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Used-Car And Motorcycle Sales Boom As New Vehicles Get Too Pricey For Many (#GotBitcoin?)

Price gap between new and preowned cars has widened to a near decade high. Used-Car And Motorcycle Sales Boom As New Vehicles Get Too Pricey For Many

The gap between the price of a new and used vehicle is as wide as it has been in years, pushing an increasing number of consumers to the used-car lot and putting pressure on auto makers to deepen discounts on new cars to keep them competitive.

Demand for used cars was unusually strong this summer and will remain at elevated levels through the year’s end as higher interest rates and rising prices on new cars continue to stretch buyers’ wallets, industry analysts said.

Used-car buyers are finding a growing selection of low-mileage vehicles that are only a few years old.

While used-car values have also increased in recent years, the gap between the price of a new and preowned car has also widened and is now at one of its largest points in more than a decade, according to car-shopping website Edmunds.com.

New-car prices have steadily climbed in the years following the recession as companies packed vehicles with more expensive technology and buyers shifted away from lower-priced cars to bigger and more expensive sport-utility vehicles and trucks. The average price paid for a car hit an all-time high of $36,848 in December of 2017 and remains at near-record levels, according to Edmunds.com.

Customers forget a new car is now more than $30,000 and they expect it to be $20,000,” said Brian Allan, a senior director at Galpin Motors Inc., a Southern California dealership chain.

“When people see the price has gone up, it is sticker shock, especially when people only buy a car every five to six years,” Mr. Allan said.

At the same time, the used-car market is being flooded with leased cars being returned to dealerships, increasing the supply and options for buyers looking for two- and three-year-old vehicles that are generally well maintained.

And unlike in recent years, where the selection on the used-car lot has tilted toward slow-selling sedans, dealers are offering more of the crossover and sport-utility vehicle models that are in hot demand now.

The customer who would never consider buying used before is now driving off the lot in a preowned vehicle, Mr. Allan said.

With nearly 40 million in sales last year, the used-car market is more than double the size of the new-car business.

The shift in demand is a troubling sign for auto makers, which will be under pressure to deepen discounts to keep customers from defecting to the used-car market. New-vehicle sales have started to cool this year following a seven-year growth streak.

As new car prices have climbed, auto lenders have kept monthly payments low by extending loan-repayment terms to five and six years and introducing 0% financing on loans that made buying new a more attractive deal.

But as interest rates rise and credit tightens, auto companies are pulling back on such sales incentives. The average monthly payment on a new car was $536 in August, up from $507 last year and $463 five years ago, according to Edmunds.com.

Justin Scholz, a 35-year-old banker, was stunned by the new-car sticker prices when he went shopping this spring for a new SUV for his growing family. He had been eyeing the Lexus RX hybrid but felt the $66,000 price tag was unusually high. He looked for 0% finance deals and couldn’t find many out there.

“In the past, I entertained new because you could get a 0% interest rate for 60 months,” he said. “New was a small premium compared to used. Now, the gap is much bigger.”

Rather than splurge, Mr. Scholz decided to try his luck in the used-car market, where he found a two-year-old version of the same vehicle that had recently been returned after a lease. It had fewer than 30,000 miles and was more than $20,000 cheaper than the new vehicle.

Mr. Scholz bought the vehicle in April for $44,000 and has no plans to return to the new-car market soon.

Auto retailers sold 10.4 million used cars in the second quarter this year, according to Edmunds.com, the highest quarterly volume it has on record since the firm began tracking preowned sales in 2007.

Used-car prices are also up, defying expectations that the influx of off-lease cars would depress values. Prices have been rising in part due to a slowdown in repossessions and vehicles coming off rental-car fleets—two sources of used cars that are typically older and less expensive.

Buyers paid an average of $22,489 for a three-year-old used car in the second quarter of 2018, up $865 from the prior-year period, according to Edmunds.com. That is still well under the average $35,828 paid for a new car last quarter.

Dealers are also putting more resources and investment into promoting their used-car sales as a way to offset declining margins in the new-car business.

The profit margin on a used-car sale was nearly 7% last year, more than double the return on a new-vehicle sale, according to the National Automobile Dealers Association, giving dealers more incentive to steer buyers to their preowned selection.

AutoNation Inc., the U.S.’s largest dealership chain, opened its first used-car center last year, aiming to capture more of the preowned business as U.S. demand for new cars and trucks cools.

“We’re offering a more attractive product at a better price,” said AutoNation Chief Executive Officer Mike Jackson, referring to the chain’s used-car offerings.

Auto Lenders Ramp Up Risk to Win More Customers

Banks, other lenders making longer-term car loans to customers who must stretch to make payments.

New risks are lurking in auto loans.

As loan growth slows, banks and other lenders have been tinkering with loan terms in an effort to gain more consumers. They are originating a greater share of loans with repayment periods of more than five years and, in some cases, extending loans to consumers who are stretching further to afford their purchases. Banks such as TD Bank, Santander Consumer USA Holdings Inc. and BB&T Corp. , meanwhile, have said they are increasing their loans to riskier applicants.

Their moves come at an unsettled time for auto lending. Sales growth has been choppy and missed payments are up from a year ago. Also, used-car prices are under pressure, raising the risk of higher losses for lenders when vehicles are repossessed. Faced with these headwinds, many lenders shunned applicants with low credit scores and have been looking for ways to make up the lost volume.

The latest underwriting efforts show that lenders, faced with conflicting signals about the health of the U.S. consumer, are engaged in a delicate balancing act to boost lending and profit without taking on overly risky customers. Though unemployment has reached an 18-year low and wages are creeping higher, some households are sliding deeper into debt and falling behind on their credit cards and other debt payments.

“[If] you only took on the financing for the top echelon of the super prime… [it’s] very, very hard to make money in and of itself,” TD Bank Chief Executive Greg Braca said at an industry conference this year.

Many auto lenders, including banks, nonbanks and the finance arms of car manufacturers, have been offering more loans with longer terms. Generally, these terms allow borrowers to make lower monthly payments, but usually at a higher interest rate. That, combined with the longer payment period, means that borrowers can end up paying thousands more for their cars than if they opted for a shorter loan.

In the first quarter, the average loan term for a new car exceeded 69 months, the second consecutive quarter it had ever been above that level, according to credit-reporting firm Experian. Also in the first quarter, new car loans originated with repayment periods of between 73 and 84 months represented more than a third of total new car loans, up from 7% of loans in late 2009.

Lenders say borrowers need flexible terms because new vehicles are getting more expensive. Despite the longer repayment periods, average monthly loan payments continue to rise, hitting a record $523 for borrowers who bought new cars in the first quarter, according to Experian.

Zac Craft wanted a three-year loan when he bought his 2012 Chevy Cruze this year but opted for a five-year loan despite its slightly higher interest rate. Mr. Craft plans to pay off the loan in three years to cut down on interest but wanted the option to make lower monthly payments when money is tight.

“There’s some security in that,” said Mr. Craft, who lives in Hawaii.

Lenders pushed into subprime auto lending after the recession, which helped boost vehicle sales. Subprime auto lending peaked at $114.4 billion in 2015, according to Equifax, accounting for 19% of auto loans and leases that year. Higher loan losses followed, and lenders subsequently tightened underwriting standards. That resulted in a drop in new car sales and loan originations last year.

While subprime lending is declining, some banks are turning to consumers whose credit scores are neither high nor low. TD Bank, Santander Consumer USA and BB&T say they have been extending more loans to borrowers they define as “nonprime” or “near prime.” Santander and BB&T also originate subprime auto loans.

Skeptics say the term nonprime is another way to label less-than-ideal borrowers without alarming investors. Nonprime and subprime customers can generate better returns because they tend to pay higher interest rates.

“When you can kind of operate in the belly of credit and generate 7-plus-percent yields on new originations, that’s pretty attractive business,” Ally Financial Inc. Chief Executive Jeffrey Brown said at an industry conference this month. Ally, one of the largest U.S. auto lenders, does business with borrowers across the credit spectrum, including subprime.

Lenders say they typically make the longest loans to prime customers who can afford them and understand the risks. A report last month by Moody’s Investors Service, however, found that borrowers who sign up for loans that last six years or longer have lower credit scores and owe a larger share of the vehicle’s price than consumers with shorter loans. The loan payments also account for a larger share of their income, said Moody’s, which reviewed loans securitized since 2017 and that were mostly comprised of prime borrowers.

At Ally, for example, borrowers with loans stretching six years or longer owed on average around 100% of the car’s purchase price when those loans were originated, according to Moody’s. Borrowers with a shorter repayment period owed 83%. Credit scores for borrowers with the longer loans averaged roughly 725, compared with about 760 for borrowers with shorter-term loans.

Similar rifts exist with loans extended by auto makers’ in-house financing arms, including Ford Motor Credit Co. and American Honda Finance Corp.

A Ford Credit spokeswoman said the company’s lending standards haven’t changed and that longer-term loans are “a relatively small part of the business.” Honda Finance has kept its maximum repayment period at 72 months, a spokesman said.

Loans with longer repayment periods are more prone to default, according to Moody’s. Loans of five years or longer extended to borrowers in 2015 with high credit scores had a cumulative net loss rate of 1.29% as of spring 2017. For shorter-term loans, the loss rate was 0.28%.

Investors Rev Up the Risk in Subprime Auto Deals

Some analysts say that if the economy takes a turn delinquencies could lead to a wave of closures among auto lending firms.

Investors are gobbling up auto loans extended to the riskiest borrowers, looking past market warning signs as they reach further for returns.

This year, they have been buying subprime auto securitization deals that offer slices with single-B credit ratings, well into junk territory and the lowest grade offered when such bonds are sold. Auto lenders have issued $318 million worth of single-B debt in 2018, more than all prior years combined, according to data from Finsight.

Subprime auto deals, often bought by large money managers and other institutional investors, are typically backed by loans to borrowers with FICO scores below the mid-600s. Because these borrowers are at higher risk of default, the bonds tied to their loans can offer higher yields. Typically such bonds are subdivided into various layers, each with a different level of risk and return based on the order in which they receive payments.

The single-B tranches, sold in recent months by lenders including American Credit Acceptance and United Auto Credit, are the last rated bondholders in line. In exchange for rates of more than 6%, roughly twice what 10-year Treasurys pay, they are the first bondholders to suffer losses if the underlying loan payments aren’t sufficient to cover all that is owed. It is a trade-off not all investors are willing to make.

“It would be one thing if it was year two of the recovery and performance was rock solid and we were off to the races,” said Evan Shay, an asset-backed securities analyst at money manager T. Rowe Price, which hasn’t been buying single-B debt. The issuance late in the economic cycle appears to be “raising some eyebrows,” he said.

Still, issuers are finding willing buyers in investors hunting for returns. Sometimes, the single-B portions of these deals have later been upgraded. In essence, investors are wagering on the health of U.S. consumers, who have once again built up record stockpiles of household debt but haven’t shown much trouble repaying it.

For securities backed by subprime auto loans, the outlook is mixed. Borrowers are getting slightly more creditworthy, with average credit scores in this year’s securitization pools rising to 588 from 577 last year, according to a Fitch Ratings report from August. But more borrowers—roughly 80%—are taking out loans that have terms of more than five years, which are more prone to default. Delinquencies of greater than 90 days have been trending higher for all auto loans since 2012, according to the Federal Reserve Bank of New York.

There have been some recent signs of trouble in the subprime market. Auto lender Honor Finance LLC closed over the summer and a slug of bonds backed by the firm’s loans was downgraded to a bottom of the barrel double-C rating this month by S&P. The Evanston, Ill., company, owned by private-equity firm CIVC Partners, has since transferred its loans to another servicer. CIVC didn’t respond to requests for comment.

While investors are largely treating Honor as a one-off event, they are on high alert for signs the bonds issued by other auto lenders aren’t as solid as they appear. Auto lenders were criticized for lax underwriting on loans issued in 2015 and 2016.

At Honor, borrower delinquencies started rising last year. Because many received payment extensions, the loans weren’t immediately written off as losses.

After a series of executive departures that started late last year, cumulative net losses on the loans backing the bonds began rising. That has left bondholders in the double-C tranche bracing for losses. Westlake Financial Services, which took over servicing of the loans, hopes to avoid bondholder losses by aggressively pursuing borrowers who are in the early stage of delinquency, the firm’s president said.

Despite risks, bond buyers have grown comfortable with subprime auto bonds in recent years, partly because these deals performed well through the financial crisis. Borrowers largely continued to pay their loans because they needed vehicles to get to work, even as they defaulted on mortgages. Companies have issued about $29.7 billion of asset-backed securities made up of subprime auto loans this year, including single-B debt, already topping the full-year record of $24.5 billion from 2017, according to S&P.

The broad auto market has cooled in recent months. Interest rates are going up, which makes it more costly to borrow. Some analysts say that if the economy takes a turn for the worse and the unemployment rate rises, delinquencies on risky auto loans could lead to a wave of closures among auto lending firms.

“In some ways it feels like 2006, which was one year before the great recession started,” said Amy Martin, an analyst at S&P, on a webcast this fall.

Still, it is tough to call the end of the boom. In September of 2017, Aaron Greenspan, who runs a legal information website, personally bet against the stock of Credit Acceptance Corp , one of this year’s largest issuers of subprime auto asset-backed securities.

He posted dozens of pages of research online in which he alleged wide-ranging misconduct by the company. He believes the firm and the bonds backed by its loans will ultimately fall apart. Credit Acceptance declined to comment.

The stock has risen 35% in the last 12 months, far outpacing the S&P’s 4.3% rise. The options he used to bet against the stock have expired worthless.

“Trying to predict the demise of Credit Acceptance is like trying to predict the demise of the global economy,” Mr. Greenspan said.

A Glut of Used Hogs Is a Drag on Harley-Davidson

Harley-Davidson is facing a particularly tough competitor for new riders: its own used motorcycles. New-motorcycle sales in the U.S. are down by half from a 2006 peak, while used sales are up 13%..

For some younger riders, new motorcycles are too expensive, while well-maintained used ones offer good value.

Harley-Davidson Inc. is facing a particularly tough competitor for new riders: its own used motorcycles.

Three used Harleys are sold in the U.S. for every new one. A decade ago, it was the other way around. New motorcycle sales in the U.S. are down by half from a 2006 peak, while used sales are up 13%.

Milwaukee-based Harley in 2018 is heading for its fourth straight year of declining sales as the company’s core older customers scale back purchases while younger riders fail to pick up the slack. A glut of used Harley-Davidsons has emerged after years of strong sales growth and production volumes, and offers a variety of choices for those unwilling to splurge on pricey new models.

Rough Ride

Harley’s sales have fallen in the U.S., while sales of used motorcycles have climbed in the past decade.

It comes down to price, always,” said Jim McMahan, co-owner of a Harley dealership in Greensburg, Pa. “There are people who just don’t want to spend $18,000 to $25,000 on a new motorcycle.” Used Harleys in good condition can cost less than $15,000, dealers say.

Harley wants to reverse its sales slump by drawing new riders with 16 middleweight bikes it plans to roll out by 2022. Among them will be the company’s first electric model, debuting next year.

Harley hasn’t released prices for the new bikes, but dealers expect many of the models will be cheaper than the big bikes that make up the core of the current lineup. Offering more motorcycle choices at lower prices could lure younger riders to the Harley brand for the first time and help offset slumping sales of traditional models.

Heather Malenshek, Harley’s vice president of marketing, said used Hogs aren’t the company’s biggest problem. “The greatest challenge is to bring younger people into the sport,” she said. “Our used motorcycle base is a great way to get them in.”

But some Harley fans—including one Harley salesman—say the price of a new Harley deterred them from buying one. John Call, 31 years old, has sold Harleys at a dealership outside of Cleveland since 2016. In buying his first Hog last year, he chose a used 2009 Dyna Fat Bob for just under $10,000.

“A new Harley isn’t really practical for me,” he said. “I’ve got a growing family.”

Harley-Davidson motorcycles tend to have long lives. They don’t wear out easily or go out of style quickly and owners tend to take care of them, making the bikes appealing in the used-motorcycle market.

Harley has struggled to lessen its reliance on baby boomers, whose growing discretionary income and passion for hobbies including motorcycle riding brought the company back from the brink of bankruptcy in the early 1980s. Now, those riders are aging and buying motorcycles less frequently. But younger riders often can’t afford as many bikes as their parents or don’t see themselves living the Harley free-spirit lifestyle.

In response, the company is pursuing younger people who don’t fit the profile of a typical Harley fan: male and clad in a black T-shirt and leather vest. On Monday, Harley said it would start selling its popular branded apparel through Amazon.com Inc. Currently, Harley apparel is sold through the company’s website or at dealerships.

Two of Harley’s new models will be dual-purpose bikes for riding on both paved and unpaved roads, a motorcycle category that is growing in popularity in the U.S. Nine will be sports bikes with racing-style body features and seating to reduce wind drag. Harley doesn’t currently compete in either of these categories.

Some dealers said they doubt customers for those kinds of bikes will one day trade up for a new, expensive Hog. Ms. Malenshek acknowledged some might not, but said Harley also needs to accommodate riders who aren’t interested in its traditional models.

“The point of all of this is bringing new customers into the brand that weren’t there before,” she said. “They don’t all want to be in the lifestyle. You can have Harley on your terms.”

The new models are also designed to attract riders overseas, where Harley wants to generate half its sales a decade from now, up from about 39% currently. Harley in June said it would shift production of motorcycles bound for Europe out of the U.S., after the European Union imposed what would have amounted to a roughly $2,200 tariff on each Hog imported from the U.S.

President Trump and unions representing Harley workers said Harley was using the trade fight to justify existing plans to move production overseas. Harley said that assertion was false.

Many foreign markets are dominated by Harley’s competitors. Japan’s Kawasaki Heavy Industries , Suzuki Motor Co. and Honda Motor Co. make popular utilitarian bikes, while Germany’s BMW AG and Italy’s Ducati, owned by Volkswagen AG , make higher-priced models.

Harley faces those same competitors in the U.S., too, along with a resurgent U.S-based competitor in Indian Motorcycles, owned by Polaris Industries Inc.

Harley still accounts for about half of sales of U.S. motorcycles built for riding on highways. That share has held steady in recent years even as its own sales stalled because the market for new motorcycles overall has shrunk since the 2008-2009 recession.

And some riders of used Harleys do eventually buy a new one. Sarah Pellatiro of New Kensington, Pa., bought a new Harley Sportster this year for just under $12,000 after riding a used version for three years. Ms. Pellatiro said she chose the middleweight bike over a larger, more expensive model because she was confident she could handle it in traffic after gaining experience with a used Sportster.

“I got that bike right when I was still learning how to ride,” said the 32-year-old photographer and silversmith. “I don’t think I’ll ever ride any brand other than Harley from here on.”

Zero-Percent Financing Deals Fade From the New-Car Lot As Interest Rates Rise

Auto lenders are backing away from no-interest loans as they become more expensive to offer to buyers of new vehicles.

Car buyers on the hunt for a 0% financing deal are going to have to look harder.

Auto lenders are pulling back on the no-interest financing offers that had become widespread in new-car ads and dealer showrooms for much of this decade. Cheap financing reinvigorated the U.S. auto industry’s sales following the recession, helping to keep monthly payments affordable and draw buyers from the used-car market, where lending rates are usually higher.

But as interest rates rose, the cost of such deals has increased, pinching profits for car makers that finance vehicles through their lending arms and must pay the difference to keep the rate at zero for the customer. With U.S. auto industry sales slowing, car companies are turning to other types of sale incentives, such as cash rebates and discount lease rates, to lure buyers to showrooms, dealers and industry analysts say.

“For a long time, everything was 0%,” said Adam Lee, chairman of Lee Auto Malls, a dealership chain in Maine. At first, buyers could find 0% finance deals on 48-month car loans, and then auto lenders started extending those deals to 60-month loans and eventually 72-month loans, he said. “There are fewer and fewer of those deals now,” Mr. Lee added.

In September, the percentage of new cars financed with an interest rate of 1% or less fell to 5.3% for the month, down from 8.2% in September 2017 and 11.7% in September 2016, the year U.S. auto sales peaked, according to market research firm J.D. Power.

No-interest loans have become even scarcer, accounting for 3.4% of all new-car financing in September, down from 9.1% two years ago, J.D. Power said.

Overall financing rates on new-car loans have also crept up over the last couple of years, although they remain well below 2008 levels. The average financing rate for a new-car purchase was 5.75% in the second quarter, up from 4.82% two years ago when auto sales were at their strongest, according to Experian Automotive.

“You’re definitely seeing the entire industry pulling back,” said Jack Hollis, general manager of Toyota North America, of the scaling back of interest-free auto loans. “Obviously, interest rates rising is a reality in the marketplace, and we’re going to react.”

In the years following the recession, auto makers took advantage of rock-bottom interest rates to make these deals more prevalent, mostly extending them to customers with higher credit scores and on specific loan lengths. For many car buyers, these promotions became a reason to buy a new car over a used vehicle, because the financing was cheaper.

General Motors Co. , which helped pioneer the 0% financing deal with its “Keep America Rolling” campaign in the early 2000s, still offers no-interest loans on select models, such as the Chevy Trax and Chevy Equinox.

While the promotions are becoming more expensive to maintain, it is “not so much that we would drop it from our quiver,” GM spokesman Jim Cain said. As interest rates continue to rise, GM will become more selective in how they are used and on which models, Mr. Cain said.

Mr. Lee, of Lee Auto Malls, said the pullback on 0% financing and uptick in interest rates are making cars more expensive at a time when buyers are already paying near-record prices for new vehicles. For instance, a customer who may have paid $476 a month for a $26,500 Toyota Camry purchased with a 0% loan for 60 months will now have to pay at least $50 more a month at 4%, he said.

“The higher payments are making it harder for people to afford a new car,” Mr. Lee said. “Some are going to used [vehicles], some are holding off [on purchases], and some are going to leases.”

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