Talk Your Book: Car Dealership Guy

0:00Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnick and Ben Carlson work for Ritholtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:32We are very excited to be joined by car dealership guy. I honestly don't know when you burst onto the scene, but holy did you burst onto the scene. Thank you so much for coming on today. Thanks, Michael. Excited to be here. When did you start on Twitter? December 2021. Wow. Right around the holiday time. So it hasn't been that long. You're like the chat GBT of Twitter in terms of user adoption. It's really incredible. You've over 300 ,000 followers and for good reason. It's not an accident. You put out killer content. Listeners of the show know that Ben and I talk about your content pretty much every week.

1:01So we're thrilled to have you. I thought a good place to start this conversation is with my own experience that I'm going through. So I might do a lot of talking here just to set the stage. So bear with me. In 2020, September 2020, I needed to get a car and I wanted to get a Jeep Wrangler, but this is when prices started going nuts. And I was going to dealerships and for like the base model, it was like 700 bucks a month. And that was way more than I wanted to spend. And so I'm like, all right, I'll just get like a Cherokee, which is fine. I don't drive a lot. So this is mostly like a station car or around town car.

1:38So I wasn't going to have a ton of miles in it. I was going to the dealership and I hate in-person negotiation as does everybody. You feel like it's an unfair fight. You don't know any information and I'm just not good at it. I get anxious. I start sweating. I don't like it. It is an unfair fight. It sucks. It's awful. So the prices they were quoting me were like, still felt too high. And I don't know how, oh, I know how my stepbrother gave me the number. He's like, dude, talk to my broker. So I spoke to the car broker. He goes, what do you want? What color? Done. I can get a few for$4.75. It'll be in your house in a week.

2:08I spoke to this dude for 10 minutes tops. And he got me the car, put it in my driveway. It was such a beautiful experience. I said, I'm never going to a car dealership ever again, ever again. All right. So that's my car. My wife, like your wife, drives a Q7. The Q7 that I got from my wife was a 2019 model. And so for my Jeep, I'm very proud. I pay$4.75 a month. I feel like it's a steal. For my wife's car, I'm paying around$800 a month, but there's more to the story. Her car came off lease in November of 2021. I don't need to tell you that prices made no sense for a new vehicle. So I bought it.

2:42And I bought it for$38 ,000. But I also bought the extended warranty for$6 ,000, which is a good thing that I did because the transmission literally exploded two weeks ago. Like it just died. Before Michael keeps going, warranties are usually a sucker's bet, correct or no? No, not true. For cars or not? because I feel like for most other things. So they're one of the highest margin products at a dealership, anywhere between 40 to 60 plus percent, depending on the car and the customer and many other things. And the deal really, but they can be very valuable. I mean, look, in his case, it was 10 grand.

3:17The transmission was like almost 10 grand. And my wife goes, I can't believe you never buy warranties. I said, exactly. I'm not a sucker. But for a car that I own, a German car, I'm buying the warranty. So anyhow, so we need a big trunk space because we drive with the kids upstate a lot. And the trunk, the Q7 is a big size trunk, but it's filled to the brim. And so - I know the pain. Yeah, exactly. So I was looking at my financing options to see how much is the payoff. And I owe$40 ,000 on the car, which sounds like a lot. It was$38 ,000 when I bought it, plus the warranty, plus taxes, whatever.

3:49So right now I owe$40 ,000 on the car. I am in the market, potentially. The Jeep has about$5 ,000 worth of equity in the car. Michael, don't tell me you're looking at a Suburban. Please don't do it. I'm not looking at Suburban. I'm in the market for a Tahoe. However - Oh, that's the same thing. What the? That's the same thing. Hold on. Hold on. It's not the same thing. Basically, it's how many more feet of trunk space does I have? Sir, sir. So right now, I'm all in. I'm$1 ,300 a month for my cars. It's$800 for the Audi. It's$500 for the Jeep. Now, I know Tahos are ludicrous. It's like$1 ,000 a month.

4:23So I'm trying to not be super, super stretched out over where I already am. You're never going to find a parking spot again in your life at the grocery store. You can't sit anywhere. Anyhow, I'm almost done talking. So if we get rid of the Q7, we need the Tahoe. But the thing that I'm worried about is I think that I overpaid for the Audi. And so right now I owe 40 and I think I could get around 40. I'm worried that a year from now I'm going to owe 35, but I can only get 26. So I'm worried about the use of car prices coming down. All right. With all of that said, what should I do? Wow. Quite a story.

4:52No, look, I think so. First of all, if we've learned anything from the last couple of years is you just can't time the market with anything. Even if we go back a year ago, everyone is panic buying to hedge for inflation and suddenly rates go up by a million percent. Now the dollar is almighty again after it was monopoly money for like a year and a half. And I think similarly to cars, there was periods and you see all these dealers that stocked up on cars near the end of 2021. suddenly Q4 came around, valuations has plummeted and all the public dealerships, every other dealership as well, everyone just took a bath on vehicle valuations.

5:27And so I think it's not necessarily the right financial advice, but the truth is that cars, we can't really look at it as an asset necessarily that you're looking to maybe time the market and get the best deal. And depending on the market movements, oh, it's a liability. Yeah. It's not an asset. I'll tell you one thing though, if the market continued the way it is today for another year, two years, the higher you go up in price point right now, the greater the day's supply is. Day's supply in this industry is just how we measure inventory efficiency and availability. It's a measure of how much supply is in the market relative to the demand.

6:02And that's how you know how quickly like the velocity of inventory. And so the higher you go up in price point, the greater the day supply. All that means is that there's less demand for these cars, especially on the use segment. And so those cars,$30 ,000,$40 ,000 plus are likely to depreciate at a faster pace than cars below$30 ,000 and$20 ,000. It doesn't mean that it's going to fall from$40 ,000 to$25 ,000. I can't tell you that. No one can because we don't know what the market will look like. But I will tell you that it will depreciate at a faster pace than the less expensive cars. We tell people all the time, do not try to time the stock market.

6:38And Michael's asking you how to time the car market. I know. I get asked a lot. I'm just asking the professionals to put themselves in my shoes. That's all. Here's what's going to happen. I'm going to end up not doing anything because I'm going to look at the price and say, this is insane. The majority of depreciation does happen the first three years of a new car purchase. You mentioned it was a 2019, right? So you're now like in the green, quote unquote. You've already passed the major hit to depreciation, at least from a percentage perspective. And so again, financially speaking, you already purchased a warranty.

7:08It's likely better to hold onto it for a couple of years. But that said, many people would say, well, I don't want that. I don't want to have to have more issues, go to the mechanic. You just mentioned you just did your transmission. And so at the end of the day, the way I see it is with purchases like this, you have to prioritize your family convenience comfort first, because you're just not going to be able to get it done perfectly. And it's really, we're not talking about hundreds of thousands of dollars. We all want to get the best bang for our buck. Well, that's the other thing. Am I stressing over like a hundred bucks a month?

7:38I think you are. Like an idiot for no reason. Yeah. You don't want to pick up pennies in front of a steamroller. So I think you are a little bit overanalyzing this. My solution to your problem is to stop bringing so much shit for your kids everywhere. Dude, that's not a me thing. That's a white thing. And you know that I would be totally down for the minivan. I just think it would be funny. But my wife's like, you're not funny. It's not funny. We're not driving a minivan. The next question for Michael's problem is the buy versus lease. And I know that Michael and I have talked about this before.

8:01That's very circumstantial depending on how much you drive and all of these things, but does the calculus change at all with rates being so much higher? You've been tweeting about the fact that some car loan rates are like 6%, 7%, 8%, 9%. Does the buy versus lease equation change at all with rates higher? Or is it still kind of depending on the same? Okay. A couple of things. So number one, if you look at just the average car loan payment and the average car lease payment versus pre-COVID, the average car payment is up 29%. And the average lease payment is up 34%. Oh my God. So leasing has gotten more expensive.

8:33of it has gotten also just less attractive as just a vehicle, as a car purchasing tool. And so leasing penetration is down. Leasing across the board used to be like almost one out of every three cars sold. Nowadays, it's closer to like one out of every nine cars sold. It's far, far down from what it was pre-COVID. Wait, why is that? Because I would think that with rates higher, that financing a car is less attractive. No. So leasing is built up of, there's like a money factor, your residual values and various other things, all the factors that make up the financials of the lease. But with there being so little inventory, it's sort of messed up the equation for leasing for the OEMs.

9:09And so financially, it's gotten less attractive and a lot more expensive to lease. What does OEM stand for? Basically, like all the car manufacturers, Honda, Toyota, Chrysler, blah, blah, blah. I've got a question for you that no one's been able to give me a good answer. So the way I understand it, the reason the car market is so messed up, and I still drive by these dealerships, there's a bunch of them right on the big street from my office, and they're still all half full of new cars. So the way that I've been explained is the pandemic screwed things up twofold. One was the auto manufacturers either slowed or stopped production when COVID hit because they thought it's a recession, people are going to pull back, and they were caught off guard when demand bounced back so quickly.

9:43The other thing, the supply chain crisis messed up the ability to get semiconductors, which is necessary to produce new vehicles. I'm sure there's more to it, but those are the two big things that I've been told. So my question is, it's been three years. Why are they still so far behind? Why do we still see half full car dealerships? Can they just not ramp up production or do they not want to? It depends on the car manufacturer. First of all, you have manufacturers like Chrysler, Volvo, Buick, Jeep, Alpha, they have more than enough inventory available for the most part across all of their different vehicle types.

10:14And so all the Detroit manufacturers have done pretty well with inventory. They're well above the industry average as well. Industry average is around 55 day supply. Like I mentioned to you, Chrysler, they're at about close to 130 30-day supply across the board. They're one example, but then you look at Volvo, they're close to 120. The point is lots of manufacturers have actually done very well, and that's benefiting the consumer right now. You're seeing new car prices come closer to MSRP, and so fewer markups. You're seeing incentives as a percentage of transaction price actually go up. Last quarter, it was around 2%.

10:47This quarter, it's around 3%. All these things are really good for consumers. The problem is that most of the Asian brands have not recovered. And it's a couple of things. You read what they're saying and they're putting out all these different articles and whatnot. And yes, they're still inundated with demand. Everyone wants a Toyota. Toyota has a serious backlog. And Toyota right now, when the dealers are getting the cars, it's shipping right to the customer's home. Toyota's at close to 20, 23, 24 day supply. That's just unprecedented. It pretty much means that I tweeted about this the other day, but you want that Sienna?

11:20out, well, guess what? You're going to wait a year and you may even pay a markup when it arrives. They're just one example, right? You have Kia, you have Lexus, Honda, Subaru, Land Rover. All these brands are struggling with inventory and it has to do with manufacturing and catching up. Now, I don't know the exact reason. I don't know what the issue is with the atomic unit within their supply chain that they can't figure out. But the reality is it's kind of like a tale of two sides in the new car industry right now where some brands have really caught up. They've done well. At a certain point, Jeep Wranglers, Michael, you mentioned that at a certain point, those were going the most above MSRP, more than any other car at a certain point.

11:56That's not the case anymore. But the point is like lots of brands have caught up, whereas most of the Asian brands and then some of the Europeans, Land Rover, BMW, VW, they just haven't caught up as much. So the American brands, you actually might have a better odds of finding inventory or maybe negotiating or not getting screwed as bad today. 100%. Look, there's always exceptions. If you're seeking some crazy model or a special car, there's only one of it. No, you're not going to have any leverage. But for the most part, across the board, you will have better odds of getting a better quote unquote deal, whether it be below MSRP, some incentive, if you're going for one of the American brands nowadays.

12:30Let's bring this back to me for a minute. Just kidding, but serious. There's the Tahoe, which is, is that a Chevy? What's the GMC one? Full-size SUVs is a problem. That's a Chevy, and you're not going to get a good deal on that. They're still in short supply. And you see the life progression that you're going through, Every soccer parent is driving one of these damn boats. I'm going through that as well. And my Q7 trunk doesn't fit anything either. And we've also considered the Tahoe and the Suburban. And by the way, my wife said the same thing about the minivan. That's exactly the same thing we're all going through.

12:59And you want the captain seats too. I want the captain seats. And listen, even when I lift the minivan, I'm a car dealer. I love minivans because I look at it as it's a utility. It's a well-equipped, comfortable, has crazy demand. When I think about minivans, I think about the people that come to me and want to buy a minivan. And I'm like, oh, wow. You know they've got their shit together. Oh, absolutely. I mean, get me a Toyota Sienna souped up and moonwalk open on a nice sunny day. If we think about the efficient frontier of cars, the minivan is the perfect sweet spot. Minivan's the best. Minivan is the best, but not everyone wants it.

13:30Lots of people still want the full-size SUVs. And so now if you go pickup truck, which you're not going to do that. I'm Jewish. Exactly. That you're going to have plenty of supply or it's at least creeping up. Ram, Chevy Silverado, Ford F-150. But minivan, full-size SUV is actually still a struggle. So should I get the Tahoe? But wait, what's the other one? So we had this debate, not this debate, on the show, there's the Drake's, Theodels, and the Hostess, Ho-Ho's. So what is the Ho-Ho to the Tahoe? It's in three tiers. It depends how badass or bougie you want to be. So it starts with the Chevy Tahoe.

14:03It goes up to the GMC Yukon Denali, and then it goes up to the Cadillac Escalade. And so - Oh, that's right. That's right. That's what we call that, Spectrum. I would never drive the Escalade. That's like way too much. I wouldn't buy the Escalade personally, but I would buy the Yukon Denali. There's something that's the look of it. I don't know. I do like that one a little bit better. Is it the grill? Yeah, yeah. It's got that grill. I mean, it's a nice one, the Yukon Denali. But the Tau's are incredible, especially you get them well-equipped. Incredible. If I do pull the trigger, should I buy or lease?

14:30It's going to depend at that exact moment and what deals are in the market. You're probably not going to get a good deal on it. And I'm probably going to tell you that you'd be better off buying. Also, I would mention that you're going to want to go through a credit union or at least try to shop the credit union when you do the financing for it, because that's just where you're going to get a better rate. Credit unions nowadays make up close to 30 % of all new auto purchases as well, which just to put that in perspective, similarly, the leases actually, prior to COVID, credit unions were doing about close to 10, 12 % of all financing for vehicle purchases.

15:03Which is the best credit union? You're going to need like a 96 month payment on this, Michael, to match your payment now. He's going to take a 96-month loan out to get his same thing. No, credit unions, I mean, the key here is you want to work with a dealer that is partnered with credit unions and you want to shop your own credit union. And then you want to see who can offer you a better rate. But they just have a structural cost advantage to traditional lenders. And so you're likely going to get a loan that's two or three points better. Could everybody get access to a credit union? I kind of thought you need to be like a teacher or something, which my wife is, but can anybody get there?

15:32There are like trade-specific credit unions. But like I said, most dealers are partnered with credit unions directly. And so you're still going to get a better rate through the credit union, even if you go through a dealer, as opposed to, you know, going through the traditional lender. And again, this assumes you have pretty good credit because if you don't, you won't. My car payment is through a local Michigan State credit union or something. Ben, what do you drive? Ford Explorer? I have a Ford Explorer and I have one more kid than Michael. I'm still not going for the upsized one. So my Ford Explorer runs up in 2024.

15:58I'm in a better position than Michael because I have an American car. You have hair. So I should be a little better. So the big thing I want though, is it probably won't be ready by 2024, but I want an electric SUV. When are these coming for us? Are we getting to the point where they're going to be affordable enough where that's going to make sense? Or is that still wait on the line? Let me ask you a question. Just now it's my turn to do some market research. Why do you want an electric SUV? Just curious. I don't know. I just think driving electric would be kind of cool. By the way, that's an important answer right there.

16:27You really don't know. You just think it's cool. And so I think we're seeing a lot of that in the industry nowadays. And OEMs, like I said, the car manufacturers have made lots of proclamations that certain ones that, you know, we're going to be fully EV by this, or this lineup will be fully EV by certain year, whatever. But I think the whole EV space is very fascinating right now because you look at Q1, Tesla gained roughly 1.4 % market share in the industry, far more than any other car manufacturer in the industry. I also mentioned the other day on Twitter that Toyota lost roughly 2 % market share in the same quarter.

17:01Toyota did not lose that because in the EV lineup or anything, they lost that because they barely have any cars to offer people. But the point is that you see Tesla where they recently dropped their prices, they're gaining so much market share so quickly. And clearly, Ben, what you mentioned, there's many other people in your shoes or in a similar situation that want to go EV, want to drive this new technology, and will be adopters over the next couple of years. Now, as far as when more SUVs, EV SUVs will come out, I don't know. I mean, driving vehicle ranges and as they beef up their EV departments.

17:35But it's going to come and it's going to come quickly. There will be adoption for it. The other thing about the premium on it, the prices seem to go to premium. They released the Ford Lightning. I remember it was like 40 grand and they've continued to increase that. And I mean, you do the math and I'm a spreadsheet guy, so I've done the math. The gas savings on that is nowhere close to the premium that you're paying, even if you qualify for the tax break on it. You don't save money driving electric, it seems like right now. At least that's the calculation I've made. Most people, I don't think they buy it to save money and there's studies on this and whatnot.

18:04But the reality is the person that bought a$120 ,000 Tesla Model X over the last six months, they're not doing that to save money. It really comes down to preference and brand. I want to drive a Tesla. And also you mentioned Ford. Let me tell you another interesting fact that the Ford Mustang Mach-E, after they made their price cuts, they follow Tesla with price cuts as well. And they're actually losing money on a per unit basis. And so they have a lot of work to do in their supply chain and manufacturing to the point where they can get it to be profitable at a competitive price for consumers.

18:35So why are they doing that? Why are they selling at a loss? It's a free market. You got to move the metal. They have to, right? And if Tesla drops their prices by up to 20%, you got to stay competitive one way or another. Let's talk about sub private leasers for a second. I think there are some whispers that the fault rate is going the wrong direction. Is that something that should be a big concern on a macro basis? Are there more implications beyond just people not paying their car bill? Here's what's happening. We're seeing that 60-day delinquencies, there's ways of measuring car payments and whatnot and just how people are paying.

19:06So we're seeing that delinquencies are rising. And on certain segments, like the deeper subprime segment, we're seeing that we've reached delinquencies, we've reached levels that we haven't seen since 2009, and in many cases, even beyond that. The interesting thing is that these are not yet translating into default. And as you can imagine, right after default is when the repossession happens. And so it is definitely an area of concern that I'm watching very closely. Will we see more repossessions over the next 12 months? Of course we will. We're putting a lot of pressure on the consumer. People committed to payments that are significantly higher than what they had prior to COVID over the last couple of years.

19:42People bought these cars at inflated prices. They're out of equity in these cars much more than they would have been otherwise. And so all roads lead to more repos. Now, I also mentioned the other day that another interesting phenomenon is that because people are buying older cars with higher miles because of course we have a used car shortage, not new car shortage, mind you, used car shortage. Well, that's going to lead to more repossessions as well. Because I remember one of the first things I learned in this industry is that 50 % of the reason why someone repossessed their car or gets their car repossessed is because they could not afford repairs on that vehicle.

20:14So they had to give it up. 50 % of the reason. And so when you think about that, if we're selling older cars with higher miles now to consumers, what's going to happen? Well, there's a higher likely that that car is going to break down, they're not going to pay for it, and the repo rate is going to go up. And so it's a very weird time for lenders and dealers because people's credit scores were artificially inflated over the last couple of years. All these stimulus checks, people were paying these loan deferments and whatever. You don't have to pay your student loans and blah, blah, blah. And it kind of messed up credit scores.

20:43Whereas if you look back a year and a half ago, the rejection rate for auto loan borrowers was almost zero. Almost everyone was getting approved for a loan. And nowadays, it's back to like one in 10, one in nine people or so are actually getting rejected in auto loan, which is actually a healthy thing for the market. Not everyone should get approved. And so all that said, we are going to see more repossessions. It's going to take time. Like I mentioned, we're seeing higher delinquencies. It's going to eventually translate to more defaults. And ultimately, that will translate to rebotes. You know, I thought you mentioned that there was always those one shady car dealerships that you'd see advertised on TV, they'd be like, we don't care what your credit score is, come, we'll give you alone.