More Than 1-in-5 Trade-Ins Have Negative Equity As One Group Of Car Buyers Continues To Get Screwed

Academically, it’s enjoyable for a journalist or an analyst to watch how one variable can interact with another to produce fascinating results. It’s a little less enjoyable if you’re a real human who bought a car at above-market prices during the pandemic and now find yourself underwater on your loan for market reasons beyond your control. Apologies in advance, but The Morning Dump probably isn’t going to make you feel better if you purchased a new car between 2021 and 2023.

If you’re one of those buyers who falls into the category mentioned above and you’re also the type of person who feels better about your personal suffering by making it seem proportionally smaller in comparison to someone else’s tragedy, then today’s news of Fisker searching out bankruptcy lawyers is worth a read.

Tesla, too, isn’t looking great after another analyst essentially downgraded the company with some fairly harsh words. Unsurprisingly, Volkswagen is looking at the above and starting to think that, hey, maybe it wouldn’t be bad if the company brought a PHEV to the United States.

It’s 5:00 AM in New York so maybe I’ll have a real shot at getting this up in the actual morning again today.

More Than 20% Of New Vehicle Sales With A Trade-In Had Negative Equity Last Quarter

I’ve talked about this before, but there’s a specific vintage of loans made from 2021 to early 2023 that are extremely problematic to hold. These are held by buyers who, for whatever reason, really wanted or needed a car during the height of the pandemic. Due to shortages (and trimflation) the lack of supply meant that prices reached record levels, with consumers paying above MSRP and ADM (additional dealer markup) on regular vehicles. Even worse, the low-interest rates at the time made it easier to get a lower car payment without a big downpayment.

This means that there are buyers out there who put only a little money down on a car that was priced at historically high levels. If car prices stayed high forever then, in theory, the value of a 1- or 2-year-old car would remain fairly high and, therefore, those buyers could trade them in on something newer and do alright.

Unfortunately for them, these buyers chose the absolute worst timing. They bought a vehicle when supply was low, prices were high, incentives were mostly non-existent, and interest rates on new cars were Flo Rida (which is to say low). Now, due to both automotive supply rising and a reaction to inflation caused by all of the above, prices of new cars are dropping, and interest rates are going back up again.

This means that someone who owns one of these cars is quite likely to be underwater because a two-year-old Jeep Grand Cherokee, for instance, commands a far lower price when a new one can be had with mega incentives.

Edmunds has all of this broken down in its 2023 Q4 Used Vehicle Report, which shows a lot of potential good news for someone in the market for a used car, and a lot of bad news for someone who bought a new car a couple of years ago.

“A storm is brewing in the used market as incentives and inventory continue to trickle back into the new vehicle market,” said Ivan Drury, Edmunds’ director of insights. “With demand for near-new vehicles on the decline, used car values are depreciating similarly to the way they did before the pandemic, and negative equity is rearing its ugly head.”

The numbers are pretty bleak. About 20.4% of trade-ins on new cars have negative equity, up from just 14.9% in Q4 of 2021. The amount is also up a lot, hitting a record $6,064, compared to $4,143 at the end of 2021.

As you can see in the charts above, the share of trade-ins with negative equity was higher in the quarters leading up to the pandemic, but the amount of negative equity was lower.

If you’re one of these vehicle owners there’s a good solution: Don’t trade in your car. There’s not a lot you can do about the near-term high availability of cars, but trying to trade in to buy something else to lower your payment means you could be facing both a negative amount of money owed on a car and higher interest rates if you’re financing.

Of course, if you’re super wealthy maybe you don’t care. For everyone else, the best action is probably no action.

Fisker Has $500 Million In Unsold Cars

It’s not looking great for electric automaker Fisker. I wrote previously about how a bad review from Marquees Brownlee was being parroted and recast on the web in a way that was detrimental to the company, with many people stating that he destroyed the company.

Well, it’s only getting worse, at least according to a new report from The Wall Street Journal that says Fisker’s looking for a firm to help it through a potential bankruptcy.

Electric-vehicle startup Fisker has hired restructuring advisers to assist with a possible bankruptcy filing, according to people familiar with the matter.

Fisker, which recently warned that it risked running out of cash this year, hired financial adviser FTI Consulting and the law firm Davis Polk to work on a potential filing, the people said. The car company reported last month that it had $273 million in sales last year and more than $1 billion in debt.

Those are not great signs and, while the review didn’t help, it does seem like major structural problems were already in place. Also, from the report, it seems like there are a bunch of unsold Fisker Oceans out there:

Employees have been working to unload the nearly 5,000 vehicles it has in stock, which are worth roughly $500 million, according to the company. Fisker has said it wanted to sell all the vehicles by the end of March, in part by signing up new franchise dealerships.

The obvious conundrum here is that Fisker could potentially raise cash and avoid bankruptcy by selling these cars, but the threat of bankruptcy only makes it harder to do so as people are wary of buying a car from a brand that they don’t think will exist to support the vehicle.

Wall Street Analyst: Tesla Is A ‘Growth Company With No Growth’

Wells Fargo analyst Colin Langan sent a note to clients on Wednesday telling them that Tesla stock doesn’t look great this year in light of slower sales and lower prices. This sent Tesla stock down a further 4.5% yesterday, adding to the stock’s poor performance this year (down 32% year-to-date).

Here are some highlights, via Bloomberg:

Elon Musk’s company is a “growth company with no growth,” Langan wrote. He highlighted that sales volumes rose only 3% in the second half of 2023 from the first half, while prices fell 5%.

And:

Even after the decline, the stock still trades at 55 times its forward earnings, compared to the average of about 31 for the Bloomberg Magnificent 7 Price Return Index.

“While an EV and battery technology leader, Tesla screens poorly relative to Mag 7 peers,” Wells Fargo’s Langan said, noting the valuation discrepancy. The analyst lowered his 2024 profit estimate for the company to $2 a share from $2.40. That compares to analysts’ average expectation of $3.03 a share for the year, according to data compiled by Bloomberg.

I’ve always thought Tesla was a super valuable company, but in light of everything else, it’s hard to square why it should be worth so much more relative to, say, Google, given that nothing Tesla did wasn’t going to inevitably be repeated by other automakers. [Ed Note: With varying degrees of success. -DT]. 

VW: Ok, Maybe We’ll Do A Hybrid

Volkswagen is one of those automakers in the United States that had some early hybrids and then decided to ditch them for a quick switch to electric cars. It was an interesting gambit, but it hasn’t entirely panned out for those automakers. VW, in particular, is now reconsidering bringing a hybrid to the United States.

Per Automotive News:

Volkswagen Group of America CEO Pablo Di Si said EV sales were pretty strong throughout 2023 until November and December, when demand started to slow.

“We’re not questioning the future,” Di Si said on the sidelines of VW Group’s annual media conference here on Wednesday. “The future is e-mobility. It’s just a transition time.”

But…

He pointed to the Tiguan plug-in hybrid that recently launched in Europe. The crossover has migrated to an updated version VW Group’s MQB platform and has an electric range of up to 62 miles.

“We have the basis, we’re just trying to figure out how, when, how to homologate and how to localize,” Di Si said.

While that isn’t an explicit endorsement of bringing the Tiguan PHEV here, it does sound like an idea that makes sense to them. If it were me, and it’s not, I’d do a PHEV Atlas.

What I’m Listening To While Writing TMD

I’m listening to Liverpool’s greatest band, Echo & The Bunnymen.

The Big Question

What would you do with 5,000 Fisker Oceans?