What Does The Automotive Industry Say About The Economy?

The Real Estate Espresso Podcast

What Does The Automotive Industry Say About The Economy?

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Introduction: What Does The Auto Industry Say About The Economy?

Welcome to this insightful exposure of how the auto industry reveals certain aspects of the economy. I have observed several indicators suggesting an economic downturn that may compel the Federal Reserve to start cutting rates. This analysis draws from the automotive industry’s recent activities, reflecting the broader economy’s state.

The Current Auto Industry Scenario

The auto industry is undergoing a significant shift, notably marked by banks retreating from their traditional lending schemes. Traditionally, loan-to-value ratios between 90 and 95 percent prevailed, supplemented by customer down payments. However, banks are now limiting their loan-to-value ratio to 75-80 percent, effectively doubling or even tripling the required down payment. This change has led to a reduced reliance on financing for new car purchases, which plummeted to 80 percent in recent quarters from 85 percent in 2022. It’s important to note that this doesn’t suggest buyers have more cash; instead, the number of transactions has reduced significantly.

The Dealership Predicament

As a consequence of the pandemic-induced new car shortages, many dealerships were permitted to sell used cars loaded with numerous additional features. However, these cars were traded way above their actual value, resulting in a considerable loan-to-value ratio. As a result, these used cars are now appearing as trade-ins and are worth less than the owed loan amount.

Indicator	Impact
Reduced Loan-to-value ratio	Increases down payment
Increased auto loans	Higher rate of delinquency
Overpriced used cars	Devaluation of used cars
Inventory surplus	Pressure to offer discounts
Layoffs	Impact on employment figures

These changes in the automotive industry not only reveal a sector in turmoil but are also indicative of upcoming significant shifts in the broader economy. With manufacturers’ shares falling and layoffs becoming more common, it’s apparent that the industry is struggling. Therefore, it’s just a matter of time before we start to see more significant impact in the economy at large.

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