Car Dealers Are Getting Pinched... And It's Worse Than You Realize

While car dealers will sometimes offer Black Friday deals on car accessories, AutoNation (AN) took it a step further this year...

It offered Black Friday sales on cars. This was only the second time the company has ever done so.

AutoNation's discounted vehicles were a great option for consumers. They were also proof that the once-strong auto market is falling on hard times.

For most of 2021 and 2022, you couldn't find a car for market price... let alone on sale. The average selling price in May 2022 was $721 over the Manufacturer's Suggested Retail Price ("MSRP"). By July 2023, the average selling price had dropped to $714 below MSRP.

Electric vehicles ("EVs") are faring even worse. New EV prices fell about 20% from June 2022 to June 2023. Used EV prices dropped 30%.

This year's Black Friday shopping deals tell us that car dealers are feeling the pressure to sell inventory. Today, we'll discuss why they're so desperate... and why they aren't likely to dig themselves out of this hole.

In the U.S., a lot of folks need cars...

According to the Bureau of Transportation Statistics, 91% of workers use their personal vehicles to commute at least some of the way to work.

And in a Car Buying Outlook survey conducted in October 2021, 84% of respondents told Capital One Financial (COF) that they've had to decline a job offer because they didn't have access to their own vehicle.

If fewer people can afford a car, that means more roles that require a car might remain empty. Fewer people with jobs means less car demand in the future.

And falling prices and sales tell us that the auto industry is in trouble.

Debt is mounting across the board. In the first quarter of 2023, auto loans increased by $10 billion... bringing the total up to $1.56 trillion. They're currently the third-largest category, after mortgages and student loans.

Even worse, the number of subprime auto loans is rising. These are loans given to people with poor credit history.

In September (the most recent data available), 6.11% of subprime loans were at least 60 days past due... the highest rate since 1994.

Looking at that data, it's clear investors should stay away from the automotive sector right now.

However, there's also a bigger issue.

Consumers are having debt problems... and there's no release mechanism.

Note that these consumer debts aren't mutually exclusive. People who owe more in student loans are more likely to be delinquent on their auto loans.

Interest rates are still high. So folks can't refinance their auto loans. They have no reason to keep buying cars. That's why auto dealers are desperate to sell at steep discounts...

It's not going to help.

Dealerships are shooting themselves in the foot with these unprecedented deals. They're hurting their margins by discounting. And with auto loan rates so high, we'll likely see rising delinquency rates... if not outright defaults.

Consumers are running out of cash. The trouble in the auto market will only bring about a recession even faster.

Wishing you love, joy, and peace,

Joel
December 1, 2023

P.S. My team and I have been sounding the alarm on the coming recession for months... Yet many folks are still letting current market dynamics catch them off guard.

On Wednesday, December 6, I'm issuing a new warning about a short period we're about to enter in the market – one with the power to make (or destroy) fortunes. Plus, I'll reveal the name and ticker symbol of my top buy and sell recommendation. Get the details here.