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Car Prices Will Drop with Home Prices

FrankGiovinazzi submitted on 01/30/2008 Official AutoSpies Timestamp: 12:15 PM
from: www.carbuyersnotebook.com

[37] user comments | category: New Cars

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Car Prices Will Drop with Home Prices

It's accepted wisdom now that overall auto sales will drop in 2008. This is seen as a function of the housing bust, during which as much as 20% of new car purchases were funded by residential real estate profit, home equity cashouts and the general euphoria in real estate related industries.

Now that home prices are dropping -- and will continue to do so until they fall in line with median income -- we believe the average new vehicle transaction price will drop as well. If houses can fall 10%-30% in value, why not cars? Read Article

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DaHarder - 1/30/2008 12:35:05 PM

+5 Boost

It would only make sense, given that (I feel) very few people will be using money to buy new (expensive) vehicles when they're struggling to pay their mortgages...

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enthusiastx11 - 1/30/2008 4:17:56 PM

+1 Boost

actually this argument makes no sense to anyone who's ever run a business. see below...

EnnNorak - 1/30/2008 5:34:48 PM

-1 Boost

I learned a long time ago that one should be totally debt-free and start a recession with a cash position. I plan to buy my next car rather than lease it.

chuck717 - 1/30/2008 12:40:17 PM

0 Boost

This is going to happen sooner then later. Even people with money are feeling as though they have to do their part and buy a good quaility high milage car and not be in the limelight when they drive down the street a social consciense will evolve out of this housing meltdown and that is good really.
People are going to be more aware of living healthy and longer and not being so stresed out, the family unit will make a come back as people stay in their home longer the cash cow days are gone and buying a over priced lease or paying 50k to70k for a car when you can shop and buy all the comfort for half the price in a crossover or nice midsize will rule the decade and beyound.

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w209w114 - 1/30/2008 1:10:38 PMView My AgentSpace

0 Boost

I dont think this is going to happen. From an economic point of view, cars are getting more and more expensive to build. Supplies are in much more demand and less availability.

European makes have hardly raised prices in comparison to the contrast of the euro to the dollar Euro is almost 50% more now, and europen cars certainly have not gone up anywhere near that figure.

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EnnNorak - 1/30/2008 5:45:46 PM

0 Boost

All labor costs increase with time -- it's part of the inflation equation. Auto makers have a pricing trick up their sleeve in that they have been overpricing frivolous optional equipment that silly customers feel they want when they buy a new vehicle. When a recession comes and competition heats up, these auto makers suddenly start including these extras as standard equipment and achieve further corresponding cost reductions through economies of scale even at reduced sales levels. With continuous improvements and increased efficiencies in manufacturing, further cost reductions appear. Given some of the good prices we are seeing these days I'm beginning to wonder if we are in a period of deflation.

0to60 - 1/30/2008 1:10:58 PM

-1 Boost

Great! Now maybe instead of having to dish out 70k+ on an x6 I can just spend 50k... (I know this is HIGHLY unlikely considering it is BMW)

But cant a man dream!?!

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EnnNorak - 1/30/2008 5:47:52 PM

+1 Boost

It may not be a dream for long -- all it takes is for the Koreans or the Chinese to start making BMW clones.

0to60 - 1/30/2008 9:50:59 PM

+1 Boost

I would pass on that one

nybimmer - 1/30/2008 2:44:36 PM

+1 Boost

Its a good thing cars are more durable than they used to be, I think people who own their cars will likely be keeping them longer.

For the unlucky who lease vehicles (many based on the 'payment') and are forced to get (i.e. lease) a new one, those are the people who will be trading down. With the auto loan delinquencies combined with the weak dollar, lease payments are going to rocket in the next year.

The person who has a really nice (say a BMW :-) ) 2005 car that is coming off lease, will be forced to replace it with something cheaper. Case in point, my next door neighbor just gave back his 3 yr old X5 and leased a new RX350 becuase the payment was the same.

It might get ugly!

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EnnNorak - 1/30/2008 5:53:10 PM

+2 Boost

I've been leasing up to now and consider myself lucky, not unlucky. The financial advantage of leasing in recent years has been low interest and high residuals. With leasing, you always have a new trouble-free car with up-to-date technology. My current lease rate is under 1% which is essentially free money. The only reason I will be buying my next car is that I have surplus cash that is hard to invest at an acceptable rate of return.

nybimmer - 1/30/2008 9:57:14 PM

+2 Boost

That is a sound approach, however a lessor has to give the car back at the end of 'x' months.

Imagine if a lessor (say somebody selling mortgages in Orange County or a Miami Fl realtor) is out of a job at the same time as they handed the Range Rover back in and need to lease a new one?

Its hard to get credit with no job - lease rate is higher, whole thing gets ugly fast. Might just buy a cheap used car, ouch quite an ego blow after driving new stuff that rolls every three yrs.

Htay7500 - 1/30/2008 3:22:27 PM

+2 Boost

wow, you've never taken economics have you?

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w209w114 - 1/30/2008 3:33:38 PMView My AgentSpace

+5 Boost

Dugit, youre right. I like economics ALMOST as much as cars and keep track regularly. The irresposibility (or should I say MADNESS?) should have been corrected a long time ago, not now, its a bit late.

In America there is somewhat of a cushion (due to our relatively low cost of living as compared to other highly industrialized nations) so that helps somewhat absorb the impact. Unless job salaries dont catch up to today's prices there is not way that America can enjoy expansive economic growth. Im not too sure about Europe, people are stretched out as it is, and it is one of the most expensive places to live. Just look at Italian shoes, you thought they were expensive in America? Think again! They cost more in Italy where they are made.

Europeans can now take advantage of the weaker dollar and purchase investments here in the U.S. and make a killing in a few years once everyhting gets back to normal, and many of them are doing so already. If a recession similar to the one in the US was to ever happen in Europe (there is a chance that it will within the coming year or 2) the consequences would be much worse. For now here in America, just sit tight and weather the storm, the sunshine will eventually come through.

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EnnNorak - 1/30/2008 5:55:43 PM

+1 Boost

We are going into a recession because of bad politics and lack of government vision. Some believe that recessions are deliberately caused every 50 or 60 years by international money masters.

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w209w114 - 1/30/2008 10:09:51 PMView My AgentSpace

+1 Boost

EnnNorak

I dont think so, if u remember correctly the last time we had a recession was 7 years ago. This time its recession plus the mortgage meltdown, plus inflation, plus crude oil prices combined with a weak dollar.

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chuck717 - 1/30/2008 3:21:46 PM

+1 Boost

Actually we may go into a recession because people bought houses and cars they can't afford and blame it on sales people and banks who "forced them to do it", imagine that, when they made a huge profit all was well now that they can't sell all the bad guys made them do it???

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w209w114 - 1/30/2008 3:38:56 PMView My AgentSpace

+2 Boost

People will always make stupid decisions and it is the job of institutions to protect themseleves (which they did not, ex. countrywide) by giving just about anyone credit for a loan without verifying assets for example. Yes they made a huge profit but look at them now. Shares from $50 were down to $5. Yes they screwed themselves but also the economy.

Its easy to come up with an answer like yours, but the problem is much more complicated than the way you put it and there were many economic factors involved.

EnnNorak - 1/30/2008 6:05:03 PM

+2 Boost

Speculative bubbles always burst. Historians will tell you that the Dutch tulip craze had speculators paying a fortune for "rare" tulips. Gold has also had bubbles in the past. The unsophisticated masses are drawn to simple speculative ventures like real estate, gold, collector items and penny stocks because there in no requirement for complex financial analysis in order to arrive at an informed investment decision -- it's all based on hope that the value of the speculative asset will keep on rising forever.

enthusiastx11 - 1/30/2008 4:17:19 PM

+2 Boost

this argument is illogical...if home prices can drop 10-30% why not cars?

because the price of housing has most to do with the value of the land it sits on. and there is no cost of goods sold for land.

cars, on the other hand, are priced based on the cost of components and materials with a profit added on top. most carmakers aren't making anywhere near 10-30% profits on their cars. and they're not going to sell all cars at a loss.

therefore, car prices can only come down if equipment in them comes down.

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chuck717 - 1/30/2008 4:46:16 PM

0 Boost

Allan Greenspan and his fed lowered fed rates to 1% and they stayed there to long, people thinking cheap money was cheap sign documents to buy homes for example for the sure profit and greed to unload it at a very inflated price while enjoying very low arm payments.
Loan companies yes should have documented these people but since they didn't it was the job of the over see agency the Fed Reserve to step in and challenge these firms they didn't because many were in on the ponsi scheme including the public who saw a bank door open with no guards so they robbed the bank, my friend it is not that compicated or underlying, the whole mess was greed on the part of the flippers,agents, banks and the foremost problem was created by a fed reserve more interested in the daily stock rise rather the bank solvency which should be it main concern, not if Jack in the Box sold hamburgers today and if their stock rose, loan papers sign with little down and selling junk mortages via the subprime market for non credit worthy people was easy to see and trace they chose not to challenge until the whole meltdown happen, you can bet on it that joe public spread the word of nobody is watching the hen house people greedy as they can be raided the shed now they want their money back fat chance???

Htay7500 - 1/30/2008 7:02:27 PM

+1 Boost

all this will also make us high schoolers pay for AP exams. DC just cut payraises for their teachers but thats a similar situation

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enthusiastx11 - 1/31/2008 11:49:47 AM

+1 Boost

lol. yeah...things were so much better under carter. i particularly enjoyed the 20% interest rates. reagan brought us out of that mess.

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enthusiastx11 - 1/31/2008 11:51:02 AM

+1 Boost

japan's debt is far more than the US....over 100% of its GDP. and they seem to be doing just fine.

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enthusiastx11 - 1/31/2008 11:48:30 AM

0 Boost

hey genius....did you know that japan's national debt is more than 100% of GDP? FAR more than the US.

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w209w114 - 1/31/2008 1:35:14 PMView My AgentSpace

0 Boost

I perceive lots of ignorance in you. Take it you've never been here and experienced life the "American Way". You are either 11yrs old or retarded. I love my country.

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theoptimisticpessimist - 1/31/2008 7:55:28 PM

0 Boost

Er, doubt car prices will drop,

1. Weak dollar will cause overseas automakers to raise prices.

2. US manufactures already have low profit margin's on cars.

3. Just take a look at commodities pricing, futures are going through the roof.

4. U.S. automakers should see overseas labor rates raise due to falling dollar.

This writer seem have questionable logic.

One bright spot look for foreign automakers building new plants and more cars in the U.S.

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autopro - 2/2/2008 5:20:30 PMView My AgentSpace

+1 Boost

If they are less buyers in the market,you will see lower prices on vehicles.It will be done with intrest rate incentives,or lease support.

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