Carmageddon: Record Incentives And Financing Terms Fail To Stem The Auto Bleeding In June

Yesterday we noted that auto investors celebrated the fact that, while auto sales were down massively year-over-year (to the tune of nearly 6% for the Detroit 3), June figures were "less bad" than expected, so "good".  All of which sparked even more "irrational exuberance" among OEM equity owners and sent Ford/GM shares soaring. 

But, rather than focus on the headline numbers, perhaps those equity owners should spend a little more time analyzing the record incentives and deteriorating underwriting standards that have been required to generate those "less bad" results.

Take, for example, incentive spending for the month of June.  As Automotive News points out, overall industry incentive spending soared nearly 10% YoY with brands like Hyundai and Honda slashing 42% and 20%, respectively, to move their bloated dealer inventories.

ALG reports automakers spent an average of $3,550 per new vehicle sold in June, up 9.7 percent from a year ago. The average discount is expected to account for 10.8 percent of the average transaction price of vehicles sold last month -- marking the 11th time in the past year that incentive spending has accounted for 10 percent or more of the sale price, according to industry forecasters.

Autodata Corp. says average incentive spending heading into June was up 15 percent to $3,516 per vehicle sold. Despite weakening demand for cars, incentive spending for light-duty truck increased 16 percent compared to 13 percent for light-duty passenger cars during the first five months of the year.

American automakers, which continue to offer the most cash on the hood, matched the industry average for incentive spending, up 14 percent through May, while average discounts at Asian brands increased 19 percent and deals at European automakers rose only 3.9 percent.

ALG reported Subaru, Hyundai and Kia experienced the largest increases in incentive spending in June compared with a year ago. Average discounts at Subaru -- the lowest spender in the industry -- increased 63 percent to $1,032; followed by Hyundai, rising 42 percent to $3,259; and Kia, with an increase of 25 percent to $3,384.

Meanwhile, Edmunds notes that auto loan terms continue to get stretched out to record new highs each month all in an effort to continually lower monthly payments so that entitled Americans can buy cars they really can"t afford.

Edmunds analysts found that the average loan term for new vehicles soared to a record high of 69.3 months in June, an increase of 1 percent from June 2016 and up 6.8 percent from five years ago. In addition, the average amount financed by new-car buyers jumped to $30,945, which is a 2.6 percent increase from this time last year and 17.2 percent more than five years ago. And the average monthly car payment is now $517: That"s 2.1 percent more than in June 2016 and an 11.3 percent increase over five years.

"Stretching out loan terms to secure a monthly payment they"re comfortable with is becoming buyers" go-to way to get the cars they want, equipped the way they want them," said Jessica Caldwell, executive director of industry analysis for Edmunds. "It"s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it"s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer."

And it"s not just new car loans as used car terms are getting stretched out as well...a fact that we"re sure will serve consumers well if Morgan Stanley"s downside case for used car prices ever actually plays out (see "Morgan Stanley: Used Car Prices May Crash 50%").

Consumers in the market for a used vehicle are also willing to stretch their payments. An Edmunds analysis found that the average loan length for a used car is now 66.9 months, up 0.1 percent from June 2016 and up 6 percent than five years ago. The average amount financed has risen to $21,142, a 0.4 percent jump from last year and an increase of 9.9 percent over five years. And the average used-car payment in June was $383, which is 0.8 percent more than a year ago and up 3.5 percent from five years ago.

And don"t even get us started on the record level of "channel stuffing" going on the industry...

...with GM being the biggest culprit with inventory days up a modest 46% YoY to an all new record high of 105 days.

???? GM"s inventory has officially hit a 10-year high. 980,454 units in stock (a 105-day supply) as of June 30, the most since June 2007.

— Nick Bunkley (@nickbunkley) July 3, 2017

Finally, as Stone McCarthy Research points out, Americans, flush with their $0 down, 0% interest for 84 month auto loans, continued to shun cars for much more expensive, and profitable, trucks and SUV"s.  Another "positive" for the industry...if you manage to ignore those record incentives we mentioned above which are eroding away all that extra profit.

General Motors domestic car sales came in much lower than we expected, and declined nearly 34% from June 2016. Their domestic light truck sales were much stronger than we expected, and were up over 7% from last year.

Domestic car sales were weaker than expected for Ford as well, and fell 23% from last year. Ford domestic light truck sales also came in below our expectations, though were not weak as ford domestic car sales, and were only up about 6% from June 2016.

Chrysler domestic light car sales came in right where we expected, down 19% from last year. Domestic light truck sales for Chrysler were below our expectations though, and fell around 3% from last year.

Car sales:

Truck sales:

Of course, things like math and critical thought are way more complicated than quickly reacting to "less bad" headlines.  That said, in the long run, math and logic tend to prevail.

 

Used Car Prices Crash Most Since 2008

Authored by Mike Shedlock via MishTalk.com,

According to NADA Used Car Guide, wholesale prices on used vehicles are getting crushed. Let’s take a look at the details.

Used Car Prices Since 1995

Used Car Prices by Type of Vehicle

Used Market Update

In a reversal of what typically occurs in February, wholesale prices of used vehicles up to eight years old fell substantially last month, dropping 1.6% compared to January. The drop was counter to the 1% increase expected for the month and marked just the second time in the past 20 years prices fell in February (last years’ scant 0.2% being the other instance).

NADA Used Car Guide’s seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index figure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.

Incentives Jump by 18.1%

Automakers grew incentive spending once again in February, making it the 23rd month in a row where spending was increased. On average, spending reached $3,594 per unit versus $3,043 per unit in February 2016 according to Autodata.

Among the U.S. Big Three, GM raised incentives by 27.4% in February to an average of $5,125 per unit. Spending at Ford Motor Company rose by 20.9% to $4,012 per unit, while FCA increased incentives by 10.6% to $4,365.

As for Import automakers, Toyota Motor Sales raised incentives by 7.9% in February, reaching an average of $2,267 per unit. American Honda grew incentives by 26.6% to $1,886, while Nissan North America increased spending by 20.1% to $4,080 for the month.

Inventory Falls to 74 Days

Compared to January, days’ supply fell by 11 days in February, landing at 74 days for the period. Looking back, February 2016 saw a supply of only 69 days according to Wards Auto.

GM’s supply reached 91 days over the month, due largely to Buick’s industry high 167-day inventory. Ford Motor Company’s supply fell to 78 days, while FCA’s inventory dropped to 83 days.

Toyota Motor Sales’ supply decreased to a lean 67 days, matching Nissan’s figure for 67 days for the month. Meanwhile, inventory for Honda fell to 74 days. Subaru’s 38 days of supply remained lowest in the industry.

As for luxury automakers, BMW’s inventory fell to 46 days, while Daimler inventory remained unchanged versus January at 44 days’ supply. Cadillac’s inventory of 107 days was the highest in the luxury sector, while Tesla’s two days was the lowest.

Desutche Bank is gravely concerned...

We’ve grown increasingly concerned about U.S. Used Vehicle Pricing down 7.7% yoy during February, per NADA. A decline in used prices has been widely anticipated given a significant increase in used vehicle supply (off-lease vehicles). But the magnitude of the recent drop was nonetheless surprising (February’s drop was largest recorded for any month since Nov. 2008). NADA cited a number of factors contributing to the drop, including an increase in late model auction supply from rental fleets, and delayed tax refunds. Used prices have a significant impact on New Vehicle demand/pricing through their effect on affordability (most new car purchases involve a trade-in).

New/Used Vehicle Pricing & Demand Relationship. Some consumers shift from New to Used when Used Vehicle prices become relatively more attractive, negatively impacting New Vehicle demand. Used price deterioration also has an impact on credit, as lenders watch loan loss severity (and frequency), and tighten when this stat. weakens (potentially creating a negative feedback loop). At a more macro level, used vehicle price weakness is also seen as an indicator of aggregate vehicle supply/demand imbalance in the economy–caused by new vehicles entering the parc significantly faster than the rate of scrappage and net new licensed driver growth. This situation should ultimately self-correct as new car sales come under pressure. That said, the biggest fear for investors is that Auto OEMs become incrementally more price aggressive to support New Vehicle sales. Historically, every 1% decline in Used Vehicle prices has corresponded with a 0.2% decline in New Vehicle prices.

Fundamentally Speaking

NADA partially blames late tax refunds for some of the declines in March.

While it’s true the IRS slowed claims for the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) to combat fraud, late refunds in 2017 cannot possibly explain an eight-month trend.

Yet, based on tax refunds, NADA expects a rebound in used car prices in March.

With massive incentives on new vehicles, I say, let’s see. Regardless, it’s pretty clear that car sales are slowing, and it takes bigger and bigger incentives to push them out the door.

Recall that on March 7, GDPNow 1st Quarter Forecast Plunges to 1.3% Following Vehicle Sales and Factory Orders Reports.

Also recall that the FRBNY Nowcast did not take auto sales into consideration.

On March 15, I reported GDPNow Forecast Dips to 0.9%: Divergence with Nowcast Hits 2.3 Percentage Points – Why?

Is this all related to slow tax refunds? We will soon find out.

US Auto Dealers Forced To Rent First "Overflow Lots" In 37 Years Amid Inventory Glut

Yesterday we noted that GM launched an aggressive incentive program in the month of February to clear out some of its pickup truck inventory.  In fact, incentives on the company"s Silverado were up 56% YoY to $6,996, while discounts on the Sierra were up 82% to $5,315 (see "GM Pickup Incentives Surge Over 80% As Auto Bubble Continues To Show Signs Of An Imminent Bust"). 

But apparently GM isn"t the only auto OEM who may have had to splurge on incentive spending in February to clear out inventory piling up on dealer lots.  Inventory days across the industry are up massively YoY and stood at 85 days at the beginning of February, up 22 days from January 1st and up 8 days compared to the same time last year.  As one Honda dealer told Bloomberg, the inventory pile up at his dealership has become so excessive that for the first time in 37 years of business he was forced to rent an overflow lot to park unsold cars in February.

For the first time in his 37 years working at New Jersey car dealerships, Larry Kull had to rent extra space to store unsold new Honda vehicles -- one of the latest signs that the record U.S. auto market is cooling.

Across dealer lots in America, inventory is piling up as automakers produce more cars than are being bought. Dealers had about 85 days worth of cars and trucks on hand at the beginning of February -- about 22 days more than at the beginning of 2017 and eight days more than a year earlier, according to Automotive News Data Center.

“The sales are good, I just have more product on the ground than I’ve had before,” said Kull, who has about 60 days of passenger cars including Civic compacts and Accord sedans stocked at an office parking lot down the road from his Honda store in Marlton, New Jersey. He prefers to have just 45 days worth of cars on hand.

Meanwhile, this news comes just as wall street prepares to digest new car sales data tomorrow.  Overall sales for February are expected to be down slightly while GM is expected to perform "best"  among the D3 on their massive incentive spending (though we"re not sure it"s much of a victory if you"re giving the cars way).

And the import brands are expected to have mixed results as well with VW benefiting from an easy YoY comp associated with their emissions scandal that effectively halted sales a year ago.

As we noted yesterday, there are only two ways to deal with the rising inventory conundrum: i) cut production or ii) splurge on incentives to sell more cars.  Unfortunately, financing terms for autos are about as loose as they can get and interest rates are now headed in the wrong direction so selling more cars the old fashioned way seems unlikely. 

Production cutbacks also have already begun. GM and Fiat Chrysler have eliminated shifts, laid off employees or scheduled days off early this year at plants making slower selling models including the Chevrolet Cruze compacts, Chrysler Pacifica minivans and Buick Lacrosse sedans.

While heavy inventory is a signal of potential pressure on automakers’ profits, it also boosts costs for dealers, which pay interest on inventory as well as any extra expense to store vehicles.

“No one likes to cut production or dial up incentives, and we’re seeing a bit of both,” Thomas King, an analyst with J.D. Power, said by phone. “We’ve got a lot of cars on the ground when the market is moving away from cars.”

Meanwhile, as one dealer points out, part of the inventory problem is a heavy mix towards cars when buyers are now looking to take advantage of low fuel prices and trade up to an SUV.

Raj Murjani, a sales manager at a Lexus dealership in Queens, said he’s selling about 40 or 50 fewer vehicles than usual this month. He sees the gap in popularity between SUVs and sedans continuing to widen, as low gasoline prices encourage consumers to switch to bigger vehicles.

“If it’s a person who’s been in a sedan and they got just the slightest taste of an SUV, they don’t ever want to go back,” he said. “They think going back into a sedan is a downgrade.”

Of course, we"re sure each of these buyers has done extensive modeling on the long-term equilibrium price for crude oil...