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Used-Car Prices Are About to Crash... Here's Why

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Mon, Aug 1, 2022 11:38 AM

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Change in demand from COVID-19 made cars a precious commodity. Prices nearly doubled as a result. Bu

Change in demand from COVID-19 made cars a precious commodity. Prices nearly doubled as a result. But recent indicators show the car market's strength is starting to fade... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [DailyWealth] Used-Car Prices Are About to Crash... Here's Why By C. Scott Garliss, editor, Stansberry NewsWire --------------------------------------------------------------- Prepare for an exploding supply of used automobiles... And like most economic disruptions these days, it'll be thanks to the pandemic. COVID-19 brought about never-imagined lifestyle changes. Families that used to live in crowded apartments and concrete jungles made the move to suburban areas with yards and trees. And trains, subways, and shuttle buses were no longer reliable forms of transportation. Everyone needed cars. This change in demand (along with global supply-chain issues) made cars a precious commodity. Prices nearly doubled as a result. But recent indicators show the car market's strength is starting to fade. And for the first time in years, prices are about to fall. Let me explain... --------------------------------------------------------------- Recommended Links: [Until MIDNIGHT: Claim One Free Year of Prosperity Investor]( Until midnight tonight, you can claim a FREE year of what may be the absolute perfect investment guide for today's market... designed to harness low-risk, recession-resistant gains in must-see "Forever Stocks" (including one company that pays a near 9% dividend!)... along with a handful of breakthrough opportunities with 1,000%-plus potential. [Claim this $5,000 value before this offer expires at midnight tonight](. --------------------------------------------------------------- [Will This Be the Worst U.S. Crisis Ever?]( A wealthy 73-year-old U.S. entrepreneur retreats to one of his three European properties to issue a serious warning (and four recommendations) for Americans. "It falls on someone like me to warn you clearly. I'm too rich to care about money – and too old to care what anyone thinks." [Click here for details](... --------------------------------------------------------------- Before we go any further, remember... this isn't the housing crisis in 2008. It's a car crisis in 2022. If the housing bust hit us like a right hook, a collapse today in the used-car industry might be more akin to a left jab. Still, the change we're seeing is dramatic. It used to be that a vehicle would start to depreciate as soon as you drove it off the lot – at least, that was the case until early 2020. Fast-forward to this year, and a car you bought two to three years ago is likely to earn you a better return than your 401(k). The chart below shows what the value of a used vehicle purchased in 2020 should be today, based on the typical depreciation (dashed line)...  Now, look at the bright blue line – the actual value of what that car is worth today. It's not even close to the trend. It's hard to imagine, but the used-car industry has swollen to a size that's simply unsustainable on a long-term basis. But what's the catalyst for change? The answer lies with consumers. A troubling number of folks today can't afford their car payments... Edmunds, an online automotive inventory and information resource, reports that about 13% of new-car buyers are making payments of at least $1,000 per month. Cox Automotive and Moody's Analytics say these numbers are the highest on record... And keep in mind, this is for an asset that's historically considered a terrible investment. For comparison, the median monthly mortgage payment is $1,600. Consumers' disposable incomes increased as the pandemic brought about debt forbearance, stimulus checks, and better unemployment benefits. But as those benefits dried up, car buyers were left holding the bag. A lot of buyers are now defaulting on auto loans from 2020 and 2021. According to Barron's, the nation is experiencing a surge in repossessed vehicles over the last year. Auto dealers are seeing repossessed vehicles go to auction where the buyer's loan-to-value ("LTV") ratio was north of 130%. (And that's our conservative number... Barron's quoted one dealer who's seeing ratios at 140%.) LTV is the loan amount versus the value of the actual vehicle. So in other words, buyers are defaulting on car loans of $26,000... on vehicles worth only $20,000 (130% LTV). What's alarming is that this isn't limited to subprime borrowers. Yes, subprime borrowers' default rate is still higher than prime borrowers' (those who have good credit)... But Barron's reports that both groups saw their default rate double since 2020. Subprime borrowers' default rate increased from about 6% to 11%, while prime borrowers' increased from 2% to 4%. It gets worse when we zoom out. According to a Consumer Reports investigation in 2021, 25% of loans were given to borrowers who might not be able to afford them. Income and employment verification only happened 4% of the time. Consider these locality default rates... 8.7% in California, 10% in Texas, and a shocking 23% in Washington, D.C. These numbers are all for loans that are 30 days or more past due. And they're concerning. These states are major economic centers. California and Texas account for roughly 23% of national output. So, while the data doesn't paint a promising economic picture, it does tell us what's coming for the used-car market. It's quickly moving from no supply to a flood of inventory... And that means the high prices we've seen since the pandemic are nearing their end. Good investing, C. Scott Garliss Editor's note: Be sure to check out Stansberry NewsWire for up-to-the-minute market commentary from Scott and his team... with daily alerts, analysis, and ideas. It's a great way to keep up with the stories that matter most to your finances in today's uncertain economy. Plus, this service is totally free. [Learn more here](. Further Reading "After a blistering streak to the upside, food prices are starting to come back down," Sean Michael Cummings says. Supply-chain chaos has led to massive inflation. But consumers are starting to get a reprieve, at least at the grocery store... [Learn more here](. "Homebuyers can't catch a break," Brett Eversole says. First, low inventory led to sky-high housing prices. Now, mortgage rates have soared. But despite what you might think, these problems aren't about to crash the housing market anytime soon... [Read more here](. Market Notes HIGHS AND LOWS NEW HIGHS OF NOTE LAST WEEK H&R Block (HRB)... tax-prep company Booz Allen Hamilton (BAH)... "offense" contractor Parsons (PSN)... defense technology Change Healthcare (CHNG)... health care technology Option Care Health (OPCH)... infusion therapies Acadia Healthcare (ACHC)... behavioral health care Centene (CNC)... health insurance Service Corporation International (SCI)... funeral homes Post (POST)... breakfast cereals Molson Coors Beverage (TAP)... beer Mueller Industries (MLI)... manufacturing Carlisle (CSL)... manufacturing Enphase Energy (ENPH)... solar power Texas Pacific Land (TPL)... oil and gas land royalties Gaming and Leisure Properties (GLPI)... casino REIT NEW LOWS OF NOTE LAST WEEK Commvault Systems (CVLT)... cloud services Snap (SNAP)... multimedia messaging app RenaissanceRe (RNR)... insurance Hasbro (HAS)... toys and games Stanley Black & Decker (SWK)... tools and storage Hayward (HAYW)... pool equipment --------------------------------------------------------------- [Tell us what you think of this content]( [We value our subscribers' feedback. To help us improve your experience, we'd like to ask you a couple brief questions.]( You have received this e-mail as part of your subscription to DailyWealth. If you no longer want to receive e-mails from DailyWealth [click here](. Published by Stansberry Research. You're receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberrycustomerservice.com. Please note: The law prohibits us from giving personalized investment advice. © 2022 Stansberry Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Stansberry Research, 1125 N Charles St, Baltimore, MD 21201 or [www.stansberryresearch.com](. Any brokers mentioned constitute a partial list of available brokers and is for your information only. Stansberry Research does not recommend or endorse any brokers, dealers, or investment advisors. Stansberry Research forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Stansberry Research (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.

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