Pumping up a Leaking Tire, by Eric Peters

The auto market has been pumped up with credit, but now it’s sprung a leak. From Eric Peters at theburningplatform.com:

Every kid knows what happens when you try pumping up a leaking tire. As soon as you stop pumping air into it, the tire begins to go flat.

New car sales have been working that way for the past couple of years – with effectively free (zero or little to no interest) loans extended over the horizon – and leasescounted as sales – serving as the “air” in the tire.

We’ve been told that business is great.

In fact, it’s as rickety as a Jenga tower.

What’s happening in the used car market is a portent. Prices are collapsing – chiefly because of historically unprecedented depreciation. During the past twelve months, the average used car lost 17 percent of its value. This is almost twice the annual average depreciation rate just three years ago. It smacks of the post-2005 collapse of housing prices.

There are several reasons for what’s happening, all related and feeding off one another like chum-crazed barracudas.

The first is the inflated prices – as distinct from value – of new cars.

Things that have value – intrinsic worth – tend to retain it. Things that merely cost a lot – when they are new – but whose value is essentially a function of their newness and not intrinsic worth – hemorrhage  value the moment after they are no longer new.

This used to be almost uniquely true of high-status cars, which people bought largely on the basis of their being the Latest Thing. A year – six months – later, of course, they no longer are. This is why a high-end car that sold for $80k three years ago is worth maybe $50k today.

To continue reading: Pumping up a Leaking Tire

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2 responses to “Pumping up a Leaking Tire, by Eric Peters

  1. The low prices of used cars are also caused by high labor costs for repairs of complex components, deliberate high prices of replacement parts from manufacturors.

    So low used cars values have been planned by car makers. The policy is now biting back at them.

    Like

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