YOU Can’t Afford a Car Anymore: This Is the Real Warning Sign
Summary
The U.S. auto market is flashing warning signs. Rising delinquencies, tighter credit, bloated inventories, and affordability pressure …
Transcript
We often talk about the car industry being the bellweather for the US consumer. It is really important for Americans to have cars because I've been there. They don't have a lot of sidewalks and you you need a car to get around. So, it's really really important to take a look at the car market. How is the US consumer doing? We are in the middle of an affordability crisis. And I've invited a fantastic guest to to run us through the current consumer sentiment, but also a bit of an outlook for 2026. How are used cars doing? How are new cars doing? And should we be worried about the car market? Because we all know repos are picking up. Uh the credit market is getting tighter. Uh delinquencies are probably increasing. So lot lots to discuss. And maybe is this the next subprime crisis that we should be looking at here. But uh before I switch over to my guest, who is Zach Trafkus by the way with Carage? Uh please hit that like and subscribe button. It helps us out tremendously and we much appreciate it. Now Zach, it is great to welcome you back on the program. How how are you doing? How are things >> doing? Fantastic, Kai. Thanks so much for having me. Really appreciate it. >> Absolutely. Yeah. No, you're absolutely our canary in the coal mine here a little bit, Zach, because uh you know, I love the car market, but I'm not a car market guy and not an expert. So, a lot of the questions that I'll be asking you are really fueled by natural curiosity. Um maybe we'll start with a really basic question. How is the car market right now? >> Uh it depends who you ask, Kai. If you're an affluent couple here, you know, you're making a couple hundred,000 a year, you're buying your new Lexus, you're you're feeling great about the car market because, well, those Lexus dealers have enough inventory to sell them to you at MSRP, and you're getting your new ride. If you're the consumer who's maybe looking for something a little less expensive, say under the $50,000 average transaction price, which is becoming the norm for new vehicles, or under 25, $26,000 for used cars, it's a little bit of a different story. There's actually not a lot of inventory at those price points below 50, below 25 on the used car side. And so for those customers, it's actually a big affordability crisis. So, it kind of depends who you're asking. If you're asking me, well, unfortunately, I'm more on that lower end side. I I'm I'm not feeling too good about where the car market is today. And and unfortunately, that's having a big impact on dealers as well. The supply side of our industry. We see dealership inventory levels starting to get back up to pre- pandemic levels. We have over 3 million new cars in inventory, which is way, way, way higher than it was during the pandemic when it was below a million vehicles in inventory. So, a sign that all those customers who want to be purchasing vehicles simply can't. And on the used car side, we just hit our highest level of inventory for the year during the month of November. So, used cars even are starting to feel a little bit of a pinch there on the supply side. >> Interesting because that really fits the US consumer sentiment as well that the University of Michigan, I think it is, puts it out, consumer sentiment. Um, because we saw that dip in November. It's picked up a little bit in December because I think that has to do just with Christmas and the holiday season. People are willing to spend more, but I'm not really sure if they're willing to spend more on cars and large ticket items here. Um, is that something you're you're seeing as well? >> It absolutely is. I mean, used car inventory going up has not been a story we've had for years. I mean, the the pandemic took 5 to 10 million new cars out of inventory in the United States simply as a function of them not being produced, and that's going to have ramifications on the used car market for the full decade. Well, that's led to used car prices going up, not down. Inventory levels going down, not up. And unfortunately for for these dealers, the first time in 5 years, they're seeing their inventory levels go up and customers saying, "No, thank you. We don't want to buy." That's good news for consumers because, again, this is really just supply and demand. As supply starts to build and demand waines, it'll create buying opportunities. And on the new car side, it's been a a really slow but steady buildback of inventory levels. And it really really really does mirror the the economic uh situation of consumers. Those who have a lot of money, well, those luxury vehicles are still selling fast. Those that do not have a lot of money and are looking for a more affordable vehicle, those are the vehicles that are finally starting to sit on the lots a little bit because again, these manufacturers jacked up prices over those 5 years too since the pandemic. And those vehicles finally aren't selling. >> Interesting. So, you're seeing meaning prices coming down for the for the used cars, but also new cars in that lower price segment. It's interesting because we're not actually seeing MSRPs on new cars go down. I'll start there. We're not seeing MSRPs go down and we're actually not even seeing average transaction prices go down that much. It's ultimately what we're seeing is the negotiability of these vehicles is going up. And so there are a lot of dealerships that are standing their ground and saying, "Hey, you know, the MSRP went up 5% year-over-year, so the price of the car goes up 5% year-over-year." What we're seeing is more and more negotiability. So savvy and smart customers are able to get a bigger discount off of MSRP or a bigger discount from the dealership. And we're also seeing an increase in incentives to dealers. We recently talked to a dealership group and their uh the chief operating officer over there told us that Stalantis, Chrysler, Dodge, Jeep, and Ram, they're paying him $3,000 if he hits his volume bonus per vehicle sold this month. So, there are some big incentives both on the consumer side in terms of manufacturer incentives, 0% financing, things like that. There are incentives on the dealer side. $3,000 per vehicle sold is a lot of money. sell 100 cars, start to do the math, and there's negotiability because the inventory is building up. On the used car side, we are al are fortunately starting to see used car prices come down. This is a function of wholesale used car prices coming down as well as retail uh retail prices follow following those wholesale values. And it's just because people can't afford them. That's really at the end of the day, they just can't afford them. And so that'll force prices down eventually. And it's taken a while, but it's finally happening. >> Yeah. Let's look at the credit side here for a second as well. Delinquencies. Um, you know, we've seen a lender go belly up here as well, Trimark. Um, like what what's the situation there? Are you seeing more repossessions and things like that as some something that we should be keeping a lookout? >> All of the data suggests that auto loan delinquencies and repossessions are are through the roof. Uh, highest levels we've ever seen before. So, absolutely. And the credit cycle is what keeps the Mary go around going around. I mean, if people can get approved for financing, you're going to sell cars. And so, a lot of this market has been predicated on approvals. And we've seen loosening of lending standards over the past few years to try and get those approvals uh in place so that customers can buy cars. I mean, there have even been some things that we've seen certain banks doing 140 150% loan to value ratios for folks that have sub600 credit scores, which is just mind-boggling to me. And so, if we see loan uh excuse me, if we see autoloan delinquencies and repossessions continue to increase, ultimately, you would imagine that would lead to tighter lending restrictions and and ultimately fewer loans being approved. We're not seeing that right now, but eventually, you'd have to imagine we will see that. Either that or the APRs are just going to continue to go through the roof. And when that happens, that again takes demand out of the market because not only are people looking for a monthly payment, they need the facilitation from the finance company to get them there. And so, yeah, I mean, we are seeing a a auto loan delinquency crisis and that's going to obviously ding a cohort of individuals credit performance into the future, their credit scores, but it's also just taking people out of the market today because they can't get approved for an auto loan that they previously may have been able to when things were looser. Again, it's still pretty loose, but we're headed in the right direction in terms of getting back to some normaly. >> Yeah. Like how how do you see that playing out though? like um so you you you default on a car loan like how quickly um do the cars get repossessed and like what's sort of the flexibility there? I'm really trying to understand get a sense of it like when is it hitting the main markets meaning when do we get a proper subprime crisis that we've seen like maybe in 2008 2009 on the housing side now um hit the auto side. Well, the thing is the bank doesn't want to repossess the vehicle because then they're going to be left with the deficiency balance and ultimately, sure, they can go after the person who who held the the loan, but in many cases, they do not. And so, they're going to end up losing money on that. So, we actually are seeing kind of an interesting dynamic between delinquencies are at a higher higher rate, but repossessions are actually not nearly as high as we would imagine them to be because both there's a repo shortage. Uh there's a shortage of companies that are out there capable of doing repossessions, so it's actually quite expensive to repossess vehicles. And then it's also not in the lender's best interest to actually repossess the vehicle and then try and go sell it at auction. So there are I think a few levers that can be pulled here uh on the financial the financial side that ultimately could try and mitigate and and obiscate a little bit how bad things really are. But obviously every single quarter from these financial institutions we get to see their loan loss provisions. We get to see their estimations for how much money they're going to lose. And depending on who, you know, where you look, like especially those subprime providers, they are laying aside a lot of money every single quarter quarter, excuse me, and in anticipation of uh loans that will not come due. That's not stopping them from selling them as asset back securities, however, and kind of passing the bag to someone else. So, my crystal ball, it's it's it's foggy. You know, I don't have an exact date for when uh we might see some sort sort of crisis here, but those are some of the dynamics at play. You >> you mentioned APR. That's of course annual interest rate um that you pay on a on a car loan of course. How how how is that developed lately? And what what are the in incentives for the consumer to come in right now? >> I mean on the new car side we're seeing the manufacturers step up significantly especially here we're filming this. We're recording this in December. We've got 44 0% financing offers right now. We also have a significant amount of lease incentives as well which also have a finance component the money factor. And so we are seeing the manufacturers step up on that side. That being said the average used car interest rate is over 10%. And so on the new car side, sure you have Ford stepping up because they need to sell their inventory that's not selling otherwise. But on the used car side, who's stepping up? Uh USAA, you know, Navy Federal Credit Union, their incentive is not nearly the same as as a Ford Motor Company. And so we have some slightly different dynamics between the new and the used car market. >> So Zach, like we all know the top 10% earners in the US make about h make up half the spending, 50%. Like how worried are you really about the 90% if they start to say okay 10% interest rate is is a no-go for us like how worried are you really that they break away? >> I mean the the thing is I'm not particularly opinionated about it. Uh it's the federal government I'm looking at to be my leading indicator here. I mean we had President Trump bring in executives from what was it the big three American automakers and he's walking back the cafe fuel economy standards in an effort to try and make new vehicles more affordable. was talking about key cars which are you know those tiny little vehicles that we see in Asia and talking about how he's going to make it easier here in the United States to produce those vehicles. So me and my opinionated about I mean at the end of the day yes I think vehicles and mobility should be more accessible to more people um you know from a financial standpoint but I think when we look macro my opinion matters very little. the opinions that matter are, you know, the people that can influence um the the ultimate price points of these vehicles. And you see these executives, you see the federal government, there's a lot of pressure, I think, to try and make vehicles more affordable because so many people have been taken out of the market, both from a price standpoint and obviously on the interest rate side as well. >> Would you drive a key car or even a smart car in the US if you park next to an F350? Like >> I wouldn't I don't know if I would either if if I'm being honest. I I think there's a reason why many people like their bigger SUVs and trucks here, but it would be at least be an option. At least be an option. >> Yeah. Within the city and better not drive outside of it. So, um >> No, definitely not. >> No, not in the US. Uh cuz I think actually maybe interesting like side note, but car regulations and um like we don't even talk emission standards or anything, but regulations are very different in the US than they're in Europe for example because in the US you can drive an F350 and have a big like what is it? cowbar in front of it >> and then uh you can also drive a smart car which has uh >> you know nothing in front of it, right? Um how does that work? Because in in Europe for example or in Germany in particular that I know of like you can't drive a cyber truck >> cuz the the the hood is not flexible enough. It's too stiff, >> right? >> Yeah. I mean obviously these these uh federal governments and then at a state level here in the United States like they have a major impact on what can and cannot be produced. And so again, I go back to is affordability really going to be that big of a deal? It is. If these manufacturers can't sell enough of those really expensive vehicles and then the US government comes in and says, "Hey, we're actually going to make it easier and more palatable for you to sell those smaller, less profit margin vehicles." It's also interesting, Kai, because there's a dynamic here, which is we're going back to prior technology. Even the EU, I read this morning, is contemplating their mandate to automakers about getting rid of combustion vehicles by 2035. They're planning on at least there's some rumors about you know walking that back and so there was a big push to new technology new powertrain right and Tesla kind of led the way there and the the legacy automakers have tried to keep up and now there's a walk back on that and so I bring that up because there's going to be a resurgence of using existing technologies that have been tried and tested that ultimately could hopefully lead to some lower price points whether that's in a massive pickup truck or in a small smart car is to be seen but ultimately the name of the game is going to be more affordability and uh making making mobility more accessible to more consumers. >> No, absolutely. I think that's the right direction though. Um, governments can't afford certain subsidies though anymore and we're we're seeing that in the electric vehicle part sector right now. Um, how do you see EV sales developing right now? >> I mean, all of the pundits that work at the large conglomerates that have way more data than I'll ever get my hands on. They think we're going to land between somewhere around five and seven and a half% of transactions and market share for electric vehicles into the future. I don't quite see it. We've seen a lot of the manufacturers walk back their EV ambitions. I mean, at one point there were well over a trillion dollars pledged towards EV programs here in the United States. This was years ago, as everyone said, by 2030, you know, we would get rid of internal combustion engines. I think you're going to see more and more hybrid powertrains. That's where we see the sweet spot for both the consumer and from a manufacturing standpoint. So, that's really where I'm putting my bet is we will see more and more hybrid powertrain vehicles um and fewer and fewer electric vehicles. But, you know, a lot of money has been put in in that direction. And heck, I'm even thinking about companies like Jaguar. They took a year off of manufacturing just so they could retool and bring to market new electric vehicles. So there's a lot of people that have a lot of money invested in EVs, but I really think hybrid is the way of the future. And these automakers, I think, are leaning into that. And Toyota, quite frankly, Kai has led the way there, and they're the they're the manufacturer that sells the most cars globally. So, you know, you follow what Toyota's doing, and it's a pretty good playbook. >> Yeah, they even got the um hydrogen cars as well. The Mura, I think it's called. Yeah, that that's probably the one aberration in Toyota's playbook right now. But but hybrid hybrid they're doing damn well. >> Absolutely. Yeah, the Prius has been a trends setter. Absolutely. Um >> the Marai not so much. >> Yeah, Mariah or something. It's some weird Yeah. So, um looking into 2026, like what are some of the car trends you're actually looking forward to? Like what what are you seeing? What what is the consumer really buying? Is it still the pickup trucks? >> It's pickup trucks and it's SUVs. Yeah, there's some late uh some recent data that Edmonds put out. I think it showed that the the percentage of sedan transactions has fallen to all-time lows, whereas pickup trucks and SUVs has increased significantly. 2026 is going to be a really interesting year in part because MSRPs for new vehicles will continue to go higher as a direct result of tariffs. Tariffs as well as obviously it's not cheap to write off these EV expenditures and they have to underwrite them with these internal combustion and hybrid vehicles. And so there's two real cost centers uh that are going to influence manufacturers MSRPs in 26. So we anticipate seeing MSRPs go up. As MSRPs go up for new vehicles, it makes them less affordable. And so as we see inventory build on the other side of that decision, what incentives will be put in place and what will happen to dealer profitability? Car dealers have made more money than ever before in a post-pandemic world during the pandemic and after the pandemic. that started to revert back to where we were pre- pandemic where car dealers still made a lot of money, but they weren't making three or $4,000 per new vehicle sold. They were making $1,000 per new vehicle sold. And so, I'll be really closely watching that. And I think what that means for the consumer on the new car market is you have to be educated and informed. You can't just walk into the dealership or else they will try and take advantage of you because gone are the days of those $5,000 gross profit car deals unless you don't know what's going on. On the used car side, Kai, I think we're still going to see elevated prices even as they start to normalize and come down all the way through the 2020s and into the 2030s again as a result of those 5, 10, even 15 million vehicles some projections had it that were not produced back during the pandemic. >> I know you run a YouTube channel based on that, but what should the consumer be asking when they walk into a dealership? Like what are the top three questions, Zach? >> Well, I mean, at the end of the day, you need to know your market conditions. you need to understand the supply and d demand dynamics within your area because that's going to influence whether it's a new or used car, how negotiable it is, what's a realistic price point. So, I think that's kind of like the first broader question for for the prospective shopper is like, do I understand my market conditions? We've built a lot of things back at caredge.com to help facilitate that, but in general, you just have to do your research. The second thing is the online advertised price. Shocker, it's not the price of the car. It never actually is. The price of the car is the out the door price. That's the price that includes all fees from the dealership, any add-ons and taxes, uh, and even your state and local government fees uh, as well, like registration and and title and tags. And so that out the door price can typically be 10 or even 15% higher than what you see advertised online. And many of those things, obviously, you can't negotiate the sales tax, but many of those things on that out the door price worksheet are negotiable. So the second question I'd be thinking about first was, do I understand my market conditions and what a reasonable price is to pay for this vehicle? Second is when I contact the dealership, I'm asking for an out the door price. And the third is going to be if I am a finance shopper, which many people are, they're going to finance the purchase of their vehicle. Have I gotten a pre-approval from um a local credit union or bank that I currently bank with? Because doing the indirect lending through the dealership creates a massive opportunity for them to jack up the interest rate. It's called indirect lending. And there's a buy rate, what the dealership can buy the money for, and the sell rate, what they'll sell you the money for. So, the third question I'm asking myself is, if I'm really serious, have I gotten a pre-approval for my financing on this vehicle before I even step foot in the dealership? >> Fantastic. Oh, those are really, really good points. Um, you know, the question is like, are you really equipped to deal with those car dealers? You know, that's uh >> I mean, sneaky sneaky guys. >> Yep. >> Well, if you get $3,000 for every move vehicle, then uh I >> Isn't that crazy? Isn't that absolutely crazy? >> I wasn't aware of that. That's insane. >> It's it's it's called a dealer step stairstep program. If if this dealership, and obviously they run this, you know, with their dealer group, um, you know, Santis does, if they hit their volume, we're talking about 3,000 extra dollars per car. That's the highest I've ever heard of a stairstep program. I mean, >> what a what a way to incentivize selling volume, right? >> Absolutely, 100%. Um, maybe out outlook, let's stay on that topic. Um, monthly average rates for a new car around $750. I think used car is about $530 roughly. Um, do you see see that trending higher or lower right now? Uh what's sort of a do do you have like a guideline like it used to be like rent or so or housing shouldn't be more than a third of your income or so? Um does the same rule apply for for a car? >> There there is a rule here. Uh my dad Ray uh he's who I do car edge with. He helped me found this business. He's got his 10% rule. So that's 10% of your your net monthly income should not go towards uh no more than 10% should go towards your car payment. And when I say car payment, I mean the total payment. No, most people don't think about uh obviously depreciation. So, we'll leave that aside for a second. But insurance, insurance in some cases can be more than the actual finance payment you're making each month. So, again, no more than 10% of your net income should be going towards that. And the moment you start to do the math on that, Kai, it gets scary quick. Most people can't afford to even be thinking about 10%. They extend this to the 20 or 30% rule. Kind of like you were talking about with housing. And then to your comment around do I see, you know, monthly payments going up or going down? What's the trend there? It seems fairly stagnant. And the challenge that we're going to run into is there's some expectation that the Federal Reserve will reduce the Fed funds rate as we move into 2026. The issue is you reduce the Fed funds rates by 100 basis points, for example. We're not going to see that big of an impact on monthly car payments. Maybe that'll have a $15 a month incre uh impact lowering on um on on um monthly payments for you know new and used vehicles, but that takes a while to trickle down. Uh and also $15 a month on a $750 or $530 payment. Yes, it is material, but that's not usually going to, you know, sway someone yes or no on a car deal. It's it's a you know, we need like a $100 a month difference for this to really be having a big impact. >> Yeah. No, absolutely. I was just looking up, you know, loan durations as well. They keep ticking up as well. I I get I get fed Instagram reels these days. Um like don't be an age, you know, talk to Joe or so like stuff like that. And then you say, "Hey, my down payment was $2,000 and what's your lease terms?" Like, "Oh, for life, right?" like things like that. >> I've seen those videos. >> They're me of course, but loan durations in general like are they of concern? Like 69 months is quite a long time for a loan. >> It should not be normalized that you're taking on debt for 70 plus months um for a depreciating thing like especially as we see for example, we haven't even talked about it, but the reliability of vehicles is more in question today than ever before. Ford, for example, Kai has set a new record for most recalls in any calendar year. The prior record, this is from the National Highway Transportation Safety Administration, was 69 recalls in one year by General Motors. Ford has over 140 as of the time that we're filming this right now. So, they've more than doubled the prior record. And it's December 15th when we're recording this. So, they still have time between now and the end of the year. I bring that up in the context of loan duration because the manufacturer powertrain warranty is only for the first 3 years in most cases. So, I mean, think about this for a second. No, it does not make sense to take on a 70 plus or you know it's becoming more and more normal to do a six year 72-month car note. No, it does not make sense especially when it's out of warranty. >> Should the government step in here? Weird question, but should the government actually tell the auto manufacturers to actually up their game? >> I my this is purely my opinion. No. Like I do not think this is the place where the federal government steps in and says, "Hey, operate differently." Um I don't think that's the the answer here. I think capitalism and and you know a free market can ultimately yield a good outcome in terms of competition and bringing other variants to market. The challenge that we run into with auto is everything has to go through dealers for the most part unless the power trains electric and even then in some states even if it is an EV you still can't sell directly to consumers. So auto's a little you know strange and kind of an aberration relative to other industries. So you think that's going to make some of the innovation a little slower to bring to market but no I think capitalism will will work its way out here. >> No perfect. Um, Zach, we're sort of at the end of our conversation. Let's let's have some fun with this here. Um, what are some of the innovations and maybe what's a new model that you're looking for uh to be released in 2026. >> Oh, new model. >> Any type any type. And I don't want to hear Subaru and Pretza or something like that. I I want to hear something interesting. >> Sure. Well, I mean, I'm a big fan of Audi, so I'm always watching what they're doing with like the the RS vehicles. The the RS 6avant is kind of the dream car over here. So, I'll be interested to see what they do with that next year. kind of on the more practical side, but something that I could actually have in my driveway. I'm very interested to see what Mazda's doing next year because Mazda have built really reliable vehicles at a fair price point, but they've started to jack up their prices. The CX90, for example, Kai, over $60,000, I'm like, huh? $60,000 Mazda. Similarly, I'm going to be watching what Kia and Hyundai do, too. They've grown so much here in the United States, but even them, like I think now that uh the the Kia EV9 is it? It's like $80,000 it can get up to. So, I'm just like scratching my head a little bit with how expensive some of these more, I don't know, affordable brands have typically been. I'll be watching that next year to see how they handle it. >> Okay. Very last question because it came to mind. You didn't mention BYD or anything. So, I'm curious like what's the situation in the US right now with the Chinese imports. >> I mean, not much movement. VinFast has uh oscillated back and forth between and obviously they're Vietn Vietnamese, but they've oscillated back and forth between not having a dealer network, having a dealer network. many of the Chinese brands have not come to the United States as a function of all of the various tariffs that they would have to pay in order to really move into this market. So, we haven't seen too much of an impact. Although, I will say it's impacting I think the strategies and the ways that the the domestic automakers think there's a lot of pressure that I think the u like I'm thinking Ford example Jim Farley's come out and said these Chinese vehicles are better than what we can build and at lower prices. So, I think there's a lot of pressure that they're putting on the market but not necessarily from a capturing market share standpoint, more mind share. >> Okay. No, fair enough. It's because we see I see more here in Germany actually driving around as well which uh is interesting because you know we're an auto country here. So >> for sure for sure. Well >> I would just say like Volkswagen domestically for you has struggled mightily. Um >> we're closing our first factory in Dresston. Like Volkswagen is closing its first factory in 88 years in in >> So this is not just this is this is not just a US story. I mean this is like a global reset of the auto industry. >> Yeah. Well, it's changing, right? And I think we need to understand that and um the question is which way is it going? And the other question is of course, can the consumers still support what the automakers are putting out and what the regulators want as well? So that's the other question. So Zach, that was hugely informational. Tremendously appreciate you coming on. Um where can we send our audience? Where can they find more of your work, Zach? >> Yeah, so for the past six years, been working on Car Edge. C A R E D G. So you can go to car edge.com. You can Google search it, uh, search my name, my dad's name. He puts out all sorts of content teaching you how to buy cars and how to get a fair deal. So, you know, all over the interwebs. We appreciate everyone that tunes in and is a part of our community. So, just Car Edge, Car Edge, Car Edge, and hopefully the right thing pops up. >> Perfect. Perfect. Really appreciate your time, Zach. Really interesting because you are our, you know, tweety bird in the coal mine here. So, tremendously appreciate your time. Thanks so much for coming on. Merry Christmas, of course, to you and your dad. And uh I'll talk to you early next year. And uh everybody else, thank you so much for tuning in. Tremendously appreciate you watching. Bit of a crossover episode cuz we we dove deep here into the auto sector as it is vitally important. I'm I'm really curious if the auto sector can bring uh the credit market to its knees. 1.7 bill trillion dollar car market here um that we need to talk about and if uh that the subprime loans start faulting or folding then we might be in trouble. So we'll really fantastic conversation here with Zack Schfka. Make sure to check him out. Go check out Car Edge. Fantastic YouTube channel, very educational. And uh if you haven't done so, hit that like and subscribe button here as well. We tremendously appreciate it. Thanks so much for tuning in and take care out there.
YOU Can’t Afford a Car Anymore: This Is the Real Warning Sign
Summary
The U.S. auto market is flashing warning signs. Rising delinquencies, tighter credit, bloated inventories, and affordability pressure …Transcript
We often talk about the car industry being the bellweather for the US consumer. It is really important for Americans to have cars because I've been there. They don't have a lot of sidewalks and you you need a car to get around. So, it's really really important to take a look at the car market. How is the US consumer doing? We are in the middle of an affordability crisis. And I've invited a fantastic guest to to run us through the current consumer sentiment, but also a bit of an outlook for 2026. How are used cars doing? How are new cars doing? And should we be worried about the car market? Because we all know repos are picking up. Uh the credit market is getting tighter. Uh delinquencies are probably increasing. So lot lots to discuss. And maybe is this the next subprime crisis that we should be looking at here. But uh before I switch over to my guest, who is Zach Trafkus by the way with Carage? Uh please hit that like and subscribe button. It helps us out tremendously and we much appreciate it. Now Zach, it is great to welcome you back on the program. How how are you doing? How are things >> doing? Fantastic, Kai. Thanks so much for having me. Really appreciate it. >> Absolutely. Yeah. No, you're absolutely our canary in the coal mine here a little bit, Zach, because uh you know, I love the car market, but I'm not a car market guy and not an expert. So, a lot of the questions that I'll be asking you are really fueled by natural curiosity. Um maybe we'll start with a really basic question. How is the car market right now? >> Uh it depends who you ask, Kai. If you're an affluent couple here, you know, you're making a couple hundred,000 a year, you're buying your new Lexus, you're you're feeling great about the car market because, well, those Lexus dealers have enough inventory to sell them to you at MSRP, and you're getting your new ride. If you're the consumer who's maybe looking for something a little less expensive, say under the $50,000 average transaction price, which is becoming the norm for new vehicles, or under 25, $26,000 for used cars, it's a little bit of a different story. There's actually not a lot of inventory at those price points below 50, below 25 on the used car side. And so for those customers, it's actually a big affordability crisis. So, it kind of depends who you're asking. If you're asking me, well, unfortunately, I'm more on that lower end side. I I'm I'm not feeling too good about where the car market is today. And and unfortunately, that's having a big impact on dealers as well. The supply side of our industry. We see dealership inventory levels starting to get back up to pre- pandemic levels. We have over 3 million new cars in inventory, which is way, way, way higher than it was during the pandemic when it was below a million vehicles in inventory. So, a sign that all those customers who want to be purchasing vehicles simply can't. And on the used car side, we just hit our highest level of inventory for the year during the month of November. So, used cars even are starting to feel a little bit of a pinch there on the supply side. >> Interesting because that really fits the US consumer sentiment as well that the University of Michigan, I think it is, puts it out, consumer sentiment. Um, because we saw that dip in November. It's picked up a little bit in December because I think that has to do just with Christmas and the holiday season. People are willing to spend more, but I'm not really sure if they're willing to spend more on cars and large ticket items here. Um, is that something you're you're seeing as well? >> It absolutely is. I mean, used car inventory going up has not been a story we've had for years. I mean, the the pandemic took 5 to 10 million new cars out of inventory in the United States simply as a function of them not being produced, and that's going to have ramifications on the used car market for the full decade. Well, that's led to used car prices going up, not down. Inventory levels going down, not up. And unfortunately for for these dealers, the first time in 5 years, they're seeing their inventory levels go up and customers saying, "No, thank you. We don't want to buy." That's good news for consumers because, again, this is really just supply and demand. As supply starts to build and demand waines, it'll create buying opportunities. And on the new car side, it's been a a really slow but steady buildback of inventory levels. And it really really really does mirror the the economic uh situation of consumers. Those who have a lot of money, well, those luxury vehicles are still selling fast. Those that do not have a lot of money and are looking for a more affordable vehicle, those are the vehicles that are finally starting to sit on the lots a little bit because again, these manufacturers jacked up prices over those 5 years too since the pandemic. And those vehicles finally aren't selling. >> Interesting. So, you're seeing meaning prices coming down for the for the used cars, but also new cars in that lower price segment. It's interesting because we're not actually seeing MSRPs on new cars go down. I'll start there. We're not seeing MSRPs go down and we're actually not even seeing average transaction prices go down that much. It's ultimately what we're seeing is the negotiability of these vehicles is going up. And so there are a lot of dealerships that are standing their ground and saying, "Hey, you know, the MSRP went up 5% year-over-year, so the price of the car goes up 5% year-over-year." What we're seeing is more and more negotiability. So savvy and smart customers are able to get a bigger discount off of MSRP or a bigger discount from the dealership. And we're also seeing an increase in incentives to dealers. We recently talked to a dealership group and their uh the chief operating officer over there told us that Stalantis, Chrysler, Dodge, Jeep, and Ram, they're paying him $3,000 if he hits his volume bonus per vehicle sold this month. So, there are some big incentives both on the consumer side in terms of manufacturer incentives, 0% financing, things like that. There are incentives on the dealer side. $3,000 per vehicle sold is a lot of money. sell 100 cars, start to do the math, and there's negotiability because the inventory is building up. On the used car side, we are al are fortunately starting to see used car prices come down. This is a function of wholesale used car prices coming down as well as retail uh retail prices follow following those wholesale values. And it's just because people can't afford them. That's really at the end of the day, they just can't afford them. And so that'll force prices down eventually. And it's taken a while, but it's finally happening. >> Yeah. Let's look at the credit side here for a second as well. Delinquencies. Um, you know, we've seen a lender go belly up here as well, Trimark. Um, like what what's the situation there? Are you seeing more repossessions and things like that as some something that we should be keeping a lookout? >> All of the data suggests that auto loan delinquencies and repossessions are are through the roof. Uh, highest levels we've ever seen before. So, absolutely. And the credit cycle is what keeps the Mary go around going around. I mean, if people can get approved for financing, you're going to sell cars. And so, a lot of this market has been predicated on approvals. And we've seen loosening of lending standards over the past few years to try and get those approvals uh in place so that customers can buy cars. I mean, there have even been some things that we've seen certain banks doing 140 150% loan to value ratios for folks that have sub600 credit scores, which is just mind-boggling to me. And so, if we see loan uh excuse me, if we see autoloan delinquencies and repossessions continue to increase, ultimately, you would imagine that would lead to tighter lending restrictions and and ultimately fewer loans being approved. We're not seeing that right now, but eventually, you'd have to imagine we will see that. Either that or the APRs are just going to continue to go through the roof. And when that happens, that again takes demand out of the market because not only are people looking for a monthly payment, they need the facilitation from the finance company to get them there. And so, yeah, I mean, we are seeing a a auto loan delinquency crisis and that's going to obviously ding a cohort of individuals credit performance into the future, their credit scores, but it's also just taking people out of the market today because they can't get approved for an auto loan that they previously may have been able to when things were looser. Again, it's still pretty loose, but we're headed in the right direction in terms of getting back to some normaly. >> Yeah. Like how how do you see that playing out though? like um so you you you default on a car loan like how quickly um do the cars get repossessed and like what's sort of the flexibility there? I'm really trying to understand get a sense of it like when is it hitting the main markets meaning when do we get a proper subprime crisis that we've seen like maybe in 2008 2009 on the housing side now um hit the auto side. Well, the thing is the bank doesn't want to repossess the vehicle because then they're going to be left with the deficiency balance and ultimately, sure, they can go after the person who who held the the loan, but in many cases, they do not. And so, they're going to end up losing money on that. So, we actually are seeing kind of an interesting dynamic between delinquencies are at a higher higher rate, but repossessions are actually not nearly as high as we would imagine them to be because both there's a repo shortage. Uh there's a shortage of companies that are out there capable of doing repossessions, so it's actually quite expensive to repossess vehicles. And then it's also not in the lender's best interest to actually repossess the vehicle and then try and go sell it at auction. So there are I think a few levers that can be pulled here uh on the financial the financial side that ultimately could try and mitigate and and obiscate a little bit how bad things really are. But obviously every single quarter from these financial institutions we get to see their loan loss provisions. We get to see their estimations for how much money they're going to lose. And depending on who, you know, where you look, like especially those subprime providers, they are laying aside a lot of money every single quarter quarter, excuse me, and in anticipation of uh loans that will not come due. That's not stopping them from selling them as asset back securities, however, and kind of passing the bag to someone else. So, my crystal ball, it's it's it's foggy. You know, I don't have an exact date for when uh we might see some sort sort of crisis here, but those are some of the dynamics at play. You >> you mentioned APR. That's of course annual interest rate um that you pay on a on a car loan of course. How how how is that developed lately? And what what are the in incentives for the consumer to come in right now? >> I mean on the new car side we're seeing the manufacturers step up significantly especially here we're filming this. We're recording this in December. We've got 44 0% financing offers right now. We also have a significant amount of lease incentives as well which also have a finance component the money factor. And so we are seeing the manufacturers step up on that side. That being said the average used car interest rate is over 10%. And so on the new car side, sure you have Ford stepping up because they need to sell their inventory that's not selling otherwise. But on the used car side, who's stepping up? Uh USAA, you know, Navy Federal Credit Union, their incentive is not nearly the same as as a Ford Motor Company. And so we have some slightly different dynamics between the new and the used car market. >> So Zach, like we all know the top 10% earners in the US make about h make up half the spending, 50%. Like how worried are you really about the 90% if they start to say okay 10% interest rate is is a no-go for us like how worried are you really that they break away? >> I mean the the thing is I'm not particularly opinionated about it. Uh it's the federal government I'm looking at to be my leading indicator here. I mean we had President Trump bring in executives from what was it the big three American automakers and he's walking back the cafe fuel economy standards in an effort to try and make new vehicles more affordable. was talking about key cars which are you know those tiny little vehicles that we see in Asia and talking about how he's going to make it easier here in the United States to produce those vehicles. So me and my opinionated about I mean at the end of the day yes I think vehicles and mobility should be more accessible to more people um you know from a financial standpoint but I think when we look macro my opinion matters very little. the opinions that matter are, you know, the people that can influence um the the ultimate price points of these vehicles. And you see these executives, you see the federal government, there's a lot of pressure, I think, to try and make vehicles more affordable because so many people have been taken out of the market, both from a price standpoint and obviously on the interest rate side as well. >> Would you drive a key car or even a smart car in the US if you park next to an F350? Like >> I wouldn't I don't know if I would either if if I'm being honest. I I think there's a reason why many people like their bigger SUVs and trucks here, but it would be at least be an option. At least be an option. >> Yeah. Within the city and better not drive outside of it. So, um >> No, definitely not. >> No, not in the US. Uh cuz I think actually maybe interesting like side note, but car regulations and um like we don't even talk emission standards or anything, but regulations are very different in the US than they're in Europe for example because in the US you can drive an F350 and have a big like what is it? cowbar in front of it >> and then uh you can also drive a smart car which has uh >> you know nothing in front of it, right? Um how does that work? Because in in Europe for example or in Germany in particular that I know of like you can't drive a cyber truck >> cuz the the the hood is not flexible enough. It's too stiff, >> right? >> Yeah. I mean obviously these these uh federal governments and then at a state level here in the United States like they have a major impact on what can and cannot be produced. And so again, I go back to is affordability really going to be that big of a deal? It is. If these manufacturers can't sell enough of those really expensive vehicles and then the US government comes in and says, "Hey, we're actually going to make it easier and more palatable for you to sell those smaller, less profit margin vehicles." It's also interesting, Kai, because there's a dynamic here, which is we're going back to prior technology. Even the EU, I read this morning, is contemplating their mandate to automakers about getting rid of combustion vehicles by 2035. They're planning on at least there's some rumors about you know walking that back and so there was a big push to new technology new powertrain right and Tesla kind of led the way there and the the legacy automakers have tried to keep up and now there's a walk back on that and so I bring that up because there's going to be a resurgence of using existing technologies that have been tried and tested that ultimately could hopefully lead to some lower price points whether that's in a massive pickup truck or in a small smart car is to be seen but ultimately the name of the game is going to be more affordability and uh making making mobility more accessible to more consumers. >> No, absolutely. I think that's the right direction though. Um, governments can't afford certain subsidies though anymore and we're we're seeing that in the electric vehicle part sector right now. Um, how do you see EV sales developing right now? >> I mean, all of the pundits that work at the large conglomerates that have way more data than I'll ever get my hands on. They think we're going to land between somewhere around five and seven and a half% of transactions and market share for electric vehicles into the future. I don't quite see it. We've seen a lot of the manufacturers walk back their EV ambitions. I mean, at one point there were well over a trillion dollars pledged towards EV programs here in the United States. This was years ago, as everyone said, by 2030, you know, we would get rid of internal combustion engines. I think you're going to see more and more hybrid powertrains. That's where we see the sweet spot for both the consumer and from a manufacturing standpoint. So, that's really where I'm putting my bet is we will see more and more hybrid powertrain vehicles um and fewer and fewer electric vehicles. But, you know, a lot of money has been put in in that direction. And heck, I'm even thinking about companies like Jaguar. They took a year off of manufacturing just so they could retool and bring to market new electric vehicles. So there's a lot of people that have a lot of money invested in EVs, but I really think hybrid is the way of the future. And these automakers, I think, are leaning into that. And Toyota, quite frankly, Kai has led the way there, and they're the they're the manufacturer that sells the most cars globally. So, you know, you follow what Toyota's doing, and it's a pretty good playbook. >> Yeah, they even got the um hydrogen cars as well. The Mura, I think it's called. Yeah, that that's probably the one aberration in Toyota's playbook right now. But but hybrid hybrid they're doing damn well. >> Absolutely. Yeah, the Prius has been a trends setter. Absolutely. Um >> the Marai not so much. >> Yeah, Mariah or something. It's some weird Yeah. So, um looking into 2026, like what are some of the car trends you're actually looking forward to? Like what what are you seeing? What what is the consumer really buying? Is it still the pickup trucks? >> It's pickup trucks and it's SUVs. Yeah, there's some late uh some recent data that Edmonds put out. I think it showed that the the percentage of sedan transactions has fallen to all-time lows, whereas pickup trucks and SUVs has increased significantly. 2026 is going to be a really interesting year in part because MSRPs for new vehicles will continue to go higher as a direct result of tariffs. Tariffs as well as obviously it's not cheap to write off these EV expenditures and they have to underwrite them with these internal combustion and hybrid vehicles. And so there's two real cost centers uh that are going to influence manufacturers MSRPs in 26. So we anticipate seeing MSRPs go up. As MSRPs go up for new vehicles, it makes them less affordable. And so as we see inventory build on the other side of that decision, what incentives will be put in place and what will happen to dealer profitability? Car dealers have made more money than ever before in a post-pandemic world during the pandemic and after the pandemic. that started to revert back to where we were pre- pandemic where car dealers still made a lot of money, but they weren't making three or $4,000 per new vehicle sold. They were making $1,000 per new vehicle sold. And so, I'll be really closely watching that. And I think what that means for the consumer on the new car market is you have to be educated and informed. You can't just walk into the dealership or else they will try and take advantage of you because gone are the days of those $5,000 gross profit car deals unless you don't know what's going on. On the used car side, Kai, I think we're still going to see elevated prices even as they start to normalize and come down all the way through the 2020s and into the 2030s again as a result of those 5, 10, even 15 million vehicles some projections had it that were not produced back during the pandemic. >> I know you run a YouTube channel based on that, but what should the consumer be asking when they walk into a dealership? Like what are the top three questions, Zach? >> Well, I mean, at the end of the day, you need to know your market conditions. you need to understand the supply and d demand dynamics within your area because that's going to influence whether it's a new or used car, how negotiable it is, what's a realistic price point. So, I think that's kind of like the first broader question for for the prospective shopper is like, do I understand my market conditions? We've built a lot of things back at caredge.com to help facilitate that, but in general, you just have to do your research. The second thing is the online advertised price. Shocker, it's not the price of the car. It never actually is. The price of the car is the out the door price. That's the price that includes all fees from the dealership, any add-ons and taxes, uh, and even your state and local government fees uh, as well, like registration and and title and tags. And so that out the door price can typically be 10 or even 15% higher than what you see advertised online. And many of those things, obviously, you can't negotiate the sales tax, but many of those things on that out the door price worksheet are negotiable. So the second question I'd be thinking about first was, do I understand my market conditions and what a reasonable price is to pay for this vehicle? Second is when I contact the dealership, I'm asking for an out the door price. And the third is going to be if I am a finance shopper, which many people are, they're going to finance the purchase of their vehicle. Have I gotten a pre-approval from um a local credit union or bank that I currently bank with? Because doing the indirect lending through the dealership creates a massive opportunity for them to jack up the interest rate. It's called indirect lending. And there's a buy rate, what the dealership can buy the money for, and the sell rate, what they'll sell you the money for. So, the third question I'm asking myself is, if I'm really serious, have I gotten a pre-approval for my financing on this vehicle before I even step foot in the dealership? >> Fantastic. Oh, those are really, really good points. Um, you know, the question is like, are you really equipped to deal with those car dealers? You know, that's uh >> I mean, sneaky sneaky guys. >> Yep. >> Well, if you get $3,000 for every move vehicle, then uh I >> Isn't that crazy? Isn't that absolutely crazy? >> I wasn't aware of that. That's insane. >> It's it's it's called a dealer step stairstep program. If if this dealership, and obviously they run this, you know, with their dealer group, um, you know, Santis does, if they hit their volume, we're talking about 3,000 extra dollars per car. That's the highest I've ever heard of a stairstep program. I mean, >> what a what a way to incentivize selling volume, right? >> Absolutely, 100%. Um, maybe out outlook, let's stay on that topic. Um, monthly average rates for a new car around $750. I think used car is about $530 roughly. Um, do you see see that trending higher or lower right now? Uh what's sort of a do do you have like a guideline like it used to be like rent or so or housing shouldn't be more than a third of your income or so? Um does the same rule apply for for a car? >> There there is a rule here. Uh my dad Ray uh he's who I do car edge with. He helped me found this business. He's got his 10% rule. So that's 10% of your your net monthly income should not go towards uh no more than 10% should go towards your car payment. And when I say car payment, I mean the total payment. No, most people don't think about uh obviously depreciation. So, we'll leave that aside for a second. But insurance, insurance in some cases can be more than the actual finance payment you're making each month. So, again, no more than 10% of your net income should be going towards that. And the moment you start to do the math on that, Kai, it gets scary quick. Most people can't afford to even be thinking about 10%. They extend this to the 20 or 30% rule. Kind of like you were talking about with housing. And then to your comment around do I see, you know, monthly payments going up or going down? What's the trend there? It seems fairly stagnant. And the challenge that we're going to run into is there's some expectation that the Federal Reserve will reduce the Fed funds rate as we move into 2026. The issue is you reduce the Fed funds rates by 100 basis points, for example. We're not going to see that big of an impact on monthly car payments. Maybe that'll have a $15 a month incre uh impact lowering on um on on um monthly payments for you know new and used vehicles, but that takes a while to trickle down. Uh and also $15 a month on a $750 or $530 payment. Yes, it is material, but that's not usually going to, you know, sway someone yes or no on a car deal. It's it's a you know, we need like a $100 a month difference for this to really be having a big impact. >> Yeah. No, absolutely. I was just looking up, you know, loan durations as well. They keep ticking up as well. I I get I get fed Instagram reels these days. Um like don't be an age, you know, talk to Joe or so like stuff like that. And then you say, "Hey, my down payment was $2,000 and what's your lease terms?" Like, "Oh, for life, right?" like things like that. >> I've seen those videos. >> They're me of course, but loan durations in general like are they of concern? Like 69 months is quite a long time for a loan. >> It should not be normalized that you're taking on debt for 70 plus months um for a depreciating thing like especially as we see for example, we haven't even talked about it, but the reliability of vehicles is more in question today than ever before. Ford, for example, Kai has set a new record for most recalls in any calendar year. The prior record, this is from the National Highway Transportation Safety Administration, was 69 recalls in one year by General Motors. Ford has over 140 as of the time that we're filming this right now. So, they've more than doubled the prior record. And it's December 15th when we're recording this. So, they still have time between now and the end of the year. I bring that up in the context of loan duration because the manufacturer powertrain warranty is only for the first 3 years in most cases. So, I mean, think about this for a second. No, it does not make sense to take on a 70 plus or you know it's becoming more and more normal to do a six year 72-month car note. No, it does not make sense especially when it's out of warranty. >> Should the government step in here? Weird question, but should the government actually tell the auto manufacturers to actually up their game? >> I my this is purely my opinion. No. Like I do not think this is the place where the federal government steps in and says, "Hey, operate differently." Um I don't think that's the the answer here. I think capitalism and and you know a free market can ultimately yield a good outcome in terms of competition and bringing other variants to market. The challenge that we run into with auto is everything has to go through dealers for the most part unless the power trains electric and even then in some states even if it is an EV you still can't sell directly to consumers. So auto's a little you know strange and kind of an aberration relative to other industries. So you think that's going to make some of the innovation a little slower to bring to market but no I think capitalism will will work its way out here. >> No perfect. Um, Zach, we're sort of at the end of our conversation. Let's let's have some fun with this here. Um, what are some of the innovations and maybe what's a new model that you're looking for uh to be released in 2026. >> Oh, new model. >> Any type any type. And I don't want to hear Subaru and Pretza or something like that. I I want to hear something interesting. >> Sure. Well, I mean, I'm a big fan of Audi, so I'm always watching what they're doing with like the the RS vehicles. The the RS 6avant is kind of the dream car over here. So, I'll be interested to see what they do with that next year. kind of on the more practical side, but something that I could actually have in my driveway. I'm very interested to see what Mazda's doing next year because Mazda have built really reliable vehicles at a fair price point, but they've started to jack up their prices. The CX90, for example, Kai, over $60,000, I'm like, huh? $60,000 Mazda. Similarly, I'm going to be watching what Kia and Hyundai do, too. They've grown so much here in the United States, but even them, like I think now that uh the the Kia EV9 is it? It's like $80,000 it can get up to. So, I'm just like scratching my head a little bit with how expensive some of these more, I don't know, affordable brands have typically been. I'll be watching that next year to see how they handle it. >> Okay. Very last question because it came to mind. You didn't mention BYD or anything. So, I'm curious like what's the situation in the US right now with the Chinese imports. >> I mean, not much movement. VinFast has uh oscillated back and forth between and obviously they're Vietn Vietnamese, but they've oscillated back and forth between not having a dealer network, having a dealer network. many of the Chinese brands have not come to the United States as a function of all of the various tariffs that they would have to pay in order to really move into this market. So, we haven't seen too much of an impact. Although, I will say it's impacting I think the strategies and the ways that the the domestic automakers think there's a lot of pressure that I think the u like I'm thinking Ford example Jim Farley's come out and said these Chinese vehicles are better than what we can build and at lower prices. So, I think there's a lot of pressure that they're putting on the market but not necessarily from a capturing market share standpoint, more mind share. >> Okay. No, fair enough. It's because we see I see more here in Germany actually driving around as well which uh is interesting because you know we're an auto country here. So >> for sure for sure. Well >> I would just say like Volkswagen domestically for you has struggled mightily. Um >> we're closing our first factory in Dresston. Like Volkswagen is closing its first factory in 88 years in in >> So this is not just this is this is not just a US story. I mean this is like a global reset of the auto industry. >> Yeah. Well, it's changing, right? And I think we need to understand that and um the question is which way is it going? And the other question is of course, can the consumers still support what the automakers are putting out and what the regulators want as well? So that's the other question. So Zach, that was hugely informational. Tremendously appreciate you coming on. Um where can we send our audience? Where can they find more of your work, Zach? >> Yeah, so for the past six years, been working on Car Edge. C A R E D G. So you can go to car edge.com. You can Google search it, uh, search my name, my dad's name. He puts out all sorts of content teaching you how to buy cars and how to get a fair deal. So, you know, all over the interwebs. We appreciate everyone that tunes in and is a part of our community. So, just Car Edge, Car Edge, Car Edge, and hopefully the right thing pops up. >> Perfect. Perfect. Really appreciate your time, Zach. Really interesting because you are our, you know, tweety bird in the coal mine here. So, tremendously appreciate your time. Thanks so much for coming on. Merry Christmas, of course, to you and your dad. And uh I'll talk to you early next year. And uh everybody else, thank you so much for tuning in. Tremendously appreciate you watching. Bit of a crossover episode cuz we we dove deep here into the auto sector as it is vitally important. I'm I'm really curious if the auto sector can bring uh the credit market to its knees. 1.7 bill trillion dollar car market here um that we need to talk about and if uh that the subprime loans start faulting or folding then we might be in trouble. So we'll really fantastic conversation here with Zack Schfka. Make sure to check him out. Go check out Car Edge. Fantastic YouTube channel, very educational. And uh if you haven't done so, hit that like and subscribe button here as well. We tremendously appreciate it. Thanks so much for tuning in and take care out there.