Car prices, debt

[jenk]

The average amount financed on a new car was $26,221 in 2003, [said Deutsche Bank's Rod Lache], compared with $22,822 in 2001. [...] According to Mr. Lache, a full third of customers coming into dealerships have negative equity amounting to $4,000 a vehicle on average. Back in September, only three out of 10 had such a problem and the average amount was $3,000.

Otoh, those who aren't heavily in debt may be able to swing a better deal. But those who are in debt are probably going to depress demand.

That new-car smell soon might not be so sweet.

Investors have started to fear inflation, but car and truck prices are still subject to discounts. After three months of anemic sales, General Motors fell back into heavy use of incentives in April.

At this point, GM, is just taking it one day at a time. But those days are going to get a lot tougher. Interest rates are going up and this is going to likely pinch profits and, potentially, sales. At this point in an economic recovery, usually the prices are firming, points out Bank of America's Ronald Tadross. The problem, of course, is that there is little pent-up demand for autos since people took advantage of 0% financing and bought new ones throughout the downturn.

Deutsche Bank's Rod Lache has been writing about the problem that many customers are coming into the dealer with "negative equity" in their cars. In other words, the debt that remains on the car loan is greater than the trade-in value of the car itself.

Yes, people have been warned about car debt practically since the first Model T rolled off the lot. But the accumulation should be a concern. The average amount financed on a new car was $26,221 in 2003, he says, compared with $22,822 in 2001.

But average monthly car payments actually went down a bit in that time. How? Because people took out longer loans at low interest rates. While the average car loan term was 52.1 months in 1998, it rose to 61.4 months in 2003, with about 20% of loans at 72 months, he says.

The problem of being "upside down" in a loan -- another term for having negative equity -- could have serious ramifications. According to Mr. Lache, a full third of customers coming into dealerships have negative equity amounting to $4,000 a vehicle on average. Back in September, only three out of 10 had such a problem and the average amount was $3,000.

Meanwhile, inventories are up near record levels. GM, which posts first-quarter results today, had inventory at 1.3 million units at the end of March, while normally it might have inventory of about one million to 1.1 million. Ford Motor inventory is high, too. Says Mr. Lache, the auto makers need "to move the metal or else."

That "or else" is that demand or prices need to come down. Perhaps both.

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