SUV and Pickup Truck Buyers Now “Owners for Life”

[FRED]

SUV and Pickup Truck Buyers Now “Owners for Life”
June 12, 2008 (Robert Farago - Truth About Cars)

A dealer reports: "Ford just re-released 'Employee Pricing' on their Ford Trucks (plus up to $3500 cash back). GM just released up to $4000 additional owner loyalty bonus cash on their trucks and SUVs (in addition to the up to $2000 already on the hood). Normally, these incentives give the dealer enough cash to throw at trade-ins to at least make a deal possible. Not profitable. And not painless for the customer. Merely do-able. Well, it ain't enough. In our meetings with manufacturer marketing teams and dealer advisory committees (where the smell of fear is palpable), the stories from the field are apocalyptic.

One salesman stood up. 'I had a customer with a two-year-old Expedition. Crazily-enough, he wanted a new F-150. I tried everything, every trick in the book, and I couldn't put a deal together. And he was my BROTHER!' (Read: I was taking a loss, he was taking a loss, and the numbers were cutting us both so bad we couldn't deal). Another meeting, another dealer. 'I brought a year-old GMC Denali to auction. Priced it at rough wholesale book, minus seven grand. I was prepared to accept any offer up to 10 grand behind rough wholesale book. I was taking to take a tremendous beating to unload it. And it didn't sell. Didn't get an offer of any kind.' (Read: You can't give 'em away. Wait; you cannot PAY people to take them.) Now that the wealthy (who can afford the beating) and the quick-movers (who have already glutted the market) are in their Civics, Camrys and Accords; consumers in full-size trucks and SUVs are pretty much owners-for-life. And dealers, who must move new metal, can't do anything to help them. Not even if it's their brother."

AntiSpin: None needed. TruthAboutCars.com is one of our favorite sites. Visit it regularly if you want the low down on cars and the auto industry.

[Mega]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

GM/Ford are re-tooling their plants to make (Shock horror) small Euro-jap type cars!

Mike

[WDCRob]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

The site is here: http://www.thetruthaboutcars.com/

[GRG55]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

SUV and Pickup Truck Buyers Now “Owners for Life”
June 12, 2008 (Robert Farago - Truth About Cars)

...consumers in full-size trucks and SUVs are pretty much owners-for-life...

Here's another way to look at it (and a classic opportunity for some contrarian thinking).

If one is going to be stuck as an "owner-for-life" I would rather it be a full size American made pick-up. As I posted elsewhere, my family tends to view every automotive purchase as an "owner for life" decision and we run our cars and trucks not for years, but for decades (I ran my fully-optioned 1982 Volvo GLT for more than 18 years and almost 300,000 miles, and only sold it because I moved overseas). I often wonder why people accept the brainwashing that a 5-year old vehicle is "too old" and may become "too expensive to maintain"; it is complete marketing BS.

Despite the fuel they use, our long experience with pick-ups is that they are reliable, tough as hell & near impossible to break, easier to work on than front-drive, transverse-engine cars, and taking an 'owner-for-life" approach to them more than offsets the cost of fuel. One no longer even needs to make creature comfort compromises; my wife's 5 year old GMC Sierra has heated leather seats (nice in Canadian winters), a Bose sound system, and runs quieter and smoother than my old Volvo sedan.

Only if there is a genuine basis for concern about the future availability of fuel (I am not there yet) would I agree that a premium-priced, super-high-efficiency vehicle becomes paramount. Otherwise, the coming collapse in the price of pick-ups may skew the equation even more in favour of an "ownership-for-life" approach.

[ggirod]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

Now, I would like to propose this thought for my iTulip friends. Let's just compare the SUV/Truck market with the real estate market. Precisely what happens when people end up out of work and upside down in their lease or loan? Not just a little upside down, but zilch residual?

The following quote is from http://www.iddmagazine.com/issues/20...inter_friendly

According to a recent report by UBS, 2008 has so far seen $40.5 billion worth of new credit card deals, up slightly from year-ago levels. Auto loan and auto lease-backed deals are at $23.1 billion, up from $17.1 billion during the same period a year ago. Bankers likely were cheered by the completion of a $750 million deal backed by subprime auto loans from AmeriCredit. That transaction was actually increased from $500 million.

The flight of some investment from real estate appears to be taking refuge in car loans. Now, what happens when these loans go down? I wonder how creative the paperwork is? Do we have pooling of CDOs? Does anybody even know?

How will that affect auto stocks when the credit arms, which traditionally kept them afloat, find themselves holding lots of lease vehicles with minimal residual value?

[tree]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

I had a dream last month -- somehow I had become the owner of a brand new red pickup truck, a biggish one, like a Ford 150. I felt horrible. Where had my turquoise 1995 850 Volvo (no great gas sipper, alas) gone? I kept reminding myself inside the dream that it was just a dream -- that I was not the owner of a red pickup (I dream in color) and I could rest assured that I would wake up and find this so. And yet I could not shake this awful feeling as I slept that I was indeed the owner of a brand new red pickup truck. Now every time I see a red pickup truck I get a funny feeling.

[Guest]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

I'd like to offer a little perspective on this general topic. It's being portrayed in the media that people are flocking out of SUV's and full size trucks because of gas prices and that you can't sell your old gas hog for a decent price because of gas prices. Somewhat true, but it's not the entire picture.

I believe that a) some people are irrationally panicking about gas prices affecting them and b) there are factors other than fuel prices at work here.

Let me take the second issue first. Besides fuel prices, don't forget that the construction industry is in a full bore depression. So the pipeline of new full size trucks is jamming up. That is going to lower resale prices on used trucks. A contractor with little work but a fleet of 6 trucks has to dump them on the market NOW to stay solvent. These are vehicles that were traditionally driven till they rusted out and the wheels fell off. Now nearly new trucks purchased during boom times in construction are prematurely entering the market in large numbers. Huge supply plus no demand = lower prices. But it has less to do with fuel costs than with the state of the RE construction industry.

A second factor is fashion. It is currently more fashionable to reduce consumption and help our economic position in the world by being more economical, and the huge vehicles like Hummers and Yukon Denaili's, etc, which were purchased as much for fashion as function, are now out of fashion. This type of buyer will always move quickly to the next great thing, finances notwithstanding. Owners who can buy a $55,000 SUV can probably afford gas at $4/gal. It's the glares from disapproving neighbors that are the problem. So it may not be fuel prices that are the motivating factor here, either. That hybrid SUV they want is bought for reasons of fashion as much as frugality.

Then there's the credit crunch and loss of the wealth-effect of housing. People who feel $100,000 poorer from their home's lost value are not eager to rush out and buy a new vehicle. Again, this is a valid factor, but not one that is caused by fuel prices.

Finally, if one does the math, moving from a large SUV for a family of 5-6 to a more efficient vehicle still capable of carrying the family in comfort saves at most 50% in fuel costs, and usually less (crossovers vs body-on-frame SUVs, for example). That's about $1300/year at $4/gal. Significant, but hardly worth panicking over. Taking a $10,000-$15,000 hit on a recently purchased luxo-barge to save less than $1300/year in fuel costs is dumb, but then some would say that people who burn their net worth up in depreciating gaudy machines are not exactly making a smart move in the first place.

The truck industry is simply re-aligning. It was geared up for $1.50/gal gas. And as is typical, the sheeple out there always overreact and rush to the newest thing without sitting down and studying it.

Anyone reading this column might want to take a look at how much more they're spending on groceries and eating out this year vs gasoline. They might be shocked.

[sadsack]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

For me, the most satifying vehicle purchases have been conducted according Mill's Utilitarianism philosophy.

"What do I need," has (pardon the unintended rhyme) become the creed. I spec my functional requirements for a vehicle, then buy the best solution to the functional equation.

Having bought American (AKA "Big Three") for nearly 10 years, it was with a modicum of reluctance that I purchased my last vehicle - a 2003 Legacy wagon. Why? No American manufacturer offered a compact or midsize vehicle that both had a manual transmission and could also accommodate cargo 60" in length. Obviously, serviceabilty, handling, and reliability entered into the equation, but I was nonplussed by the fact that no US vehicle even made the first cut :mad:.

Shame on them . . .

[c1ue]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

I think another item affecting the large SUV resale value was the demographic buying them.

Besides construction, I think the big SUV is the penultimate soccer mom/keeping up with the Jones'/mortgage broker car.

My suspicion is that the entire leveraged debt lifestyle types were largely into the large SUVs if they could not get into the Mercedes and BMWs.

The collapse of real estate, construction, mortgage lending, and credit availability in general coupled with the extremely general 0% interest programs that GM/Ford/etc were offering for these SUVs could easily have snowballed into what we're seeing now.

So it is not necessarily just fashion, or gas, or construction, but a perfect storm of all possible negative effects.

[jacobdcoates]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

I work in auto finance, that being said. A couple of points to clarify. Banks and semi-literate leasing companies have insurance on the residual value of the leased vehicles. When a contract is written on a lease vehicle the Residual Value(RV from now on) is calculated based on the ALG(Auto Leasing Guide). It is basically an educated guess on the probable value of the vehicle at a specified mileage some number of months in the future. Example msrp of 25k, 60 month lease = 33% RV of msrp(8K). Auto financing from the bank is pretty sedate, We don't like surprises and banks are not going to lose the shirts on RV's on trucks, SUV's or any other vehicle, 95% of the time. It is the RV insurance companies, after they bite the bullet one too many times, then after they fold the banks are on the hook for the neg equity of the vehicles turned in. Where banks will lose their shirts is in the repossessions of said vehicles, when the loan defaults.

When the person turns in there vehicle to the bank at the end of the lease, the bank takes it to an auction, auctions the vehicle off for the most money it can get. If the auction amount is lower than the RV on the contract then the bank submits a claim to the insurance company which pays them the difference, but the vehicle has to be turned bank into the bank for the RV insurance to kick in.

On the other hand if the person trade the vehicle on a new vehicle prior to or at the maturity date of the lease, the amount for the dealer to purchase the vehicle is the RV(8K)+ small fee(varies by bank). So the bank gets the full value of the vehicle, but wasted the premium on the RV insurance, the customer eats all the negative equity not the bank, because the dealer is only going to pay what he thinks he can sell it for minus profit margin(ex ~NADA=6k, dealer gives you 3k or maybe 4k) and keeps to 2k or 3k as pure profit. and the customer has ~3k in neg. equity rolled in the the new loan, at best, in this case more likely 3k.
The general situations for LARGE SUV's is worse, the customer usually ends up with 8k to 10k in neg equity, rolled in to the new loan. over a 60 month loan, $200 dollars of there payment is going to be neg equity. Seems bad doesn't. Look it as a cash flow game. The customer drives 15k per year at 15mpg = 1000 gallons of gas at $4/gallon($4000). The buy new civic for 20k + 10k(neg equity) total is 30k; payment of over 5 years is ~$600. New Civic gets an avg 30mpg , So, driving 15k per year = 500 gallons of gas($2000). They probably paid ~40k for their large SUV over 84 months making their payment about $600. Through the miracle of modern auto finance they have the same payment and half the gas bill. It is all about cash flow for the consumer weather they know it or not, that is what they are doing!!

[FRED]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

I work in auto finance, that being said. A couple of points to clarify. Banks and semi-literate leasing companies have insurance on the residual value of the leased vehicles. When a contract is written on a lease vehicle the Residual Value(RV from now on) is calculated based on the ALG(Auto Leasing Guide). It is basically an educated guess on the probable value of the vehicle at a specified mileage some number of months in the future. Example msrp of 25k, 60 month lease = 33% RV of msrp(8K). Auto financing from the bank is pretty sedate, We don't like surprises and banks are not going to lose the shirts on RV's on trucks, SUV's or any other vehicle, 95% of the time. It is the RV insurance companies, after they bite the bullet one too many times, then after they fold the banks are on the hook for the neg equity of the vehicles turned in. Where banks will lose their shirts is in the repossessions of said vehicles, when the loan defaults.

When the person turns in there vehicle to the bank at the end of the lease, the bank takes it to an auction, auctions the vehicle off for the most money it can get. If the auction amount is lower than the RV on the contract then the bank submits a claim to the insurance company which pays them the difference, but the vehicle has to be turned bank into the bank for the RV insurance to kick in.

On the other hand if the person trade the vehicle on a new vehicle prior to or at the maturity date of the lease, the amount for the dealer to purchase the vehicle is the RV(8K)+ small fee(varies by bank). So the bank gets the full value of the vehicle, but wasted the premium on the RV insurance, the customer eats all the negative equity not the bank, because the dealer is only going to pay what he thinks he can sell it for minus profit margin(ex ~NADA=6k, dealer gives you 3k or maybe 4k) and keeps to 2k or 3k as pure profit. and the customer has ~3k in neg. equity rolled in the the new loan, at best, in this case more likely 3k.
The general situations for LARGE SUV's is worse, the customer usually ends up with 8k to 10k in neg equity, rolled in to the new loan. over a 60 month loan, $200 dollars of there payment is going to be neg equity. Seems bad doesn't. Look it as a cash flow game. The customer drives 15k per year at 15mpg = 1000 gallons of gas at $4/gallon($4000). The buy new civic for 20k + 10k(neg equity) total is 30k; payment of over 5 years is ~$600. New Civic gets an avg 30mpg , So, driving 15k per year = 500 gallons of gas($2000). They probably paid ~40k for their large SUV over 84 months making their payment about $600. Through the miracle of modern auto finance they have the same payment and half the gas bill. It is all about cash flow for the consumer weather they know it or not, that is what they are doing!!

Very interesting post from an industry expert! Now let's see if I can understand it.

Banks and semi-literate leasing companies have insurance on the residual value of the leased vehicles.

I assume this means that most lenders who offer car loans insure the residual value on their loans. Do they insure 100% of the RV?

When a contract is written on a lease vehicle the Residual Value(RV from now on) is calculated based on the ALG (Auto Leasing Guide). It is basically an educated guess on the probable value of the vehicle at a specified mileage some number of months in the future. Example msrp of 25k, 60 month lease = 33% RV of msrp(8K).

How are RVs holding up? You'd expect with the downturn that a glut of used cars coming off lease is pressuring prices. If they are not holding up, what is the impact on lenders?

Auto financing from the bank is pretty sedate, We don't like surprises and banks are not going to lose the shirts on RV's on trucks, SUV's or any other vehicle, 95% of the time. It is the RV insurance companies, after they bite the bullet one too many times, then after they fold the banks are on the hook for the neg equity of the vehicles turned in. Where banks will lose their shirts is in the repossessions of said vehicles, when the loan defaults.

OK, so who are the insurers? How do we track them? How do we know when they're going to turn turtle? Is there a theoretical repo rate that spells doom for the insurers and thus the lenders?

When the person turns in there vehicle to the bank at the end of the lease, the bank takes it to an auction, auctions the vehicle off for the most money it can get. If the auction amount is lower than the RV on the contract then the bank submits a claim to the insurance company which pays them the difference, but the vehicle has to be turned bank into the bank for the RV insurance to kick in.

So in the case of auction price below RV, the lender gets the insurance (100% of RV?) and owns the car and has possession. Now what, the lender tries to auction it again and take whatever money they can get? Seems to me that this is the auction our readers want to go to. How can they be identified?

On the other hand if the person trades the vehicle in on a new vehicle prior to or at the maturity date of the lease, the amount for the dealer to purchase the vehicle is the RV(8K) + small fee (varies by bank). So the bank gets the full value of the vehicle, but wasted the premium on the RV insurance, the customer eats all the negative equity not the bank, because the dealer is only going to pay what he thinks he can sell it for minus profit margin (example ~NADA=6k, dealer gives you 3k or maybe 4k) and keeps to 2k or 3k as pure profit. and the customer has ~3k in neg. equity rolled in the the new loan, at best, in this case more likely 3k.

So you as a used car buyer purchasing from a dealers are always buying well over market value, either a lot or a little depending on how much RV insurance was spent.

The general situations for LARGE SUV's is worse, the customer usually ends up with 8k to 10k in neg equity, rolled in to the new loan. Over a 60 month loan, $200 dollars of the payment is going to be neg equity.

Ok, just so I understand this, when you say "$200 dollars of the payment is going to be neg equity," you are saying $200 of the dealer's neg equity. From your point of view as a buyer, you are paying $200 per money over market price. On a 60 month loan that's $12k.

Seems bad doesn't. Look it as a cash flow game. The customer drives 15k per year at 15mpg = 1000 gallons of gas at $4/gallon($4000). The buy new civic for 20k + 10k(neg equity) total is 30k; payment of over 5 years is ~$600. New Civic gets an avg 30mpg , So, driving 15k per year = 500 gallons of gas($2000). They probably paid ~40k for their large SUV over 84 months making their payment about $600. Through the miracle of modern auto finance they have the same payment and half the gas bill. It is all about cash flow for the consumer weather they know it or not, that is what they are doing!!

We talk about the Monthly Payment Consumer here, who doesn't pay attention to the total cost of a car or house or big ticket appliance but only the monthly payment. If there's enough cash flow to make it, they think the price is ok. You are saying that the auto financing industry figured this out a long time ago and structures car loans for household cash flow?

Thanks.

[jacobdcoates]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

Fred,

RV only applies to leased vehicles not vehicle with a loan. For an auto loan the customer is always either stuck in the vehicle if the neg equity is too high, until the pays down the neg equity to the point where a deal can be done or keeps it till paid off, then trades in.

The are some new auto finance products which deal with loans with neg equity, but the are strictly between the customer and the insurance co. and usually have a maximum dollar value of 5k. It pretty sure one of the companies offering this is called AMA, I would have to check back through some paperwork to find it.

RV are not near where they were projected to be, hence a lot of blood letting on the insurance side. I'm not clear by what you mean by "100% RV", The RV insurance is loss insurance, Example RV=10k, car sells at auction for 8k, then the insurance company is on the hook for 2k. The insurance company does not pay the bank the full RV only the difference between what it sold for at auction and the RV. The leasing companies does not get to keep the vehicle, it is sold at auction to the highest bidder, The highest bidder is the owner of the car and the car is sold"AS-IS". No warranties expressed or implied.

RV insurance is provide by a lot of companies, many of the small insurance companies. An example of a smaller one is R.V.I. Guaranty Co., Ltd, Toyota uses Grammercy Place Insurance Ltd. Some leasing companies have a "Subsidiary" provide the insurance, hence the losses are not tied directly to the leasing firm.

RV insurance does not apply to repossession, if the bank repo's your car, it is on the hook for the remaining balance, hence you are subject to the deficiency balance. The difference between what you owe on the car and what it sold for at auction.

As for used cars, the dealers add ~3k to the amount that they paid for it. Sorry I love examples- You trade in you 2003 Chevy Malibu, the deal gives you 5k for it. that is the trade in value disclosed on you new car contract. the dealer services it or not, depends, and then puts it on the used car lot for a little above NADA/blue book and sells it to the guy who dutifully looked up what the car was worth in NADA and buys it, along with the gap insurance, extended warranty, etch, so on and so forth. Till the reach the max underwriting guidelines approved for that buyer. A misnomer about NADA is that it shows what the car is "worth", it is actually just a statistical average of what those cars sold for at auto dealers in the recent past with some future projections based on past performance.

On that point things are starting to change, lenders basically look at your FICO score and you DTI, BK and defaults that's was pretty much it. Now there starting to look at payment history, length of employment- what most people would consider proper underwriting. It is still much more room to improve.

As for the neg equity rolled in to the new loan, the dealer doesn't have neg. equity it is always the customer who has it. the dealer only pays you what he thinks he can sell it for and make his profit margin Think of it as a credit card balance transfer or a cash out refi at 125% ltv. the customer borrow money from bank B to pay bank A off plus purchase said new vehicle.

Fred as for your last question I have read a lot of you post and you strike me as a very bright person but, which finance company hasn't figure that out? if they do it with houses, TV's, and appliances they'll do it with cars. They figured it out a long time ago. Have you ever notice when you go to a auto dealer they ask, Are you looking to buy a car? Do you have something in mind? What are you paying now? The last line is the most important. IT tells them how much/how long and what category of car you can afford and since you paying that payment now of course you can afford it in the future.

If you live in Columbus, Ohio there is the Columbus Fair Auto Auction that is open to the public on Weds, otherwise you need a dealer license to get in. if you Google it I'm sure you find at least one or two in every large city in the U.S.

[jacobdcoates]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

Sorry Fred,

I forgot to address your question about repossessions and at what rate it really begins to hurt, that unfortunately I do not know. At what point the RV insurance companies call it quits, It would large depend on their loss reserves, would be my guess.

[jacobdcoates]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

guess the thread died!!!!

[Spartacus]

Re: SUV and Pickup Truck Buyers Now “Owners for Life”

There was a leaked Ford research paper on who buys SUVs.

Impotent or mostly powerless people looking to their automobile for an ego boost and to show some aggression.

That report apparently was one reason why SUVs with front grilles looking like teeth were introduced (the Edsel's grille would NOT appeal to this crowd, nudge, nudge, wink wink).

i don't know how that squares up with your suggested demographic - do a lot of those people feel powerless?

I think another item affecting the large SUV resale value was the demographic buying them.

Besides construction, I think the big SUV is the penultimate soccer mom/keeping up with the Jones'/mortgage broker car.

My suspicion is that the entire leveraged debt lifestyle types were largely into the large SUVs if they could not get into the Mercedes and BMWs.

The collapse of real estate, construction, mortgage lending, and credit availability in general coupled with the extremely general 0% interest programs that GM/Ford/etc were offering for these SUVs could easily have snowballed into what we're seeing now.

So it is not necessarily just fashion, or gas, or construction, but a perfect storm of all possible negative effects.

Not the one I read earlier, but another

http://www.washingtonmonthly.com/fea....mencimer.html

A small snippet
SUV buyers tend to be "insecure and vain. They are frequently nervous about their marriages and uncomfortable about parenthood. They often lack confidence in their driving skills. Above all, they are apt to be self-centered and self-absorbed,