Oh boy, there is a lot of fear that the car bubble is over. in fact, and now reports across the country are suggesting that car repossessions are on the rise in a dangerous sign for the economy. This comes as car loans are up an average of two thousand dollars a per car loan per car that's financed. Now that depends.

that could be because cars have gotten more expensive. As you can see here, the red line has sort of run up, Or it could be because people have been able to borrow more, they've been able to pay for more car, and therefore car prices have gone up. But either way, as car prices have gone up and car loans have gone up now, all of a sudden, the bubble is reversing and we're seeing repossessions skyrockets. So much so that repossession companies think a demand will continue until peaking in 2024.

potentially a bad sign for cars in the second half of 2023.. Now, this could trickle through through the entire economy. and we'll talk about some of these implications By starting with Carvana. look at Carvana's Behavior here.

According to car dealership guy here, car dealership guy on Twitter says Carvana may have just quietly started liquidating. The company is now advertising its retail inventory to wholesale dealers. Okay, so let's explain this. First of all, we've done an analysis on Carvana previously in videos and we found that Carvana seems to be on the verge of bankruptcy.

much like Open Door. Carvana is also in talks with bondholders to potentially negotiate together a debt settlement in the event that Carvana goes into Bankruptcy. to where essentially the debt holders unite together and say Hey You know we'll hold out for taking 70 cents on the dollar together rather than fighting each other for you get 75 and I get 65. Long story short, people are starting to prepare for a potential bankruptcy At Carvana.

Similar stories are starting to ruminate about open door as well in the real Estate World Both kind of similar in that they're kind of like wholesalers of either real estate or cars, but let's stick to cars for a moment. when a company advertises retail inventory to wholesalers, you have a little bit of a concern. See, ordinarily a company like Carvana will buy vehicles from wholesalers and the goal is hey, look, we'll pay you say thirty thousand dollars for a Ford pickup and then we're going to try to resell it for 35 000 and maybe in the meantime we'll put a couple thousand bucks into it to Spruce it up a little bit, some air fresheners, change out the rugs, the carpets, whatever, and we'll have some holding costs and transaction costs. And our goal is that after all of that and after some negotiating, after all of that, we'll try to make a margin of maybe like 1600 bucks.

has kind of been the goal for Carvana. If we can get to 1600 bucks. Great. That means we bought a car for 35 or for 30.

Rather, we sold it for 35 minus costs minus negotiate station. we ended up with sixteen hundred bucks When Carvana starts advertising however, cars that they bought from wholesale. so they bought perhaps this Nissan Frontier Crew Cab here at Wholesale When they start advertising that same car that they're now trying to sell to a retail audience to wholesalers themselves. In other words, now they're trying to sell wholesale inventory to other wholesalers, it somewhat sends a sign of panic.

Now let me give you another comparison. Lennar is the second largest homebuilder in the United States Lennar has a Home Building Division and a landlord division. in the landlord division, they go buy rental properties to rent. out.

In the building division, they build homes and sell them well. The building division is now trying to sell Homes at a potential 20 to 25 percent discount to investors who are willing to buy those homes in bulk. And I'm thinking myself, if you're willing to sell these homes at a 20-25 discount to get rid of them in bulk, why doesn't your own home renting platform buy those homes? Oh, because it's probably still a really bad deal. The same story I believe is what you're seeing here at Carvana.

If Carvana is having to sell their own inventory that they're trying to sell to retail now to wholesalers at a big discount, in this case, a five thousand dollar discount on a thirty thousand dollar car works out to somewhere around what sixteen? Seventeen percent, right? Uh, let's let's just do the math here really quickly. If you're selling it, uh, to what are you selling it for, you're selling this one listed to retail for 35.990 That's the retail and we're going to divide that by what you're advertising it to retailers for or to wholesalers, rather, 39.99 Yeah, that's like 16.4 percent more for the retail and you're cutting that off. Uh, for wholesale, it's kind of a sign. And I Like how it says zero bids over here, ending in two days.

Oh, look, that's today since December 19th. It's kind of interesting to me that you're starting to see this sort of pain in the used car market, especially since the used Car market has has been really, really bubbly in the last two two years. In fact, the Used Vehicle Index the Mannheim or Used Car Vehicle Index report is showing that prices, while they've dropped about 30 percent, have potentially stabilized in November going from just an index read of 200 to 199.9 in November potentially suggesting that the Used Car bubble has slowed. it's popping though.

Some people think this is just a Black Friday reprieve, and used car vehicle prices are going to continue to decline, especially since the average monthly payment for vehicles is up 26 since 2019. now an average vehicle payment is sitting at 718 dollars per month. The current five-year loan for a new vehicle or or new used Purchase cost people about six and a half percent. and that's if you've got a prime credit score.

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You need to kind of take a screw gun to it and you just run it in reverse to rewind your odometer to essentially try to fraudulently increase the value of your car when you go to trade it in or sell it as people are kind of pushed into, uh, desperation. uh? In addition to that, we are now showing that there potentially reports of production hitting slowdowns for new vehicle manufacturers. The largest winners are expected to be companies that have price and margin strength as consumers pull back both in the used and new vehicle space. Which makes sense because that's what we're seeing at Carvana.

That's what we're seeing with high interest rates. That's what we're seeing with affordability challenges. For people going into a recession, we think that profitability for companies like Lucid and Rivian is far out. potentially.

uh, bankruptcy is much closer. For Lucid and Rivian, GM and Ford have gone through recessions before Tesla kind of grew up in a recession, so it's hard to say if Tesla's been able to weather a recession before, although many will argue that yeah, they've weathered the 2008 GM and Ford have certainly survived before, although many else include myself included, will argue that Tesla should have substantial margin strength and pricing strength even through a recession that we'll see. It is interesting though to consider what this could mean for the overall economy. Consider this if somebody goes in to sell a used car.

but they can't sell their used car for what they thought they could get. Now they're stuck with their old car. That means one less piece of inventory for the used car dealer. It means one less transaction for the used car dealer.

It means one less buyer for either a new used car or a new new car for that person, right? And what does that do? Well, All of that ends up crimping GDP because the less transactions you have, the less you potentially have a GDP or gross domestic product, which is the sum of all those transactions contributing to overall strength in the United States which reiterates to the Federal Reserve that oh yeah, our high interest rates are finally starting to trickle through the economy. Keep in mind, it takes a while for high rates to trickle through the economy. The Feds raised rates in a matter of nine months from zero to four and a quarter percent and they're on a trajectory of continue viewing to hike rates. And this has actually turned pretty scary because a lot of folks realize, wait a minute, we don't need to get new debt that often to where just in nine months we're going to be able to see the impact.

That's why we talk about lags and monetary policy, because how often are you getting a new car? I Don't know. Maybe once every three years. Well, if you just got a new car, maybe you even got a new car lease in 2020. When are you due for a new one? Oh, maybe in 2023.

So you actually haven't even hit the realization of high interest rates right yet? For the whole group of people who bought a new car or leased a new car that is in 2020, uh, itself. Which is really interesting because you realize wow, yeah, the lagging effects of rate increases are something that take a while to actually hit individuals. And what we're starting to see in the used car market is a sign that oh, the FED may have gone too far too fast and there's a lot of hurt coming for the used car business, but it potentially could hurt the new carbon business as well. We expect new vehicle inventory to move up from where it is now around 1 million units on average to about 2 million.

Now that's about still 2 million below the trend that we saw between 2000 and 2019 where you actually had such high inventory levels where like car dealerships were overflowing with cars and that was actually kind of bad for dealership profitability. We do think new inventory is going to kind of climb again, and that could slow down some automaker's desire to get into EVs and really just their desire to try to get by through this recessionary environment that we're going to be going through here in 2023, and hopefully that'll End. By 2024, though, we'll see buckle up long and short of all of this Look, we're probably going to see deflationary impacts from this disaster in cars, which is good for sending signals to uh, the Federal Reserve that maybe they've done enough, especially since used and new cars have been a big driver of consumer price inflation over the past two years. Now, they might be a big driver of consumer price disinflation as these prices deflate.

Remember the difference disinflation is a lower rate of inflation deflation as price is actually coming down with cars, We actually expect prices to start plummeting, especially again as repossessions. Skyrocket And do keep in mind as repossessions Skyrocket people's credit scores get hurt, which makes it hard for them to ever buy a new car on credit. and that unfortunately means lower demand for new cars. But then again, you have to ask yourself which cars and this could create an interesting dichotomy.

Maybe lower credit buyers are really just lower income purchasing users anyway. So for example, if somebody has bad credit, maybe the best they would be open to ever buying would be like a new uh Honda Civic right? A lower priced car sub 25 000 sub 20 000 a dollar car. Maybe you have less of an impact at that higher end vehicle, say above forty thousand. Though who knows, as lower price cars get less expensive, the premium you're paying for a more expensive vehicle, at least in appearance wise, extends.

Because if let's say, the price of a Honda Civic goes down well all of a sudden now, what you're paying for a premium car is a lot greater than what you would be paying ordinarily for a Honda Civic and that spread becomes harder to justify the larger it gets, which could also then hurt more expensive vehicle demand. All around, this is probably just bad news for the vehicle industry and it's It takes a lot of Hope to say that yeah Tesla's going to be able to maintain their margins. They're probably going to have to reduce prices now. Keep in mind they've increased prices a lot over the last couple years, so maybe it'd be okay for a model 3 to rotate back from where it is now in the mid 40s back to that higher 30s or maybe even mid-30s range and we just get back to where things were.

which would be nice to show the Federal Reserve that deflation is actually on its way and it's time to stop hiking. But in the meantime, the Fed's probably going to keep going until they see meaningful signs of rotation down. And so far this is just an early warning sign of that rotation down getting started. Anyway, let me know what you think in the comments down below.

Thanks so much and we'll see in the next one. Check out the programs on building World link down below. Thanks Bye.