As the auto industry faces some of the harshest effects of the Federal Reserve’s rising interest rates to battle inflation, Tesla CEO Elon Musk and others are warning the public about the potential for a major financial crisis in the auto industry.
Above: A nearly empty car lot. (Image: Iewek Gnos / Unsplash)
@Musk tweeted that a delicate situation with auto loans could “potentially” become “the biggest financial crisis ever,” as detailed in a report from The Street. The warning came in response to a retweet of a post from Twitter account @CarDealershipGuy, a highly followed and well informed account claiming to be an anonymous car dealer group CEO.
CarDealershipGuy posted about monetary concerns following the Fed’s recent round of rising interest rates, which they say could create “the perfect storm” for consumers, dealers and lenders.
“This morning I discovered something *extremely* alarming happening in the car market, specifically in auto lending,” CarDealershipGuy said in a tweet. “I'm now convinced that there is a massive wave of car repossessions coming in 2023."
Be sure to click on the tweet and check out the entire thread, it's worth it.
The account went on to explain this wave of repossessions, saying that many people who took out large loans on vehicles in 2020 and 2021 are now facing significantly declining value on their purchase. When trying to trade vehicles in, dealerships will be forced to decline due to the consumer owing more than the value of the car.
As a result, CarDealershipGuy says the “only way” for lenders to finance vehicles and help dealers get cars in the hands of consumers is to waive the open auto stipulations on loans — effectively letting buyers take out an additional loan while a first loan is still in progress, creating a high risk of default.
The take even got the thumbs up from @Musk, who called it a “good prediction,” in response to the thread, before sharing the above warning of his own.
Experts have noted the Fed’s monetary policy increasing the cost of car loans, just as inflation reaches its highest point in the last 40 years. Consumers are likely to become more hesitant to take out loans, according to Edmunds.
"Interest rates for new and used vehicles are skyrocketing," said Edmunds research analysts.
Edmunds executive director of insights Jessica Caldwell echoed some of Wood’s concerns, noting that the current market doesn’t allow for some of the benefits available to buyers decades ago — instead, the emerging EV market hasn’t quite solved the affordability question yet.
"The last time interest rates were this high, consumers could at least rely on lower vehicle prices and a greater range of inventory to soften the blow," Caldwell said. "That simply isn’t the case in this market.”