We told you so.
On Sunday, we reminded readers that the US auto loan bubble i) has hit truly epic proportions and ii) is increasingly dependent upon Wall Street’s securitization machine.
We also noted that the percentage of total outstanding retail auto ABS comprised of subprime is at an all-time high, and that within subprime, lenders with subprime-ier underwriting standards are gaining market share.
Then we noted that given the environment described above, just about the last thing you want to hear is that, to quote BofAML, “CPI for used vehicles declined for the twelfth consecutive month [and] further declines, driven in part by an increase in off-lease vehicles, are expected to place pressure on realization and recovery rates for auto lease and loan ABS.”
Well, less than 24 hours later, Deutsche Bank is out with a new note reinforcing all of the above. Consider the following and do note the bit about how lower used vehicle prices constrain new car sales by depressing trade-in values…
Via Deutsche Bank
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.