The California bubble, bigger than the other ones

Morning bloviation: Most reporting on the American economy is based on national statistics, giving the impression that all 300 million of us are in the same boat, rising or falling together at roughly the same time. Of course we all know that's not true -- there are big differences between regional economies. 

Which brings me to a story from the New York Times earlier this week on the effect of the weak housing market on car sales. Here's what grabbed me: "In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research."

Look at the chart put together by CNW measuring percentage of new-car purchases in 2007 that were made with home equity loans:

1) California  29.8%
2) Florida      19.7%
3) Illinois      14.7%

National average: 11.8%

Think about that for a second: Californians were nearly three times as likely as the rest of the country to use their homes as ATMs during the bubble (at least for buying autos). You know that stereotype of the equity-rich homeowner who borrows against his or her equity and splurges on a new car, a vacation, etc.? That stereotypical homeowner is a California homeowner. Why did Californians behave differently? Because theirs was a bigger housing bubble. They had more equity to borrow against. Their housing ATM had a higher withdrawal limit.

Does this mean that the fallout from the housing crash will be worse here? I'm guessing it does. The way I read the chart above is that California car dealers have just lost a lot more of their sales than car dealers in Chicago. Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: L.A. Times

Comments

[MyLessThanPrimeBeef]

I hope soon I can tap the value of my car to finance the purchase of a house.

Don't laugh. It can happen.

[cass]

Pigs get fat, hogs get slaughtered.

[MarkW]

I recently bought a new Honda Odyssey. I was shocked by the lack of customers at the different dealerships I went to. I visited four different places and in two of them I was the only customer. In the other two, there was one other customer. And, this was on Friday nights.

[Keith]

Let's not discount the quality of Californians when we consider factors like this. Nowhere else in the country do you see the parking lots of decrepit apartment complexes filled with Mercedes and BMWs. Pure vanity, and no brains.

This is a state that has been populated by people whose only thing in common is they they can't stand uncomfortable weather. The education system in LA is the worst in the industrialized world. It's not surprising that there are lots of clueless vain people here who can't do math, and make really dumb decisions on many levels.

It seems obvious that the places with the biggest bubbles are the places with the dumbest people, because this bubble started becoming obvious in 2003 to anyone able to do some math.

[Jackie Romulo]

@puckhead - i know it because i've seen the high end cars parked in their driveways. The driveways in a suburbian, middle class neighborhood otherwise filled with kias and toyotas and hondas. The driveways that now have a "For Sale" sign on the front lawn with a sign that says "Bank Owned".

[puckhead]

OK, this BMW bashing has got to stop. I’m on my 3rd BMW and I can honestly say they make THE best cars for the money. Lexus, MB and Infiniti do not even compare to BMW. I love cars and the first time I drove one, I was hooked. And no, I did not tap into my HELOC to buy them and I can easily afford them.

BMW also has great lease deals. You can lease a 328 with $3379 down and $429/month for 36 months. That works out to be $523/month for the life of the lease and that’s not much more than what it’ll cost for a Accord and Camry and you get a much nicer car. Plus, BMW has free maintenance for the first 4 years.

Hey, all of us spend money on little luxuries. I like nice cars and expensive mountain bikes but I shop at Target, Old Navy and Costco and clip coupons. Go figure.

[TakeFive]

Puckhead wrote:

“Maybe I’m missing something, but is it that big of a deal to tap into a HELOC to buy a car?”

When you get a conventional car loan and can’t make the payments, they repo your car. With a HELOC, they repo your house.

There’s probably a few families are now renting because mom and dad thought it would be cool to have a Hummer with dual flatscreens. I bet a simple auto repo would be looking pretty good to them right now.

[Ragnar]

It's tough keeping up with your neighbor if you always percieve that your neighbor has more than you. However, out of the millions of people in the LA area there are plenty of people making intelligent financial decisions, including purchasing sensible cars. However, it's more difficult to notice the sensible cars when the flashy ones command so much more of our attention. Be one of the sensible people and do what is best and responsible for you and your family. I can understand the appeal of driving an extra nice car if I spend 2+ hours commuting to/from work each day. However, people need some financial goals and contrary to what many think, a new car is never an asset; a new car is always a liability due to depreciation, because it is always worth less with each passing day.

Thanks for the HELOC / car purchase tidbit, Peter. I get the impression that you actually pay attention to your readers, and for that I thank you.

[LA Land Fan]

I'm with Keith. It's just not homeowners tapping equity to buy overpriced inefficient showy cars. Driving through the less prime areas of LA, I aways see bmws and escalades with obnoxious rims in front of crappy apartments. But then again in my nice-ish area, my neighbors rather upgrade their luxury cars then move into a house. Not that it's a good time to buy a house or anything. I guess people who were lucky to own/rent before 2000 are enjoying the equity/rent control. And it LA, it means having a car that says "look at me".

[Inland Empire]

How many Benzes, BMWs, Caddies, Hummers, Jags etc do you see these days in comparison to what you saw ten years ago? Ditto SUVS, humugous trucks etc?
Also things like ATVs, ski boats, RVs, cruises, orthodontia, boob jobs and nose jobs (how many born-that-way ugly duckling people do you see here?). Hell yes they have been pulling money out of non essentials.

[Dan]

I wonder about the sanity of a person who uses a 30 year refi to buy something that will be essentially worthless in 7-8 years.

[tealeaf]

puckhead, I'm with you.

like any good hobby, there is no defending the financial sense of buying/leasing a car. it is absolutely crazy, but I cannot help myself - i need to have the latest. I want to enjoy my ride to and from work, and cruise on weekends to SM, Ventura or SB.

if you're going to be an idiot, like me, and change cars every few years - leasing is the way to go - mainly because of the pay-tax-as-you-go setup.

and if you're going to lease, you may as well lease something nice and enjoy it.

the deals out there are unreal. i just picked up an audi convertible for $500 per month (incl tax), nothing down, 12k miles, 36mo, and they made the first payment. the apr on the lease was 1.9% (converted money factor) and the adj cap cost was $1500 under invoice. I just couldn't say no. Did you know it's only $7 more per month for all maintenance included?

All that being said... "an automobile is a car, not an investment." And it is all but guaranteed to lose money.

keep your cloth camry... let the rest of us enjoy the ride!

[Fourth Generation]

There is lot of noisy that californians buying expensive cars, more cars, etc. Now how many of those "californians" are native or third, fourth or more generation californians. See my moniker, in my family nobody was buying expensive cars or using equity for such silly thing. Most of those buying the cars are transplants that as usual come here and be more obnoxious and loud than everybody else.

[dd]

puckhead: "Maybe I’m missing something, but is it that big of a deal to tap into a HELOC to buy a car?"

People using a HELOC (or worse, a cash-out refi) to buy a car are typically going to wind up paying the loan off over a much longer period of time than if they used an auto loan. Auto loans are usually 5 or 6 years max. HELOCs can be 15 years or longer. Sure, they could pay it off sooner, but will they? That means they're paying many more years of interest on a depreciating asset.

A $30K loan at 6% interest for 5 years would amount to total payments of $34,798 over the life of the loan.

A $30K loan at 6% interest paid off over 15 years would amount to total payments of $45,568. That's almost $11K more for the same car.

The car would probably be long gone before it was ever paid for.

[tealeaf]

How many Benzes, BMWs, Caddies, Hummers, Jags etc do you see these days in comparison to what you saw ten years ago? Ditto SUVS, humugous trucks etc?
Also things like ATVs, ski boats, RVs, cruises, orthodontia, boob jobs and nose jobs (how many born-that-way ugly duckling people do you see here?). Hell yes they have been pulling money out of non essentials.

Posted by: Inland Empire | May 29, 2008 at 11:47 AM

Growing up in the IE and visiting my parents, I will tell you that toys and toy haulers are not the norm as you progress west. Unless you're on the coast and have a boat, most folks on this side of the 57 play with their friends' toys.

[Rich]

" how many of those "californians" are native or third, fourth or more generation californians...in my family nobody was buying expensive cars or using equity for such silly thing. Most of those buying the cars are transplants that as usual come here and be more obnoxious and loud than everybody else"

Okay, but didn't the modern "California" get started when a bunch of "obnoxious and loud" guys from New Jersey drove into town around 1911 with their girl friends and started up the movie industry? In your case it sounds like the "transplants" have been "natives" longer than some of you "natives" have...

[firesale]

PUCKHEAD wrote:
"The rates from HELOC’s were really low and you can deduct the interest (for auto purchases)."

How do you deduct the interest? It's not an
improvement for the home?

Actually, I'm not so naive. I just hope the IRS
is reading this blog and hiring the thousands
of new workers it needs to police HELOC
expenditures over the past 3 years. There's
a national fortune to be collected here from
California's bubblehead, egocentric, population
who cheated on their taxes for consumer items.

The home equity squeeze isn't sufficient
punishment for the scum who brought us this
mess. They need to go through the IRS for a
good second pressing!

[bobsuruncle]

Doesn't help when the president of the US tells you to go buy a house and to go shopping.

[Inland Empire]

"an automobile is a car, not an investment."

Sometimes. I suggest you go to www.kbb.com
and look up what you can get for a 1987
Buick GNX (or even a run of the mill GN).

[tealeaf]

IE:

Can you name one car manufactured today that will be so lucky as a GNX?

Me neither.

[Jackie Romulo]

Just for the record, I'm not against splurging from time to time if it makes sense for you and the financial situation you are in.

As for the the readers of this blog that keep defending themselves because they buy nice cars, I don't think you should have to defend yourselves for doing so. Why? Because if you are a reader of this blog then you already have at least a "one-up" over those who don't read this blog and buy the nice cars.

[DSL]

I have to meet this guy Puckhead. Eerily similar stats. Lives right near me and like me on his 3rd BMW. Bought my first one when I was 20 and haven't looked back. Best cars for the money and very little repair/maintenance expense. Like Puck have never needed to tap home equity to buy a car. Just seems silly for $400/month...

[Ace]

puckhead 'BMW also has great lease deals. You can lease a 328 with $3379 down and $429/month for 36 months. That works out to be $523/month for the life of the lease'

Come on. There is no such thing as a 'great lease deal'. Leases are still for people who cannot think more than one month down the road and cannot operate a calculator. Leasing is really fun if you like to rent depreciation.

You could buy the same BMW used for $25k and drive it for 5 years. It will still be worth $10k when you are done with it. Therefore, you can drive it for 5 years for only $15k (or $250 per month). Sure you don't get that new car smell... but you can buy a lot of new car perfume for $250 per month.

[Ace]

tealeaf 'the deals out there are unreal. i just picked up an audi convertible for $500 per month (incl tax), nothing down, 12k miles, 36mo, and they made the first payment. the apr on the lease was 1.9% (converted money factor) and the adj cap cost was $1500 under invoice. I just couldn't say no. Did you know it's only $7 more per month for all maintenance included?'

You better leave that car parked in the garage and just look at it. If you are allowed 12k in miles per year, you are still spending 50 cents in lease payments for every mile you drive plus 21 cents in gas. And I am sure the auto insurance is a great deal.

I know so many suckers who lease a car because they get a car allowance or mileage reimbursement from work. They spent 80 cents a mile to dive a car and then get reimbursed 50 cents.

[tealeaf]

Ace, if the lease deal is right, you *ONLY* pay for depreciation. And better still: you only pay for the tax of the used portion. And you know the residual value up front, not some WAG as you did.

better still: with swapalease.com and leasetrader.com, you can get out of your lease with very little out of pocket, rather than taking it in the shorts or dealing with a pp sale.

the only reason to own a car is if you buy it used and plan to stay in it at least 7 years. beyond that, the tax, maintenance, and trade-in is pretty much a wash with a lease.