Talk Your Book: Need to Have Cars With Car Dealership Guy

0:04Welcome 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. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:34We are joined today for the second time by car dealership guy, our favorite car person Can we boost out of the scene? I don't know. A year ago? Two years ago? How long have you been doing it for? Something like that. I would say it really blew up about a year ago. Okay. Last time we talked to you, Michael talked about his new experience getting a Jeep. And I rode in it. It's a nice car. It's got a nice top that sort of fades away in the summer. Pretty. Michael doesn't like the EV, I guess, part of it. Something wrong with it, right? I'm not quite regretting the purchase because I do. I like how it looks.

1:03And I love the electric top. but the electric part of it like isn't great it shut off one time on the road and i was like i started sweating i was very anxious people were honking probably not not the greatest vehicle but i like it it looks nice thank you so i i think i actually so my lease is coming up in early 2024 i lease a ford explorer i need the room and i have kids it's like the honda accord of suvs for me basically right and i think i think actually cut in it's supposed to Oh, wait a minute. Wait a minute. Wait a minute. Before we talk, tell him your take. What's my take? If Ben could have any car in the world, he would have a Honda Accord.

1:42I'm an A to B guy. If I could just pick a car, I would drive an Accord. That is a basic B take. No one drives a sedan anymore. I want to drive a sedan, but I have three kids and they have sports. And so I can't fit it. That's my goal one day. So I think I actually looked into ending my lease early and looking for deals because of one of your tweets. I think you said, here's the biggest deals right now. And you have a list. and I saw Ford is on there. Like you were saying Ford is offering some rebates. So two months ago, I reached out to the dealership and said, hey, I know my lease doesn't end yet, but can we look into something?

2:11So they looked into it for me and said, yeah, come on in and we'll talk about it. And we talked and they said, it's actually cheaper for you right now to like build your own car through Ford. And it would be more expensive for you to buy a car that's already here on our lot than it would be to assemble a car through Ford and have them make it and then send it here. Like, all right. so they did that and I and you've been tweeting the fact that like auto rates are like nine percent and saying fewer people are leasing because of this and so I'm thinking oh crap my and my car my payment went up I think 12 or something from two and a half years ago it was negligible it was up like 30 a month I was shocked they gave me a bunch of rebates and so I got it so I said give me the same car I have now just a different color but like all the same features and it was like$30 more a month.

2:59So I asked the guy when I was checking out of my lease, I'm like, why did I get such a good deal? What's going on here? Because I keep seeing how new cars are so much more expensive and the rates are so much higher. And he basically said, you kind of got lucky. It's the end of the month. They were offering a bunch of rebates and it's just luck of the draw, basically. I don't know if it's luck, but yeah, I mean, I think overall, if you just look at the industry right now, the domestic manufacturers, they're oversupplied, right? They produce too many vehicles. So is that because they're playing catch-up or what?

3:30I don't know the specifics. I mean, there's many factors. It's always supply and demand, right? So you may be producing too much and demand starts falling. But you're in an increasing interest rate environment, right? The average auto loan rate in the country is at like 9.5 % right now. It's the average. That's the highest it's been since the early 2000s. Does that impact leases as well? Of course. Of course. Yeah, it impacts leases in several ways. I mean, number one, leases are made up of like four major pieces in the equation, but one of them is called the money factor, which is pretty much a fancy term for the interest rate.

4:01And so it impacts that. But then the second piece - Hold on. Sorry to cut you off. It wasn't you. It was somebody else who told me, when you go into a dealership, and listen, I don't go into a dealership anymore. I use my broker. But if you do go into a dealership and you want to know that you're not f***ing around the person who's negotiating with you, ask him what the money factor is. And then he'll be like, oh, shit, I can't screw this person over. He knows about the money factor. So what is the money factor? I don't have the technical definition for you. I'm sure the audience can Google it better than me.

4:30Exactly. Exactly. It's so technical. You don't even know it. No, no. But I'll tell you what it is. It's essentially the interest rate. And then they divide it by like, I forget it. I think it's like divided by 365 or something. And you essentially get the interest rate and like - Yeah, it's just the discount rate basically, right? Yeah. And like decimal format. That's what I'm saying. It's dumb. Like everything, it's just like the finance world. I talk about this all the time. And like people make things confusing so that other people just like don't get it, right? Like finance, like all these derivatives and all this crap, right?

4:57You're just trying to get an edge on someone else. But the bottom line is, so yeah, look, interest rates are seriously impacting leases. Leases are down. If we were leasing in 2019, like one out of every three new cars, today it's one out of every five, right? That's a big difference. That's almost, you know, that's, you're talking about almost, you know, just half as much, right? So you've really seen that a massive drop in leasing. But it's also due to that, look, the manufacturers that don't have that much supply, they prefer to sell the car, right? They can sell that car upfront. And so it's also an incentive thing because you get all those upfront economics.

5:36And so leases are just down across the board. And you're seeing that the manufacturers that have supply right now and are doing more rebates and offering sales and discounts are the domestic manufacturers. for Stolanch's GM. Intuitively, you would think, not knowing anything, that given interest rates that people would prefer to lease instead of to buy, to finance it. But you're saying that leases are just as impacted by interest rates as owning, as purchasing? It's tricky because on one hand, the average lease payment versus the average monthly payment, if you compare the two over like since like 2019, leases have gone up.

6:14They've actually increase 10 % more than a normal monthly payment would have a purchase. What drives that? So again, like I said, it's, you know, manufacturers are disincentivized to lease the car. They're more incentivized to sell you the car. And so, you know, you know, the other piece that the other piece that helped me is I had more equity in my used car because used car prices are up. So they're saying that's a big piece of it, too, that the trade in of my old one, the equity was still pretty high. So I it was worth more than what they figured. It's kind of it's kind of dumb because like you do have more equity, but then you're also paying more for another car.

6:45Right. Yeah. Kind of like buying and selling a house right now. Yeah. Yeah. The average used car is up like 45 % since 2019 from like 18, 19 grand to 28 ,000 now. So, I mean, yeah, it's like, it does, it's cool. Like you feel good at the moment. Like, oh yeah, my car, I drove this thing for 50 ,000 miles and it's only worth 5 ,000 less. Right. Then you're like, oh shit, I got to pay$55 ,000 for Toyota Sienna. So the other thing they told me, I asked, I said, so how are you guys normalizing? Again, and this is one dealership in West Michigan, so take it for what it's worth. And they said the biggest difference between now and pre-pandemic is their lot is never going to be full again.

7:19They're like, we're not going back to those days where we have a full lot of cars and you can choose. That's not true. You don't think so? That's not true. Okay. No, who said this, a Ford dealer? This is like the guy signing my lease papers. Was he bald? He just said he thinks that - Was his name Michael? They're not going to fill their lot like they used to and just have all these cars. And maybe that's just a decision that they made to not hold all the inventory. I'm just curious. Because I feel like I still see a lot of empty lots places. Or not empty, but they're not full anymore. Look, I think that's like a utopian perspective.

7:50Like, yeah, like we're not going to have fill up. Look, I'm not saying that lots, fine. I'll give him some benefit of the doubt. I'm not saying lots will be as full as they were, you know, five years ago. Fair. But at the end of the day, it's a free market. And, you know, I think that things will continue normalizing. I think lots will continue to fill up. And again, it might not be like it used to be, but I do think they're going to continue to fill up. And so I don't necessarily buy that like, you know, we're going to this like, you know, very minimal inventory on lots type of gig. Because I just don't think that's the case.

8:21I don't think a free market is going to function that way where, you know, you're going to tell someone, hey, you have to order this car online when my competitor down the street is offering it to me right now. Right, because most people want to see it first, right? Yeah. And look, brand loyalty is at an all-time low. That's a super important point to know, right? Because if I'm at a Ford dealer who only has five cars on this lot and then the GM dealer right next door has 1 ,000 cars, 100 cars, whatever, and I need a car, like I don't want to wait two, three weeks, a month. Who knows how long?

8:48Maybe I'll just go. That's the thing. I had to wait two months to get mine. There you go. So I don't think that's a practical perspective. It's nice. Dealers, a lot of dealers, you know, think that it's like that's the utopian perspective. Yeah, let's get to that point. Like, you know, just in time, you know, you save on floor planning costs. You save paying interest on the inventory, blah, blah, blah. But I don't think it's that practical in an environment like this that's more normalized. So interest rates for – you tweeted that interest rates for used cars are 11%, which is higher than the overall market, which is – Higher than that.

9:19They're actually – average across the country is around 13.5%, 14%. That's an average. If you have not great credit, obviously, it's even worse. So you also tweeted about the percentage of loans that are 60 days delinquent. Now, if you're not paying your car loan, that's like the last thing to go, right? Like you need your car to get from A to B. Are we worried? Are you worried about the implications of higher interest rates impacting people to the point that they can't service their debt and that they're going to have to just give their car back? Hmm. Well, first of all, you know, cars are not floating rates, car loans, right?

9:56So, you know, these are like simple interest loans. I'm not worried that interest is impacting people that currently have vehicles or anything like that. I think if anything, it impacts you, it impacts your daily life in other ways, right? Like just general inflation across the board. You know, you're priced out of, you know, suddenly you can't buy a house, things like that. I think that's where how it actually impacts the, you know, the American consumer. I'm not an economist, but I'm close enough to this info that, you know, I have sort of that kind of pulse. And so anyways, I think that you're going to get squeezed.

10:26People are getting squeezed in other areas of their life, you know, student loan payments being resumed, all these things. And I think then that then impacts your ability to pay your loan on time. And I think that's why we're seeing defaults or delinquencies specifically. I want to say that like 60 plus day delinquencies for asset-backed security loans are like 5 % or so plus minus, which is I think it's the highest since 2009. Now, that's on the public side. I know Cox Automotive also put out some data, and they said that around 20 basis points of all loans are – I don't want to completely quote this because I forget if it was fully delinquent.

11:07But the point is that the benchmark – Is that a high number or low number? So let me bring that all full circle. The benchmark that Cox Automotive put out with respect to repossessions specifically states that we are back to 2019 levels. Okay. Which – yeah, which exactly. It's not like too concerning. So what I've been saying about this is like, look, something to watch. Delinquencies are rising. Repos are clearly rising. We're also, you know, stimmies aren't being thrown around left and right. But I also don't think that we're, you know, it's at a crisis point or anything like that. Yeah. I mean, there's still plenty of money in the market.

11:42You know, unemployment is low. If we see unemployment start to rise, that's when we should start getting concerned. I think you've tweeted this data before, but you can kind of give me a feeling on it. Are people just holding their cars on for longer now? Is like the average holding period of a car just extending now because of all this? Yeah, people are definitely holding the car. I mean, we're at an all-time high. I think it's around like 13 years for the average car specifically. That's an all-time high. You know, it's been a tailwind for service facilities, repair shops. They're booking, you know, record profits.

12:11There was a bit of a dip in July specifically. So it seems like maybe like the summer lull or something. It could also be that people are just opting into going to more independent shops. and you have to remember that, you know, throughout the last three years, we've undersold roughly 8.5 million new cars. And so those are all cars that would otherwise be on the road today and would go be, you know, using their warranty at the new car dealership. And when you don't have a warranty, you might not go to the new car dealership because you're just going to go to a lower cost vendor. And so it's tricky, you know, we've seen this increase in service and then now we're seeing this dip.

12:46But nonetheless, I mean, it's still overall, I'm still very bullish on the whole service side of the business because you got to remember that people don't want to buy a new car. They don't want to lease something for$750 a month that they could have leased for$400 a month a couple of years ago. And they're just trying to kind of extend the lifetime of their current vehicles. So let's talk about how expensive cars are getting. Ben and I spoke about your tweet a couple of weeks ago that some people are paying mortgage payments for fancy cars. And I really, I'm struggling for words because these numbers are so astronomical.

13:18in florida somebody is leasing a 2022 acura nsx it's a three-year lease for 5600 a month a mercedes i said no one brags about an acura and people corrected me on that saying no no it looks like a ferrari great car i mean but like go ahead with these cars it's crazy talk yeah well look i think you'd be surprised so this is actually kind of funny right like those cars those loans actually perform better typically than the lower end because those are people that have money and they can afford it. And those are clearly like just, you know, I saw this data. I was like, what the heck? I was like, this is crazy.

13:50Let me just, I want to tweet about it because it's, it's, it's very, it's aggressive. So, you know, it's, it's obviously a very kind of, you know, strikes out at you, but this is the thing, right? People are still paying crazy, you know, crazy amounts for cars nowadays, right? Like when you, when you look at the average, the average new car today is like around like 50 grand, just a little bit under, right? We have no more cars under$20 ,000, right? You can find cars that are for sale under$20 ,000, but not one transacted in July under$20 ,000. What are the cheapest cars? Is it like a Honda Civic?

14:20Is it kind of that range? Is that the... Yeah, I mean, it would be that class, not Honda Civic to be specific, you know, like maybe like a Chevy or something. But you have to also remember, a Nissan, but remember this, that Mitsubishi, their Mirage, which has been the cheapest car on the market, They just announced they're discontinuing it like a week or two ago. So we are entering an environment where we've been in this environment where, you know, a new car is becoming more and more of a luxury good. And you have no choice but to go used, to go higher mileage, to go a bit older. If you look at the supply on used car dealer lots and you look at just assortment, you see that dealers are carrying older cars with higher miles as a percentage of their total inventory today than they were four years ago.

15:07You just have no choice as a dealer, right? Like there's a lack of supply on the use side. You need cars to sell or else you're not making any money. And so you're going deeper, you're going older, you're going higher mileage. You have no choice. The average, you tweeted this, the average Escalade sold for around 70 grand in 2010. And it's just been a almost straight line up until the right since 02, since you have this data, was 50 in 02, 70 in 10, crossed 90 in 2020, and now it's 115. I mean, it's like a college tuition or something. Like what's going on? I'm sorry, but isn't an Escalade a Suburban with a Cadillac symbol on it?

15:47Come on, right? I think you're going to offend a couple of people with that one. No, look, Escalades are hot. And so all the full-size SUVs are hot, pretty much all of them. I would say, you know, like all the GM full-size SUVs, super hot. Yes, I can't fit into parking lots anymore because these cars are too big now. Yeah, you go to a suburban parking lot, a suburban strip mall, I mean, you see like a Wagoneer next to an Escalade, next to this, next to that. It's true. I actually tweeted that as well like a couple months back. But look, here's the thing. Escalade, all these full-size SUVs are still super in demand.

16:19Like again, people that have money want them. They want the newer ones. And they're still hard to get, believe it or not. Like you're still paying markups on some of these things and you just can't get them you know they're it's it's funny because like where we're seeing the supply kind of crunch is we're seeing it on the high end with these full-size suvs and whatnot and then we're seeing it on the low end um but then kind of in the middle is where you have all these like you know cars and stuff that are you know moving up in day supply specifically i would say like luxury vehicles that are not full-size suvs we're seeing those that are i mean look, I'm just going to make up an example, right?

16:55Throw like, I don't know, like an Audi Q7 or something, right? Like it's not a full-size SUV. It's like a nice to have. It's not a neat to have. Again, I'm not saying an Escalade is a neat to have, but if you're a mom and you have like three kids and you need a big truck and you don't want a minivan, you're going to go for like a Suburban or like a, you know, a Yukon Denali or something like that. So it's a bit of, you know, like the Audi Q7, again, I totally just like, you know, I'm picking on that one because - I have one. That's my wife's car and we're very underwater. That's why I did it. Dude, I just looked this morning because I got a call from my Audi dealership.

17:29Because last time I went, all right, so last time I was going to get rid of - Like a BMW X5. You know what I mean? Like that class. It's like, you know, they're still selling. I'm not saying they're not. Of course they are. But you're just seeing those prices come down a bit faster than the full-size SUVs and stuff like that. So the Audi dealership called me yesterday, coincidentally. He's like, hey, Michael, last time we spoke, it didn't make sense. We have some new deals. I'm like, all right, well, I still have$36 ,000 on this car. and how much is it worth? He's like, yeah, all right, maybe you're screwed.

17:54Well, get back to your affordability stuff. No one wants to drive them, but minivans are still relatively affordable if you're comparing to the big SUVs, correct? Depends what type of minivan. You know, like I said, the Sienna right now, fully loaded, it's going to run you 60K plus minus. Really? That much? Yeah, add-ons, more comps. I would totally get a minivan. My wife won't. Like a Honda Odyssey, can you still get for like 40 probably? I think I mentioned to you, I think I mentioned in the last podcast, We just bought a minivan. So here, right? Let me preface this for a second. So my wife was against it initially.

18:25You know, she was moving from an Audi. I've been a dealer my whole life. I know that minivans are, again, like the Rolex. Like, we love minivans. They sell super quickly. People want them. It's, again, it's a need to have. It's not a want to have. Whenever you're selling a need to have product, it's an easier sell, right? People want it. People need it. They come. You know, it's just easier a car to sell. So we got it. We got the Sienna. We got a Platinum, fully loaded. and it's pretty badass. I mean, I can't believe I'm saying this right now, but Michael's looking at me like, get the hell out of here.

18:54No, I want one. And they're very practical. You know what? But listen, I'm, you know, the quote unquote car dealership guy, all this hoopla. And by the way, I had to order it from across the country. I had to get it shipped. Like it was hard. It wasn't easy to get it. You know, I had dealers that I spoke with. They're like, yeah, I mean, I can't help you. They're all pre-sold. So it was not easy. So I can only imagine for the, you know, everyday consumer how difficult it is to get a new deal. If you had to break down the average, it's hard obviously to come up with the attribution, but how much of the average car price seemingly going to the moon in the last 10 years is because of bigger SUVs and not selling as many sedans?

19:27Because what is it now? Two thirds of all cars are SUVs and trucks. How much is it? How much is the average being pulled up because of that? And how much is it because prices have just really gone higher? I don't know the exact split there, but I can tell you that, look, consumerism, just the taste of the American consumer for an SUV, a bigger vehicle, more well-equipped, more technology, more features, you know, that impacts. It's expensive. You need more chips. You need more of this. You need more of that. And so, you know, we are not selling these base models anymore. No one wants them. And so, yeah, I mean, it's had a massive impact on prices.

19:58I can't quantify that for you exactly how much, but I can tell you that, you know, like I think the number one most requested feature from like moms in the country is CarPlay, Apple CarPlay. Yeah. You know, by the way, like my wife, huge test, like she was like, I want CarPlay. Right. So you You just see it's these features and technology. People want to. So if you did get the base model, percentage-wise, how much could you save if you just said, I just want no bells and whistles. I want it just a straight whatever. Give me it off. You could save, I don't know, 15%, something like that? I think so.

20:28MSRP on a Sienna, I am looking at$46 ,000. So maybe$10 ,000 less than I paid or so after getting all features and stuff. So it's a lot, but it's not like$20 ,000,$25 ,000. It's not that big of a swing. Right. Let's talk about Tesla and electric vehicles. All right. So you said electric vehicle market share has been on a tear since 2020. So this is by a year from 2020 to today. 1.7%, 3.1%, 5.5%, 6.9%. Nice. Is this new sales or cars on the road? This is new sales. Okay. So 7 % of new sales are electric vehicles. You also tweeted for the first time ever, Tesla outsold Toyota in California. But then I also saw a tweet over the weekend that was making the rounds on Twitter showing that at the start of the year, the Model S was$105 ,000.

21:19Then it went to$94 ,000 in January,$89 ,000 in March. It's been coming down, down, down. Today, it's$75 ,000. So again,$105 ,000 to start the year, the Model S. Now, it's$75 ,000. What the hell is going on with these Teslas? I think Elon Musk is either putting on a masterclass or he is, I don't actually, I don't know what he's doing. I have zero idea what he's doing. But here's the thing. Like he's definitely doing stuff that's unprecedented in this industry. Like he is taking goods that are, you know,$100 ,000,$120 ,000,$150 ,000. He's discounting it by like 10, 20, 30 grand with one swing. I think, I don't think many, many companies can't even do that, right?

22:00Elon Musk, he has that autonomy, he has that power to pull off these moves. He's clearly a long-term thinker. His goal is clearly to put cars on the road over short-term profits. So you have to be, you know, you can't underestimate this guy, man. I mean, he's just, he's being very aggressive. And we don't even know the ramifications of this. Like, he just lowered prices the other day. How is that going to impact dealers? You know, I can tell you one thing. Every dealer that had Teslas in their inventory, again, just lost a ton of equity on that. Everyone just took a big L. Just imagine, right?