fall car prices are coming, according to ARK Invest’s Cathy Wood. That may be welcomed by car buyers, but falling prices could mean the Federal Reserve is pushing too hard against inflation, creating a new risk for investors: a Fed policy lapse.
Car prices contributed to 40-year high inflation in the US. New and used car prices have jumped about 17% so far this year compared to 2021.
Higher prices are a big reason for this
(ticker: TSLA) and
(F), along with dealers like
(LAD), see better profit margins in 2022 compared to 2021.
But the Federal Reserve is raising interest rates to try to stifle inflation. If successful, new and used car prices could fall. A car deal doesn’t sound like a bad thing, but there are other side effects of rising rates and falling prices to consider.
For example, there are loans to consider. “If auto residual values deteriorate accordingly, $1+ trillion in US auto debt will be in jeopardy,” Wood tweeted Monday, pointing out that borrowers continued to make car payments during the 2008/2009 financial crisis. Mr.
“This time, thanks to ride-hailing services and recent cheaper autonomous taxis, people are unlikely to prioritize car debt payments over mortgage payments, which could turn backward-looking quantitative models upside down.” Wood added. There is nearly $1.5 trillion in outstanding auto debt in the U.S., according to the Federal Reserve.
Most cars are bought with financing. Residual values—essentially what a car will sell for when coming off a lease or in a repo situation—are critical estimates for lenders. If residual value estimates are wrong, it can mean big losses for creditors.
Equity in the U.S. banking industry is roughly $2.5 trillion, more than 10 percent of total assets, according to the Federal Deposit Insurance Corporation. Auto lending does not appear to pose an existential problem for the US economy. Still, credit losses will be something to watch for on upcoming conference calls at auto companies and lenders like
A financial ally
Some industry profits may be at risk from falling prices. Currently, residual values are a boon to lenders.
( GM )’s financial unit, for example, has averaged roughly $1 billion in quarterly operating profit since the pandemic hit. That’s up from about $500 million per quarter in the years leading up to Covid-19.
Wood, for her part, seems most concerned that the Federal Reserve may be looking at the wrong data on inflation — and that inflation may soon fall on its own as innovations — like robot cashiers — lead to lower transportation costs. ARK did not immediately respond to a request for comment on Wood’s tweets.
The risk of a Fed misstep, of course, is that the agency slows the economy unnecessarily, adding pressure on American households.
Falling car prices also have their upside and can lead to an improvement in car demand. The US industry sells cars at an annual rate of about 13 million units. High prices are part of the reason, but so are supply chain issues.
Automakers failed to make all the cars they planned because of things like a shortage of semiconductors as well as production issues related to Covid. 16 million or 17 million units is more normal for the country.
Lower prices also mean better deals. US used car prices peaked in January. They are down almost 11% since then. Still, they’re up nearly 50% from just before the pandemic.
This statistic probably comes as no surprise to anyone who has recently been looking for a car.
Write to Al Root at [email protected]