The truism that the second most expensive purchase most people make is a car tends to ignore the part that houses usually appreciate in value, whereas cars almost always lose their value. The pandemic/chip shortages/trimflation inverted this for cars, with people getting offers for more than what they paid for their cars. According to a new study, this has dramatically screwed up how car buyers view what their cars are worth, with many being off by $5,000 or more.
Tesla buyers are the worst off in this study, which is no surprise given how heavily Tesla continues to discount its vehicles. That strategy seems to be working for Tesla, especially in China, where a rise in car sales may help the company overperform in the third quarter.
Toyota, on the other hand, probably had a bad quarter for production due to a bunch of problems. Will Volkswagen have issues with the ID.Buzz? You better hope your local dealer sold a bunch of ID.4s, otherwise don’t expect to be able to find an ID.Buzz. A lot to contemplate in today’s Morning Dump.
1-in-3 Buyers Are Underwater On Their Cars And May Not Know It
The period of 2021 to early 2023 was an extreme fluke when it comes to car sales. The global pandemic, and the hamfisted response of automakers, led to new cars getting way more expensive. There was such a shortage of new cars that used ones in good condition were suddenly worth as much, or more, than their original sales prices. (Many of you might remember the crazy Carvana offers you got at the time). At the same time, government stimulus and job protection put extra money in the pockets of consumers.
The market is now past this period of constrained supply, and all of that spending (as well as other factors) led to a period of inflation. Interest rates were raised in response, which means that even though cars are getting cheaper, the overall cost of buying a car remains stubbornly high for individuals who need to finance.
While used car values haven’t completely plummeted, almost any car purchased in the last five years is not worth what it was at the height of the supply shortage. I’ve talked before about how auto loans from 2022 are probably the worst to hold given the cars in that period were sold at prices that were above market values, and now, given that there’s plenty of new car inventory, people are still paying those inflated prices every month.
While all of this is obvious to you, dear Morning Dump reader, it may not be so obvious to consumers according to the Q3 Negative Equity Report from CarEdge/Black Book. The survey of over 1,000 drivers found that 31% of drivers who financed their car purchases had negative equity (in other words, they owe more than their car is worth). This number rises to 39% for buyers who purchased a car since 2022, likely reflecting both the above-market transaction prices and the fact that fewer payments have been made compared to a pre-2022 car.
I was disappointed to find out how many buyers misunderstood the value of their vehicles, but I’m also not surprised. From the report:
61% of respondents believed that their vehicle was worth more than its actual trade-in value, based on data from Black Book. Furthermore, 17% of respondents overestimated their vehicle’s value by $5,000 or more. This disconnect between perceived and real value is an important factor contributing to the financial difficulties many car owners face when trying to trade in or sell their vehicle. The belief that a vehicle is worth more than it actually is may lead some drivers to underestimate the extent of their negative equity. Many drivers are encountering this unpleasant surprise at the car dealership when attempting to trade-in for an upgrade.
It’s not great, and the trends make a lot of sense in terms of who has more or less equity (the longer the loan term, the lower the equity, and the more likely you are to be underwater). The people most impacted by this are not surprising, either.
This is graphic shows the equity versus loan-to-value ratio for different brands, which is determined by taking the amount of the loan and comparing it to the value of the car. Above 1.0 is bad, the closer to 0.0 the better. Luxury cars, which are historically the biggest and fastest depreciators, tend to be close to 1.0. So why is Tesla at the bottom? It is a quasi-luxury carmaker but most of its cars are Model Ys and Model 3s.
The cheapest Model 3 in 2022 was about $50,000 (before incentives). Today, the cheapest Model 3 is a full $10,000 less. The KBB trade-in value for a 20,000 mile 2022 base Model 3 in excellent condition is about $23,000, or less than half (worth noting that private party sale value is a little over $27,000). Unfortunately for Tesla buyers, the company has been continually lowering the prices of its cars to attract new customers. This is good for new buyers and bad for old ones. And to make matters worse, Hertz dumped a bunch of Teslas on the used car market this year.
So long as the economy stays strong this isn’t likely to become catastrophic, though in a recessionary period, this could lead to even more delinquencies than expected.
Tesla Probably Had A Great Quarter In China
Tesla is the automaker that is most opaque about its car sales. Every three months, without warning, it’ll drop production and delivery numbers (its analog for sales) broken down only by “Model 3/Y” and “Other Models.”
Thankfully, most developed markets report more detailed numbers, including in China, where it’s starting to sound like Tesla had a super strong Q3, leading analysts to increase their targets for the automaker.
At least four analysts have boosted their estimates for Tesla’s third-quarter delivery numbers, which are due next week. All point to signs that sales are starting to pick up in China, a key area for Tesla and a major market for electric cars globally.
“This China strength comes at a very opportune time for Tesla, helping to offset ongoing weakness in the US and Europe,” said Dan Levy, who follows the company for Barclays. Levy now expects deliveries of about 470,000 vehicles in the three months ending in September, up from 462,000 previously.
A healthy delivery figure next week would go a long way in allaying fears about weakening demand amid an industry-wide slowdown and the emergence of competitively priced rivals.
Elon Musk may no longer view his company as a car company, but it’s still a better car company than most. I’m curious to see how well BYD does in China in Q3.
Toyota Is Taking It On The Chin This Quarter
Toyota is in the enviable position of having a strong brand and a product line that offers something for almost every consumer. The Japanese carmaker is in the less desirable position of being caught up in numerous testing scandals and stop-sales for its extremely popular three-row crossovers.
Those issues are being dealt with, but August was the 7th consecutive month of decreased output according to Reuters. There were lots of reasons, including the aforementioned scandals and production pauses, as well as a typhoon in Japan, where production dropped by 22%.
So, if you’re waiting in line to buy a new Toyota, stay in line. They’ll make them, eventually…
VW Dealers Are Only Being Promised ‘One Or Two’ ID.Buzz Vans At Launch
I am excited about the Volkswagen ID.Buzz, even if I’m not totally sold on its high price. The EV retro van seems like an ideal use case for an EV, which is why it’s a bummer that it’s felt like 900 years since this thing was first revealed.
If you want to buy one, it’s going to feel even longer than 900 years because, according to Automotive News, the rollout is going to be slow.
Andrew Savvas, VW’s head of U.S. sales, said each VW dealership will get one or two ID Buzz models for the vehicle’s U.S. launch. That will equate to a ramp-up that Savvas described as “quite tight.”
He said VW’s allocation policy is based on the size of a dealership’s market, along with its ID4 sales performance.
“We want to obviously give the cars to the dealers who did a wonderful job on ID4,” Savvas said.
If you live in a large market with a dealer capable of moving ID4s you might be in better shape.
What I’m Listening To While Writing TMD
This video might be a bit much for work, FYI, but the Addison Rae short film for her lusty “Diet Pepsi” continues the trend of pop stars using giant, Malaise Era American cars (Sabrina Carpenter’s “Please, Please, Please”) in their videos. Is this a trend? Are these cars ripe for a comeback?
The Big Question
How much money do you put down as a down payment (as a percentage) when buying a new car? I just did about 25% on my Honda, meaning I am thankfully not underwater.
Topshot credit: YouTube (Family Feud)
Regarding underwater car buyers and people thinking their car is worth more than it is… that is absolutely nothing new. There have always been people and dealerships who live in a fantasyland thinking what they’re selling is worth way more than it’s actually worth. The COVID pandemic shortage period was just a short sellers-market aberration.
And regarding Elon Musk not viewing his company as a car company… that’s also nothing new. He’s been saying for at least a decade that he viewed Tesla as more of an energy and services company. If you look at their financials, you’ll see their energy and services revenue has been growing.
Tesla is setting itself to be a lot like Apple… where the hardware sales are just a method for selling more profitable software, services and other stuff.
Regarding the big question… when buying a ‘new-to-me’ car, I’ve always put down 100% of the cost. And that’s mainly because I’ve only ever bought used cars that I’ve always had the cash to buy outright.
Now if I were to buy an actual new car, how much I put down would depend on how much I would need to put down to get the best deal. If I got the best deal with 0% down, that’s what I’d do.
I bought my Kia Ev6 just over 3 months ago,
I gave 35000 and financed about the same over 5 years.
In my situation I’m basically financing the gas cost if I would have bought another forester.
I read somewhere that this percentage could be even higher for owners of multiple BMW i3s.
Down payment? It depends. On new cars I have tried to do at least 15-20%. On used cars, normally 100%. I generally refuse to owe money on a car with no warranty, and I generally refuse to take a note for longer than a car has warranty.
But that said, on my most recent purchase for myself, a 2014 Mercedes E350 wagon two years ago, I paid half upfront and took a 3.5% note from my credit union on the balance. It was also, BY FAR the most expensive used car I have ever bought (and it’s *awesome* – zero regrets). Which I just paid off this week actually. The reason was I needed to give a car to my mother to replace one Hurricane Ian drowned, and I had about $20K in damage to my house I didn’t want to wait for insurance to get fixed, so I paid out of pocket while waiting for the insurance company to do it’s thing. Paying all cash for the car would have left me with an uncomfortably low “cash on hand” balance. I intended to pay it off when I got the insurance check, but that rate was SO low that I didn’t until now.
On the new KIA Soul that eventually replaced the Volvo I gave my mother (she and older Volvos do not get along, I should have known better), we also put 50% down and took KIA’s 2.99% on the other half. She wants to pay it off, I keep telling her that is foolish when the money she has in CDs that she would use to do it is making 5%… Probably should have financed the whole damned thing, but CD rates hadn’t jumped when we bought it, and she was much happier with the lower payment for four years, though she certainly could have swung the full welley.
I paid off the Mercedes early because I am building a rather expensive new garage with attached living quarters that I am going to have to mortgage on completion, and not having that $400 payment on my credit report is more advantageous than the amount I was making in interest on the money at this point.
I bought a 2023 GTI new in November 2022. Out the door, the final bill was $34.2K, give or take a few bucks. It was about $1K below MSRP.
Fast-forward 12 months, I’m no longer enchanted by it (especially by all the interior crickets) and want to move on. So I look at Carvana, Cargurus, Cars.com, Autotrader and pin the average listing price of a manual S with 8K miles at around $31K. Adjusting for private party values, I price it at $29K (KBB shows private party “very good” condition between $28K and $31K). Nary a bite. I drop it to $28K, then $27K, then Carvana offers me $25K for it. I pass, flip it back to $30K (sometimes you have to do something nonsensical to get results) and list it on Cars.com. Two interested parties, one of which tries to talk me down to $27K, I relent, but he pulls out at the 11th hour to buy one from a dealership with more miles and $1.8K more. Makes perfect sense, why wouldn’t it? Finally, on month 22 of ownership, I give up, and after Carvana up their offer to $26.2K, I let it go, only for the entire VW universe (comprised mainly of VWVortex commenters) to suddenly blow up and tell me how much of an idiot I was to let it go so cheaply. Can’t win for losing…
Timing is everything. I bought a ’17 GTI Sport new in ’17, right in the midst of Dieselgate when they were giving them away. Four years later, I sold it to Carvana for only $1K less than I paid for it new out the door – they actually gave me MORE than the price of the car itself).
But I DEEPLY regret selling that car. Sigh.
Yeah, I’m pretty sure I won’t regret selling the GTI. What I do regret is not buying a brand new CF Blue ’19 Rabbit back when life was still normal.
If you count trade in as money down, my last car down payment was almost 50%
It’s the exact same w/ homes.
I more often than not have put zero money down on new cars. Having a great credit score, shopping credit unions well in advance of purchase, and buying only when there are great incentives available has worked really well for me.
For my best two loan deals, I took out zero down payment, 6 year loans at under 0.5% after the financial crash and stretched payments on those loans to full term. I got such a great deal on the first that I immediately started shopping for a second vehicle that I’d planned to buy a couple years later.
Buying when rates were high, I usually put 25% or more down, and pay the balance off as fast as possible, sometimes just after the 30, 60 or 90 days the dealership needed to get commission on the finance part of the transaction. (Ask your dealer during negotiations. Get them that spiff on the back end and they’ll be more willing to work with you on the sales price.)
Also, zero down auto loans seem to be much less available now. The ones I’ve found lately come with a rate penalty that I won’t accept unless I expect to pay it off in months.
That is an excellent point about working with the dealer on their financing commission. I did that for my two new BMW purchases. Got a better price, paid the slightly higher rate for three months so my sales gal and the dealership could get their kickback, then refi’d at the lower rate with my CU. I have also taken the “you get this rebate if you finance with us” money and then immediately refi’d the car the same day. Just have to read the contract to make sure there are no pre-payment penalties. Many if not most states don’t allow them these days anyway.
There are definitely no finance deals to be had currently on most anything popular ATM, though 1.5 years ago I was happy to get 2.99% for my mother on a KIA Soul. And my CU continues to significantly beat their own advertised rates for me as a “good customer” (and one with diamond encrusted credit and lots of money in investments through them).
But I am DONE with buying cars for a while. I have five that suit me well, no need to change it up until my new garage with attached living quarters is done and furnished.
I got boned being underwater on the first new car I ever bought – lost my job and it needed to GO. Thank goodness for the First Bank of the Old Man, but never, ever again do I want to be in that situation. NOTHING sucks more than making payments on a car you no longer own, even at the ‘family” interest rate. If the poop hits the rotator in life, I want to be able to swing by the closest CarMax and walk away with a check and without a monthly payment, even though today I have the wherewithal to just pay cash for anything I would ever actually desire. But the best time to borrow money is when you don’t really need to, it gives you leverage, literally and figuratively.
I’ve only purchased 3 new vehicles in my life, but each time I put down enough money to make sure I wouldn’t be underwater at any point.
2018 Camaro 1SS 1LE – ~45k OTD put 15k down. Sold to Vroom in 2021 for 42.5k so that worked out pretty well. Although with how well they’re holding value I probably should have kept it..
2020 KTM 690ER – ~12k OTD put 4k down. Still have it, great bike.
2022 Colorado ZR2 – ~47k OTD put 17k down. First and only vehicle I actually ordered from a dealer. What I wanted was impossible to find on the lot – diesel, extended cab, block heater, vinyl floor. Luckily my dealer is large enough that they got an allotment right away, I ordered pretty close to GM closing the books on the diesel option.
Latest new purchase (about a month ago), we only put the 33% trade equity down. Got a 3 year note at 0% APR for the rest even though we had another 33% of it in cash available. The used toy car we purchased in late 2022 we paid cash for.
Apparently I timed our first car loan in 20 years just right. It was an off lease car in early 2020, and the Carmax offer is 4x what we owe. If we sell it after it’s paid off the next car will be cash
The Mercedes dealer is asking $3K more for the Allroad I traded in to them, than I paid for it 4 years ago at another dealership and with 12K fewer miles than now. I think they’re a bit optimistic……
I’ve been buying new, financing it and writing it down as a business expense. Usually keep them for a decade or more and then donating to whomever I last heard was taking beaters for charity on the radio. The vehicle is valued at whatever the the allowable depreciation is. With the allowed capital tax write off and expenses, I get to drive the things for close to free.
My next car I expect to be a toy but it certainly won’t be of this century and I’ll pay cash for it.
Annoyingly, the IRS changed the rules on car donations a few years back. You can no longer just estimate what the value is and take that as a deduction. The charity has to actually sell the car, then you only get to take what they sell it for. So in many cases, your deduction is just going to be scrap value.
They also MASSIVELY changed the rules for Section 179 deductions for vehicles this year. It is no longer the no brainer it once was for pickups/SUVs and Rolls-Royces, etc. Which is good, because it was being horribly abused.
They are also cracking down on business use deductions of vehicles in general. You had better be legitimately using the thing for actual business use, with documentation of such. Another area that is *horribly* abused.
I live in Kanukistan. The rules are different here. I let my accountant deal with the details. I track the use of the car for business or not, the km and fuel. The CRA allows writing off a specific amount of mileage at a set rate. I live far enough away from where ever I am working to write off my milage, fuel, and parking expense. Its a good deal until covid had me working from home. I bought out the lease when it came up as I am now 100% wfh. In terms of donating the car most charities here give you a receipt for a set amount. Works for me as the vehicle by the time I get rid of it has a depreciated value of zero.
That’s how it used to work here, more-or-less. You could in many cases just tell the charity what to put on the receipt “what you thought it was worth”. Which was 99% nonsense, or course, which is why they changed the rules.
I put down about 25% on my new car. We wanted to have equity from the beginning. The subsidized interest rate is low enough where the amount left to pay will make more in the bank.
Here in Virginia we get to pay taxes on the assessed value of our car twice a year, so everyone here insists their car is worth less than the tax man says it is.
For some people with in-demand cars like Toyota hybrids, they are shocked to find the value of the cars went up or remained flat year-to-year.
In my home state of Maine they got around that by basing annual excise tax on original MSRP (technically, MSRP or what you actually paid for it, whichever is *higher* so extra fun for the idiots who overpay to be first).
Doesn’t matter that your P38a Range Rover HSE is worth $5K today, it cost $80K new, you are paying tax on $80K annually forever ($500+ a year when I had mine). Good times for those of us who are fans of fully-depreciated luxury iron.
Other Non-American Nations” seems to be an apt description for these markets, since the jackoff CEO named its cars “S/E/X/Y.”
Jfc that’s probably on purpose. What a fucknugget.
He actually has said it was on purpose. The only reason that the Model 3 isn’t the Model E is that Ford already had the trademark on Model E and wouldn’t sell it to him.
I meant the ONAN one.
I’m having conflicting feelings regarding the VW Bus allocation approach.
On one side, I feel sorry for the dealerships being allocated what seems to be a great product based on their performance selling a shit product.
On the other side, f*ck dealerships and their scumbag fees and generally awful hoops they make customers jump through.
Have paid cash since 1995.
But times have changed.
Based on the future need for something, will probably be putting down 25-40%,
depending on selling price and interest rates.
Waiting for a Toyota hybrid truck to become affordable to my budget.
These days, I’m selling whatever vehicle I have private party if I plan on buying a new car (the Hyundai I sold last year was offered only 2k for trade which was pitiful for a hot used car market, I sold it for 5300$). I conservatively estimated that I was going to sell it for 4k, and threw some extra cash at the purchase to cover sales tax and called it good. It was roughly a 21k purchase. I took a 4 year loan on a 3 year old van, but I set up the automatic payments to have it paid off in closer to 3 years.
I have a general rule that I shouldn’t be making payments on a vehicle that’s over 6 years old. Aka, if I couldn’t afford the car new, I probably can’t afford the car used. Payments and repairs/major maintenance items don’t mix. This keeps me from the ol’ “I have a 25k budget, but instead of buying a new Corolla I bought a 7 year old Grand Cherokee” that I see happening all the time.
Starting my adult life with student loans and exactly $0 in the bank, no property, no help from family, no inheritance, nothing by my abilities to get by. Now have a home, two decent cars and a barely 6 figure income. I have no problem financing reliable transportation versus waiting to pay cash for a car that may not run long enough to keep a job. Cars are not investments they are transportation and one pays for reliability one way or another and having grown up very poor I choose reliability because I do not have a middle or upper class family to bail me out.
I haven’t borrowed any money for assembling my fleet of decades-old vehicles in various conditions of operability and presentability but I’m pretty sure I’m still in a position of negative equity on them.
and 78% of Americans are above average
That seems…very low.
Piff. 50% of the population is below average, and the average isn’t high to start with.
I put very little down on my car, but it was 0.9%, for a term shorter than the warranty period.
I toy with the numbers if I were to get something new or different now. The rate would definitely play in to how I would structure it. But I don’t think I’d be going something significantly more expensive, relative to my car’s original MSRP or even value now. The estimate from the vending machine place still shows a couple grand higher than that from KBB, plenty to offset any sales tax difference in my state vs. trading in, so that gives some flexibility too.
We did that with my wife’s car in 2016. The loan was so cheap, we were better off financing and holding onto some cash as an emergency fund. Especially since she was finishing up her PhD at the time and therefore not making any money. The car has been pretty damn good. Some warranty work, and AC recharge and a set of tires.
Was this study for NEW vehicle purchases only? Nowhere is it stated the specifics of the survey.
I don’t want to give them my email to download the study either.
Here’s a direct link: https://caredge.com/wp-content/uploads/2024/09/2024-09-25_Negative-Equity-Report.pdf
I’d really love to know exactly how this was asked. Because there are a number of factors at play. Though people often trade, they’ll see that as losing money off the value, instead of seeing a private sale as adding to a base value. So someone could have an accurate view of their private sale value while reporting a value that is higher than the Black Book trade.
Not as big a factor, but it’s also incredibly easy to track your CarMax/Carvana trade values, so a person could also have a completely accurate view of those generally inflated trade values and end up within that 61% (not going to be in the 17%, probably).
I think this is a fair question. I get offers from the dealer to trade my van in for $26k. I know I can sell it private party for $36k+ and dealers are still asking $42k+. Many people don’t realize just how much the dealer is looking to profit on your car.
If you ask me how much my car is “worth” I say $36k. A dealer says $26k if I’m buying and $42k if I’m selling.
This is it, 100%. People value their car at blue book retail. So, yeah, black book is going to be lower. And people willingly give up the extra money when trading in because of the convenience (and some of it is offset by tax savings).
I don’t want to give them my email to download the study either.
So do what everybody else does and have a spam Google email account. Make sure to enter unique bullshit data per site and uncheck all the send me boxes so when the spam comes you you’ll know who violated your do not contact wishes.
Are you trying to say that my 2011 VW isn’t worth what I paid for it pluss all the repairs and mods? Whatever man, I know what I got