle (which is to say, from the 2016 model year) had a median list price of $21,137. By contrast, the median list price in December 2021 for a three-year-old car (so, a 2018 model) was $34,339 — a 48% spike over the course of two years.
The increase gets more severe when you look at older cars. A five-year-old (2014) model in December 2019 had a median list price of $15,700, while a five-year-old (2016) model in December 2021 carried a median price of $24,000. That’s a 53% jump.
The most dramatic increase is for much older vehicles. A 10-year-old (2009) used car in December 2019 had a median price of $7,990. That’s now catapulted to $15,498 for a 10-year-old (2011) model in December 2021, a whopping 94% increase.

When will the used car bubble pop?

KPMG, the accounting/consulting firm, did an excellent analysis of the auto industry. They are predicting that the auto price bubble will pop late 2022 to 2023 Here is a summary of their findings:

Whatever path the new car market takes to a “new normal”, used car prices will eventually return to the traditional relationship with used car prices. In other words, a 20-30 percent plunge in used car prices is in the cards.

The 2008 housing crisis could be repeated in autos

Used car prices are bound to decline to more traditional levels once the inventory issues are worked out. We saw a similar scenario in housing in 08/09 where many houses that were recently purchased were worth less than what they were bought for. This left many lenders and buyers underwater which led to tons of strategic defaults.

For example, assume someone bought a truck for 45k, and you put 5k down, leaving a loan of 40k on the truck. As prices reset, that 45k truck could decline 30% bringing the value to 31.5k, many owners will simply walk as the value of the vehicle is not going to increase so they are stuck and would rather take the hit now than keep paying for something worth less than what they could buy today. We saw this play out in homes in 08/09 but it will be considerably worse in the auto market as there is no hope of the car regaining its value as opposed to a house that if you wait long enough the value likely will increase.

What does the extraordinary drop in car prices mean for real estate?

Credit scores plunge: with a substantial number of auto loans underwater, this will lead to a sizeable number of borrowers that have enormous impacts on their credit scores which would prohibit them from purchasing a house. This will drive another wave of renters.
Consumer sentiment drops: with such a large asset like an auto depreciating in value like historical trends, there will be a large hit to consumer sentiment. As people feel less wealthy they spend less.

Will Autos trigger a larger economic event like a correction or recession?

According to the credit agency, Experian, auto debt has grown to a record 1.37 trillion dollars. This is almost double the auto debt out in 2010. With such a large amount of auto debt outstanding, a reset in the auto market will have large implications on the general economy as defaults rise. Although I don’t think the decline in auto prices will take down the economy like the subprime crisis, it will cause a large slowdown in consumer sentiment and in turn spending.

Summary:

The world will normalize as we get back from the Covid disruptions and used car prices will follow more historical patterns as the inventory situation of new cars correct. This will lead to a 20-30% decline in values which will have profound implications on consumer credit scores, consumer sentiment and in turn consumer spending. The 2008 housing crisis provide a roadmap for how bad the auto industry could get. The depth of the crisis will determine the impact on housing prices. Currently I don’t see the auto industry taking down the housing market, but if the contagion spreads due to strategic defaults, then all bets are off. How the bubble deflates in autos will be important to watch later this year into 2023.

Additional Reading/Resources

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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