The truism that the second most expensive purchase most people make is a car tends to ignore the part that houses usually appreciate in value, whereas cars almost always lose their value. The pandemic/chip shortages/trimflation inverted this for cars, with people getting offers for more than what they paid for their cars. According to a new study, this has dramatically screwed up how car buyers view what their cars are worth, with many being off by $5,000 or more.
Tesla buyers are the worst off in this study, which is no surprise given how heavily Tesla continues to discount its vehicles. That strategy seems to be working for Tesla, especially in China, where a rise in car sales may help the company overperform in the third quarter.
Toyota, on the other hand, probably had a bad quarter for production due to a bunch of problems. Will Volkswagen have issues with the ID.Buzz? You better hope your local dealer sold a bunch of ID.4s, otherwise don’t expect to be able to find an ID.Buzz. A lot to contemplate in today’s Morning Dump.
1-in-3 Buyers Are Underwater On Their Cars And May Not Know It
The period of 2021 to early 2023 was an extreme fluke when it comes to car sales. The global pandemic, and the hamfisted response of automakers, led to new cars getting way more expensive. There was such a shortage of new cars that used ones in good condition were suddenly worth as much, or more, than their original sales prices. (Many of you might remember the crazy Carvana offers you got at the time). At the same time, government stimulus and job protection put extra money in the pockets of consumers.
The market is now past this period of constrained supply, and all of that spending (as well as other factors) led to a period of inflation. Interest rates were raised in response, which means that even though cars are getting cheaper, the overall cost of buying a car remains stubbornly high for individuals who need to finance.
While used car values haven’t completely plummeted, almost any car purchased in the last five years is not worth what it was at the height of the supply shortage. I’ve talked before about how auto loans from 2022 are probably the worst to hold given the cars in that period were sold at prices that were above market values, and now, given that there’s plenty of new car inventory, people are still paying those inflated prices every month.
While all of this is obvious to you, dear Morning Dump reader, it may not be so obvious to consumers according to the Q3 Negative Equity Report from CarEdge/Black Book. The survey of over 1,000 drivers found that 31% of drivers who financed their car purchases had negative equity (in other words, they owe more than their car is worth). This number rises to 39% for buyers who purchased a car since 2022, likely reflecting both the above-market transaction prices and the fact that fewer payments have been made compared to a pre-2022 car.
I was disappointed to find out how many buyers misunderstood the value of their vehicles, but I’m also not surprised. From the report:
61% of respondents believed that their vehicle was worth more than its actual trade-in value, based on data from Black Book. Furthermore, 17% of respondents overestimated their vehicle’s value by $5,000 or more. This disconnect between perceived and real value is an important factor contributing to the financial difficulties many car owners face when trying to trade in or sell their vehicle. The belief that a vehicle is worth more than it actually is may lead some drivers to underestimate the extent of their negative equity. Many drivers are encountering this unpleasant surprise at the car dealership when attempting to trade-in for an upgrade.
It’s not great, and the trends make a lot of sense in terms of who has more or less equity (the longer the loan term, the lower the equity, and the more likely you are to be underwater). The people most impacted by this are not surprising, either.
This is graphic shows the equity versus loan-to-value ratio for different brands, which is determined by taking the amount of the loan and comparing it to the value of the car. Above 1.0 is bad, the closer to 0.0 the better. Luxury cars, which are historically the biggest and fastest depreciators, tend to be close to 1.0. So why is Tesla at the bottom? It is a quasi-luxury carmaker but most of its cars are Model Ys and Model 3s.
The cheapest Model 3 in 2022 was about $50,000 (before incentives). Today, the cheapest Model 3 is a full $10,000 less. The KBB trade-in value for a 20,000 mile 2022 base Model 3 in excellent condition is about $23,000, or less than half (worth noting that private party sale value is a little over $27,000). Unfortunately for Tesla buyers, the company has been continually lowering the prices of its cars to attract new customers. This is good for new buyers and bad for old ones. And to make matters worse, Hertz dumped a bunch of Teslas on the used car market this year.
So long as the economy stays strong this isn’t likely to become catastrophic, though in a recessionary period, this could lead to even more delinquencies than expected.
Tesla Probably Had A Great Quarter In China
Tesla is the automaker that is most opaque about its car sales. Every three months, without warning, it’ll drop production and delivery numbers (its analog for sales) broken down only by “Model 3/Y” and “Other Models.”
Thankfully, most developed markets report more detailed numbers, including in China, where it’s starting to sound like Tesla had a super strong Q3, leading analysts to increase their targets for the automaker.
At least four analysts have boosted their estimates for Tesla’s third-quarter delivery numbers, which are due next week. All point to signs that sales are starting to pick up in China, a key area for Tesla and a major market for electric cars globally.
“This China strength comes at a very opportune time for Tesla, helping to offset ongoing weakness in the US and Europe,” said Dan Levy, who follows the company for Barclays. Levy now expects deliveries of about 470,000 vehicles in the three months ending in September, up from 462,000 previously.
A healthy delivery figure next week would go a long way in allaying fears about weakening demand amid an industry-wide slowdown and the emergence of competitively priced rivals.
Elon Musk may no longer view his company as a car company, but it’s still a better car company than most. I’m curious to see how well BYD does in China in Q3.
Toyota Is Taking It On The Chin This Quarter
Toyota is in the enviable position of having a strong brand and a product line that offers something for almost every consumer. The Japanese carmaker is in the less desirable position of being caught up in numerous testing scandals and stop-sales for its extremely popular three-row crossovers.
Those issues are being dealt with, but August was the 7th consecutive month of decreased output according to Reuters. There were lots of reasons, including the aforementioned scandals and production pauses, as well as a typhoon in Japan, where production dropped by 22%.
So, if you’re waiting in line to buy a new Toyota, stay in line. They’ll make them, eventually…
VW Dealers Are Only Being Promised ‘One Or Two’ ID.Buzz Vans At Launch
I am excited about the Volkswagen ID.Buzz, even if I’m not totally sold on its high price. The EV retro van seems like an ideal use case for an EV, which is why it’s a bummer that it’s felt like 900 years since this thing was first revealed.
If you want to buy one, it’s going to feel even longer than 900 years because, according to Automotive News, the rollout is going to be slow.
Andrew Savvas, VW’s head of U.S. sales, said each VW dealership will get one or two ID Buzz models for the vehicle’s U.S. launch. That will equate to a ramp-up that Savvas described as “quite tight.”
He said VW’s allocation policy is based on the size of a dealership’s market, along with its ID4 sales performance.
“We want to obviously give the cars to the dealers who did a wonderful job on ID4,” Savvas said.
If you live in a large market with a dealer capable of moving ID4s you might be in better shape.
What I’m Listening To While Writing TMD
This video might be a bit much for work, FYI, but the Addison Rae short film for her lusty “Diet Pepsi” continues the trend of pop stars using giant, Malaise Era American cars (Sabrina Carpenter’s “Please, Please, Please”) in their videos. Is this a trend? Are these cars ripe for a comeback?
The Big Question
How much money do you put down as a down payment (as a percentage) when buying a new car? I just did about 25% on my Honda, meaning I am thankfully not underwater.
Topshot credit: YouTube (Family Feud)
We had pretty large down payments on our new vehicles that we bought for sticker price in 2022. So we are good on equity, thankfully. Especially on my wife’s vehicle. People were patently stupid or stupidly rich to pay those market adjustments.
I don’t understand the concept of underwater vehicles tbh. Your not really underwater unless you sell it right. Like I’ve been above water since 2011 when my last car note expired.
These cars last a long time. Today I drove my 2003 infiniti g35 coupe to work. Did the job just fine and short of a large screen in the center of the dash I don’t even really feel like I’m driving and old car.
This weekend when my rock auto parts show up I’ll put my new pads and rotors on my 2005 jeep grand cherokee and be ready for winter. It has a bit of rust but it still trudges through the snow and ice just fine.