3 Signs A Car Market Crash Is Inevitable Hi, I'm Kevin Hunter, the homework guy here today with the amazing Elizabeth, the homework gal. Here at THG, we are finally seeing some light at the end of the tunnel when it comes to car pricing. That's the good news. Car sales are still needed, but reports everywhere indicate that car sales have been rapidly declining in both the new and used markets. But car sales are declining for several reasons. Wide spread consumer concerns about inflation, including higher food, gas and vehicle prices, and try building anything. I put up a fence and closed your fur chickens, and I was stunned to see that the wire was more than 50% higher than just a year ago. That in a generally floundering US economy and all of this likely played a role in the last quarter sales decline, which included an expected drop of around 24% in March. Car buyers are getting smarter out there and exercising some patience. You betcha, well this past month of May we had fewer selling days in April, experts don't know that the daily selling rate was basically flat with April, but that is a much of a consolation as May is typically a month when automakers see a sales bump, and there was no magical sales bump this year. No bump, you poor dealers. A few key points to consider, the pandemic caused use car prices to spike to 28,000, a 42% increase in the past two years. The unsustainable spike has created a used car financial bubble and it absolutely has to pop. It has to pop. With chip manufacturers currently catching up with demand and the Fed raising interest rates twice now, experts are forecasting that used car prices may crash by 30% in the near future. The crash isn't here yet, but 30%, that's a crash worth waiting for. The pandemic created an unprecedented and unsustainable bubble where used car prices rose by 42% since December 2019. Like all bubbles, it is inevitable that prices will come crashing down. Here are more details on each of the three signs while the used car market crashes underway. Number one, an unprecedented and unsustainable price increase when the pandemic hit automakers expected car demand to plummet as a result they reduced output and chip manufacturers followed suit, but that didn't happen. Other than just initially, despite the shortage of new cars, consumers began to use their stimulus checks, a very unintelligent and foolish move and took advantage of low interest rates to purchase used cars instead, driving up prices four times faster on used cars than new cars. Right. And the perfect storm of supply and demand created a temporary and unsustainable spike in used car prices. As the car market stabilizes, consumers can expect to see used car prices drop down to more normal levels. As I say that, we fully acknowledge that prices are unlikely to dip to a level in line with the 2019 car market, wishing for that is what we call pie in the sky. And number two, chip manufacturers are catching up with demand. According to Goldman Sachs and other industry experts, chip manufacturers are currently slowly catching up with demand. Out of production is expected return to normal by late 2022. Once automakers get the chips they need to produce a normal supply of new cars, new car inventory will begin to stabilize. But with the vehicle shortage being what it is, it will take a little time for the full effect to be felt by new car buyers. And millions of consumers that were forced to buy used cars may go back to purchasing new cars again. In addition, supply chain issues due to the pandemic are beginning to clear up, helping expand auto product capacity. This will result in a decrease in demand for used cars. As a result, JD Power is forecasting that used vehicle prices will drop by late 2022 and into 2023. Number three, interest rate hikes. The Federal Reserve has raised interest rates twice in the effort to help combat inflation. Experts say the increase in interest rates could result in the automotive industry losing 22 billion with a B dollars in sales. Well that could happen because car sales have always been extremely sensitive to interest rate changes. Higher interest rates make it more expensive to borrow money reducing demand for used cars. As a result, consumers may purchase 150,000 fewer new cars and 500,000 fewer used cars. Watch out, Carmax. So how about some considerations on how to prepare for the crash? If you have the luxury to wait to buy a car you should hold out until prices fall. Expect that to be late 2022 or early 2023. According to Edmunds 8 out of 10 car buyers paid above sticker price for a new car. There are close to 17 million car owners driving vastly over price vehicles. More than half of these cars are financed, potentially resulting in many car owners with car loans that will be underwater. And report show that loan defaults and repossessions are on the rise. Ooh, not good news you guys. We always recommend that your first homework step is to determine your budget when looking to buy your next car. Then take a look at your personal finances and make any necessary adjustments. Shop around for the best deal and expand your search. By widening the type of car you want and the geographic area it can be found in, you may get a better deal. You may also be able to leverage your current car as a potential trade-in. If you do well on your trade this can help offset those high costs. The automotive industry suffered a series of unexpected events that resulted in a supply and demand imbalance that was unprecedented. This caused the average used car in America to rise to 28,000 to 05, 28% higher than one year prior and 42% higher than two years prior. With the supply imbalance returning to normal and the added interest rate hikes, consumers should expect to see used car prices coming back down to planet earth sometime in late 2022 or early 2023. But used cars aren't the only concern. There's also a slump in new car sales and that has the prospects of US recession being the topic of conversation. In fact, slumping US new car sales in May with continued high prices and low inventories have some analysts worried these lower than expected results could be a forecast of a broader economic downturn. Anyone who hasn't been living under a rock should be keenly aware of the coming financial chaos. Some of you have wondered why we have always said buy your cars with cash as much as possible to avoid being financially buried in a car loan. Nobody but a fool runs their budget based on monthly payments. And then some of you are or will be learning the hard way unfortunately. Sales of new cars last month fell to 12.8 million vehicles at a seasonally adjusted annualized rate representing an 11% drop from April. That is the lowest level since December and reflects shrunken inventories amid a persistent shortage of semiconductors and still near record high vehicle prices. With increasing worries about macro economic headwinds, two industry analysts registered concern the downbeat data could be a taste of tougher times to come even as automakers expect a recovery as supply chain woes ease up. The market appears increasingly concerned about the economy, inflation, rising interest rates and recession said Joseph Spack an analyst at RBC capital markets in a research note to clients published recently. Well Spack said there are no signs of demand destruction in the latest data. A recession would likely keep new monthly car sales in the low 12 million range, not far off from the rate seen in May. He lowered his demand forecast for the year to 14.7 million from his original forecast of 15.2 million. If you learned something today and you'd like to say thanks for a video with a tip, the links appearing on the screen now will be easy to find down below. And if you enjoyed this video, we'd appreciate you giving us a great big thumbs up and please always remember to comment and share with family and friends. And if you're not already on board with us, don't forget to subscribe. The entire homework I team is here to represent you the car buyer and that's exactly what we strive to do in every video we produce. The bottom line of today's video for anyone car shopping from here on out, it's time to go full tilt on negotiations. Make sure you see our most recent video. Thanks everyone for coming back. We'll see you on our next video. You guys rock. I'm Kevin Hunter the Homer guy signing out with amazing Elizabeth the Homer gal. We gotta go.