Wednesday, March 22, 2017

Subprime on Wheels - By Eric Peters

It’s a good time to be a repo man. . . again.
Lots of business picking up used cars people stopped making payments on.
According to S&P Global Ratings and an article in Bloomberg News, defaults on these subprime loans are at their highest water mark since the subprime collapse of 2008 and the “recovery rate” – what the lender ends up recouping of the original debt principle – is a mere 34.8 percent.
It’s a lot of money flushed.
But how is it that cars – all of them, not just the used ones – bleed value this quickly and this much?
It’s because they’re not really worth that much, to begin with.
As distinct from what their price was, to begin with.
New car prices are hugely inflated – mostly because of electronic gadgets that dazzle when new and for which people will pay (that is, finance) top dollar . . . but which get old and lose value quickly.
They don’t get old in a calendar year or wear-and-tear sense but in terms of their “latest thing-ness,” which vanishes like a late April snow shower. Think how quickly your smartphone or computer hags out. Now consider the screens and apps and other such they’re installing in cars.
How useful is a five-year-old GPS system with a non-touchscreen and without the latest version of whatever-the-latest-apps are? It probably doesn’t even have the latest app to version up to.
And how much is a five-year-old laptop worth? It cost $1,200 new.
Today, it’s worth $200.
Cars have become similarly short shelf-life items because they are a bundle of computers and apps and screens as much as they are gears and cams and wheels.
Another problem, beyond almost-immediate technological obsolescence of the gadgets, is that in-car electronics and gadgets have gone from peripheral amusements to embedded in the DNA of every mechanical system in a modern car. And the electronics do not hold up as well over time (the time usually corresponding to the duration of the warranty) as the mechanical parts.
The engine in almost any car built since the ’90s is a marvel of durability with a useful service life three to four times as long as an engine made back in the ’70s. What was once burning oil and knocking rod bearings by 75,000 miles is today hardly even broken in.
But the electronics that are critical to the operation of the engine won’t last that long.
Eric Peters [send him mail] is an automotive columnist and author of Automotive Atrocities and Road Hogs (2011). Visit his website