Cars and houses: The borrowing bubble

If you think some homebuyers have been taking weird financial risks lately, take a good look at the way Americans are financing their cars these days. Ken Bensinger's insightful piece in today's LATimes explains that car "buyers" (are they really even buying the car?) are increasingly rolling over previous car loans into new car loans. The result: bigger and bigger vehicle loans, often for way more money than the new vehicle is worth.

Example: Cindy Gerhardt, the Oklahoma secretary pictured at right, "has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000."

Who needs to buy five vehicles in three years? But I digress.

The potential consequences mirror the mortgage meltdown: at some point (it's already happening) defaults on auto loans start to rise. The underlying value of auto loans repackaged as securities drops, and the owners of those loans take losses, and at some point credit tightens, which hurts auto sales, which hurts the overall economy. Not a pretty picture.

And not a picture that lends itself to sound policy solutions. Show me a politician of any stripe who will say to Americans: you can't really afford that new SUV. You can't really afford that new house. You need to manage your credit more carefully.

Your thoughts? Comments? Insights? Email story tips to peter.viles@latimes.com.
Photo Credit: LATimes

Comments

[RichW]

"Who needs to buy five vehicles in three years? But I digress."

Touche' !

To this day I still have a 1996 Lexus (among other vehicles). Turned 100,000 miles this year and still looks & runs as good as the day it was new. So I wonder what the malfunction is with the people in the story ? Do they chronically buy crappy cars and trash them ? Or is their self-esteem so low that they feel a need to own new cars as a form of "showing off" to others ? Seems a nice car can last me 12 years. Heck maybe I should sell it to them !

[E.]

Haven't any of these people heard of leasing? Sheesh.

[tew]

This reminds me of an old friend's favorite saying "You can live in your car, but you can't drive a house." (And he said that *before* people took to driving cars the size of small houses.)

So in some perverse way people have treated their cars like houses. Now they can't afford to drive them.

So if you can't afford to drive your car or live in your house, what do you do? Get rid of the house and save money by living in your car! Ah, the wisdom of that old saying comes 'round.

[Lionel]

I think car financing primed the pump for the housing fiasco. People became accustomed to "buying" cars they could not ordinarily afford, and they applied this twisted scheme to home buying. I lived in a small apartment building where people drove Lexuses, high-end BMWs, Mercedes, etc. There was a fellow who was a roofer who drove a brand new truck for work, a 7-series BMW, and bought his girlfriend a Lexus (He might have supplemented his income through pot sales, but still...). I couldn't figure out why I was the only one driving a Corolla. Soon thereafter I couldn't understand why I was the only one not buying a house. Last I saw of the roofer he was heading to Northridge to buy a "cheap" $500K house.

[Martin]

This is part of a bigger picture than whether or not people need to indulge their self-image by frequently buying new cars. The greater reality is those car fanciers are not soley victims of a state mind. We are, indeed, frequently judged by others for the type of car we drive. If we drive an older model, it is presumed we are less successful.

I have never had a monthly car payment to support. I pay cash for older-than-new (sic: nearly new) cars. I must have failed somewhere along the line. But I just don't remember when.

[Uncle Billy]

The Triple Whammy, Trifecta, 3 pillars of mammon: Houses, cars, and credit cards. At least the cars and houses are partially secured by something. Credit cards are secured by air. Let's bundle the works into debt packages and sell it on the Hang Seng. Before they figure out what hit them, they'll own homes worth 1/10th of their former values, cars with a future value of zero, and.... air. C'mon let's con the rest of the world intstead of ourselves.

[doubledogdare]

I think Lionel makes a good point on how car financing primed the pump for the housing fiasco. Car financing (purchase and leasing) was what got consumers used to thinking in terms of monthly payments rather than the actual size of the debt that had to be repaid.

[xtine]

Here's what my momma told me:
--Never, never, EVER pay interest on an asset that is guaranteed to depreciate in value.

So I blame these people's mothers.

Wasn't that easy? Good thing I just solved the world's financial problems ;)

[Hula Girl]

My former tenants drove fabulous cars: Mercedes 500 SL Convertible,new Suburban, and a flashy BMW...And, they were late paying the rent. I don't know where they went. They're either living in their cars or a $500k gate guarded McMansion in Fontana with a 2/28 mortgage..

[Cal]

Look at the people in the picture, they have this "What do you mean I have to pay for it" look on their faces.

Securitzation is turning out to be a pretty bad idea, the fact that there is so many bad ideas piled on top of this one bad idea (CDOs, using short term debt to finance long term debt, etc) has magnified the boom and the bust.

I dont think securitization is going away but credit is clearly contracting and history doesnt deal with credit contraction very well.

[brettdl]

Thanks for the story, Peter. I knew people were taking equity out of their homes to buy cars, but I didn't know they were doing something THAT dumb.

You know, when the housing market started to crash, a lot of analysts said, "Well, the problem is with subprime. America's economy would be fine, otherwise."

But I disagree. The problem has to do with America's attitudes toward credit and wealth. Americans across all walks of the economy were engaging in a cycle of greed by exploiting employees (think pay and benefits), exploiting markets (think mortgage securities and debt) and plundering personal net worth to buy boats, cars and stainless steel appliances.

It was never a matter of IF there would be a collapse. Just a matter of when. Carrying debt from car to car is just a symptom of the overall malaise that Americans are going to have to dig themselves out of for years to come.

[Jennifer]

This was an interesting article; glad you highlighted it. It 2003, I was two years out of college and moving back to LA from New York. No car, not a lot of money. So, I purchased a used car and financed the $4-5K. Six months later, the car was totally kaput. I had to pay $15K for my $10K (new) Hyundai. It irked me to no end, seeing that money just wash down the drain. And within a year, I was being telephoned/mailed offers to refinance the Hyundai to take out "equity"! I didn't bite, but I wonder if someone less debt-savvy would have fallen for it. I think borrowers and lenders are both culpable in these situations. Truth is, not everyone is well-educated about financial matters. And when Wells Fargo says you have equity in your car, you might believe it.

By the way, four years later, my balance is back to the original price of the used car.

[Teresa]

I've had arguments with people regarding the foolishness of car loans. IMO, about the worst thing you can finance is a car. You're better off taking the $400.00 to $500.00 a month you'd blow on a car loan, put it in the bank, then use it to pay in cash for a car that's no more than five years old and has low mileage (they're not difficult to find, since idiots like the ones in that article trade them in so often because theyyyyyyyyyyy want something newwwwwwwwwwwwwww).

I just can't wrap my mind around the idea that a brand-new car is worth literally thousands of dollars less the moment I drive it off the lot, that if the car were hit or stolen, the insurance company would not pay me enough to pay off the loan I just took out on it. But, according to people who believe in car loans, that's NO PROBLEM, because "they'll just roll that balance into your next loan!"

What astounds me is that so few people see what's wrong with that. They act as though the balance just GOES AWAY because it was rolled into a new loan.

[Trudy Self]

Have you watched any of the end of year car ads this past week? They basically promise to finance anyone with a pulse-- you too can drive out of the lot with a new car-no money down- no payments until Spring, etc. Sound familar. For those who now recognize they cannot buy a house-- Buy a car-- same terms apply.

[MyLessThanPrimeBeef]

You can buy a war the same way.

No money? No problemo. Go ahead, make my day, send in the soldiers. Congress will roll over the debt anyway.

"As above, so below,' the Masonic/Hermetic axiom, which coincidentally, or maybe not, was applied in the building of the Egyptian pyramids, yes, you heard right, pyramids (solid and concrete like stone pyramids or abstract and flimsy like financial pyramids) - that's what we have here in this country, all the way from the not-so-prime top to the very sub-prime bottom, whether it be home mortgage, Wall Street accounting, cattle-futures trading, law-firm billing records, WMD, new taxes or the defintion of what 'is' is.

It all starts from the top.

[Dr. JwB]

Teresa-

It seems you have combined two different arguments, one is right and one is not quite right:

Yes, a new car loses values when you sign the papers. If you buy a new car, you are paying thousands for the new car smell (and a known maintenance record, etc). New vs used is one issue. But . . .

No, you are not always better off putting your money in the bank and paying cash for a car. My investments last year made more than triple the highest bank interest rate (and more than 4x the rate on my car loan). So the extra money I invested was better spent on stocks than on the down payment.

Did I get lucky in the market? Yes. But if long term stock yields approach 7% (correct me if I am wrong), then a car loan at 4% is generally money well-borrowed.

But for the average person who is not careful with their money . . . then you are right on both points - If you don't invest your money, you are always better off having it in the bank than spending it.

[Leavin' LA]

brettdl: this isn't new -- it's been going on for years. I had dealers in the early '80s offer to roll over my old car loan into a new one. Car dealers advertise this all the time, and even explain it in the fine print.

[brettdl]

Leavin' LA: I had no idea. I don't think I've ever received such an offer and I'm oblivious to most advertising.

[Maggie Knowles]

I would never make a $20K+ commitment for the cars that are manufactured today. I am disappointed that my country can't get behind better car designs and manufacture something more cutting edge. The technology is out there. For example:

http://usinfo.state.gov/journals/ites/0706/ijee/lovins.htm

"...an uncompromised mid-size SUV designed in 2000, equipped with the most popular efficiency-doubling hybrid-electric drive system, could carry five adults in comfort and up to two cubic meters of cargo, haul a half-ton up a 44 percent grade, accelerate from 0 to 100 kilometers per hour in 7.2 seconds, be safer than a steel SUV even if it hits one, yet use less than a third the normal amount of gasoline, getting about 3.56 liters per hundred kilometers, or 67 miles per U.S. gallon."

Now THAT's something I could commit to.

[Enlightenment]

Lots of fools in California buy fancy things they can't afford to make themselves look rich. I laugh all the time at those wanna-be's but instead they will never-be rich because they spend it all. A new car is nice...but not as nice as driving around a car that is paid-off and having lots of spare cash after I get paid.

[Leavin' LA]

brettdl: You're probably better off 8-)

Happy New Year, everybody!

[RichW]

"Congress will roll over the debt anyway." "It all starts from the top."

How true. Congress sets a poor example. Think about it folks, are your elected officials looking out for you when they continually run up deficits ? (For you partisan squawkers, this is a congressional issue, not a presidential issue, so the usual Bush/Clinton arguments don't apply here).

It says something for the average voter I.Q. when these politicians continually get re-elected. Perhaps the financial dumbing-down of the electorate fits right into their agenda...

[Susan]

"Lots of fools in California buy fancy things they can't afford"

Isn't the woman featured in Peter's post from *Oklahoma*?!