This morning, a Twitter user, named CarDealershipGuy, tweeted something alarming that was retweeted with a quote by Ark Invest's Cathie Wood and got the attention of Tesla CEO Elon Musk, who called it "potentially, the biggest financial crisis ever."
CarDealershipGuy tweeted, writing " This morning I discovered something *extremely* alarming happening in the car market, specifically in auto lending. I'm now convinced that there is a massive wave of car repossessions coming in 2023."
The background is that in the past 2 years, many people took out exorbitant loans on cars. Car values were inflated (and frankly, still are to some extent). But many people simply had no choice and bought an overpriced car."
He says car valuations are now plummeting. Some cars have declined in value as much as 30%, and these same people that took out these big loans are now "underwater." Basically, they owe banks more on these cars than they are worth. The banks are well-aware of this. And there is no easy solution.
Ark Invest's Cathie Wood, who's Ark Invest is one of the biggest shareholder of Tesla stock, retweet the CarDealershipGuy's tweet with a concern that ARKInvesthas been concerned about the impact of declining residual values on the $1+ trillion auto loan market. She wrote "most of these loans back gas-powered vehicles. @GuyDealershipexplains that the crisis is underway. The consumer preference shift toward EVs will exacerbate this crisis."
Potentially, the biggest financial crisis ever— Elon Musk (@elonmusk) December 16, 2022
To this, Tesla CEO Elon Musk replied, commenting, "Potentially, the biggest financial crisis ever."
This is very obvious to people, who have researched this issue. Dealers who hold the inventory will likely be most impacted. Their existing assets will decline in value. On the other hand, price is constantly adjusting as they buy new used car inventory; so the impact may be somewhat muted.
What may happen now? CarDealershipGuy shares 8 scenarios.
1) Consumers take out an auto loan in 2020/2021 on an overvalued car.
2) 2022 comes around and that overvalued car is now rapidly declining in value.
3) With the car declining in value, consumer now owes more on the car than it is worth
4) Consumer no longer wants the car. Maybe they outgrew it. Or maybe it keeps breaking. So consumer wants to trade it in.
5) But dealer can't trade the car in because the consumer owes WAY too much on it. So dealer asks consumer for lots of money down to cover the difference.
6) But of course, the consumer doesn't have $1,000s to cover the difference between what they owe on the car and what it's worth.
7) Dealer can't sell consumer a car, Consumer can't buy a car, And, you guessed it, lender can't finance a car! Everybody loses! Oh no So what happens next?
8) Lender knows that most consumers are stuck in this situation, and does the following: WAIVES THE OPEN AUTO STIPULATION. Meaning, the lender lets the consumer buy the car KNOWING that they already have an open auto loan with another bank!
He says "I've been a doubter, but after what I saw this morning, I'm now FULLY convinced that a wave of car repossessions will hit in early/mid 2023. If lenders are willing to backstab each other in order to put more loans on the road, we're in trouble. This will not end pretty."
This is why Cathie Wood and Elon Musk also show their concern, the Tesla CEO calling it "Potentially, the biggest financial crisis ever." What would you say about this situation?
Armen Hareyan is the founder and the Editor in Chief of Torque News. He founded TorqueNews.com in 2010, which since then has been publishing expert news and analysis about the automotive industry. He can be reached at Torque News Twitter, Facebok, Linkedin and Youtube.