Skip to main content

Time to Equity


Time to Equity


By Daniel Ruiz

My approach to analysis consists of starting with a specific sector of the auto industry then peeling back one layer at a time until I truly understand how it works. More often than not, I find used vehicle values staring back at me by the time I get to the core of various sectors. This is why I’ve said many times that used vehicle values are the foundation for the entire auto industry. I’ve devoted a lot of time and effort in the search for data to support this theory. I knew that if successful, I could use that data to better understand the cyclical nature of the industry and to more accurately predict future performance. I now feel very confident that I’ve found what I was searching for. I’ll start with a quick recap for those that are unfamiliar with my work.

Why Used Vehicle Values?

I believe that only jobs and credit are more important than used vehicle to the health of the automotive industry. I say this because 86% of new-vehicle sales are financed, and under normal conditions, those vehicles are traded within three years.

Knowing that most car loans have a 60-72 month duration, we can assume that the majority of vehicles traded at the 3-year mark are not paid off. The level of equity in these loans directly affects consumer behavior and in large part determines when the vehicle will be traded for another new vehicle. The frequency, with which this very large group of consumers replaces their vehicles has a direct impact on new-vehicle sales velocity.

The Search For Evidence

I thought to myself, the theory sounds good, it makes sense, I’ve seen it in action many times throughout my career in retail automotive sales, but is there any evidence out there to support it? To find this evidence, I knew that I would have to figure out a way to measure equity on new vehicle loans at the 3-year mark. So how do I do that? Well, I started by constructing loans using average new vehicle transaction prices, average interest rates and average loan terms for each year going far back as I could. I then took that information and plugged it into an amortization calculator. But there was one still one missing piece, the average value of 3-year-old used vehicles (Luckily I know someone who’s a bit of an expert on that subject). After many hours of research and brainstorming, I developed a formula that very accurately measures the historical value of 3-year-old vehicles. I then went back to the amortization chart, compared the principal balance owed at 36 months to the average value of a 3-year-old vehicle for each calendar year and PRESTO! I had my answer to the equity question. From that point, a little further analysis was necessary to find the month in which the value of the vehicle exceeded the principal balance owed on the loans. The end result is what I will refer to from now on as time to equity.

Does Time To Equity Impact The Performance Of Auto Loans?

While discussing my theory about used vehicle values and how they affect the health of the auto industry, I couldn’t help but notice the growing concerns about subprime auto loan delinquencies. I began to wonder if the value of the asset which backs the loans might have something to do with it. So I decided to compare subprime delinquencies at auto finance companies to my time to equity calculations. The results were encouraging to say the least.



As a general rule, the longer the loan, the higher the risk of default, since the ability of the borrower to repay the is more likely to change. However, when one takes into consideration that few auto loans are held till maturity, I think it’s fair to say that time to equity is more relevant to risk than than the length of the loan. So what’s most capable of changing how long a loan reaches equity? You guessed it, used vehicle values.

Aside from credit worthiness and employment status, auto lenders rely mostly on LTV ratios and maturity variations to measure risk. However, little attention is given to the performance of the asset that backs the loans. In my opinion, this leads to reactive lending behavior with a tendency to tighten credit standards when risk is at its lowest and to loosen when risk is at its highest.

Perhaps some good used vehicle value analysis could be of value...

Higher Prices Come With Consequences

Time to Equity is affected by more than used vehicle values. The ever-increasing price of new and used vehicles has forced consumers to extend their loan terms to all-time highs in order to afford their monthly payments. Extending the length of a loan slows down the rate at which the principal balance is payed down and therefore increases the time to equity. Here's a look at what's to come:


Could Credit Scores Provide Further Clues And Tie It All Together?

I want to be very clear that what I say next is an observation of behavior and not an attack on people with poor credit scores. I am well aware that bad things happen to good people (job loss, illness, etc) and a bad credit score can be the unexpected result. With that said, the data clearly shows that borrowers with credit scores <620 tend to be less responsible than those with higher credit scores.

The longer it takes borrowers with credit scores <620 to reach an equitable position on their auto loans, the higher the risk of default. On the other hand, the borrowers with higher credit scores don’t tend to default on their loans when it takes longer to reach an equitable position; they keep their vehicles longer which slows new-vehicle sales velocity.




In simple terms:

Less Time to Equity = Lower Credit Risk and a Faster Velocity of New-Vehicle Sales.
More Time to Equity = Higher Credit Risk and a Slower Velocity of New-Vehicle Sales.

I hope this article was helpful. As always, thank you for your time and consideration.

These are my opinions and the content contained in or made available through this article is not intended to and does not constitute investment advice. Your use of the information or materials linked from this article is at your own risk.



Comments

  1. Do you need Personal Finance? Business Cash Finance? Unsecured Finance Fast and Simple Finance? Quick Application Process? Finance. Services Rendered include, *Debt Consolidation Finance *Business Finance Services *Personal Finance services Help contact us today and get the best lending service personal cash business cash just email us below Contact us:(fastloanoffer34@gmail.com) /whats-App Contact Number +918929509036

    ReplyDelete
  2. Thanks for giving a wonderful article. after I read this blog I got a lot of knowledge about this. Ratsms offer message automation, message schedule personalization, mobile number database extraction, and area code blocking. Online sign-up forms really are a breeze, and individuals can certainly enter their contact details on all of your websites to be able to help expand your database.

    bulk sms in bangalore | bulk sms explicit Bangalore | promotional sms provider | bulk sms reseller mysuru | SMS API | bulk sms gateway



    ReplyDelete
  3. Quad biking Dubai is an adrenaline-fueled adventure that lets you experience the city's dynamic landscapes in a thrilling way. Whether you're a seasoned rider or a first-timer, quad biking offers an exciting off-road escapade through the iconic desert dunes surrounding Dubai.With powerful quad bikes available for rental, enthusiasts can explore the vast and ever-changing terrain, maneuvering through sandy expanses and challenging dunes. Many tour operators provide well-maintained quad bikes along with safety instructions, making the experience accessible for riders of all levels.

    ReplyDelete

Post a Comment

Popular posts from this blog

The Perfect Storm 2 - Autonomics

By Daniel Ruiz Blinders Off, LLC To better understand why the automotive industry is in the middle of a perfect storm , first go back and consider the also perfect set of events that led to a robust recovery and a record setting 2016 sales year. Our Last Recession In 2009, the automotive industry faced a great challenge. New light vehicle sales dropped to 10.4 million, GM and Chrysler went through bankruptcy reorganizations, retail dealers closed and many folks lost their jobs. The US  government felt the need to act in order to support the very vital automotive industry (3% of GDP & 10% of manufacturing). The Fed also stepped in to help stimulate the overall economy by reducing interest rates. Consumer Purchasing Power For the purpose of this piece, the central focus will be placed on the purchasing power of the consumer. With no bottom in sight for falling new vehicle sales, our government attempted to stimulate demand by approving the 3 billion dollar Cas

Is There Safety in the Truck and SUV Sector?

By Daniel Ruiz Blinders Off, LLC Until this point, a lot of what I've shared with you is theoretically based on my knowledge and experience of used vehicle values and how I believe they affect new vehicle sales velocity. Today, I am going to share some some hard data that I've been researching with a great deal of effort. I genuinely believe that used vehicle values have a very significant effect on new vehicle sales velocity. I have explained it on Twitter and on a previous blog post through the concept of trade cycles. Because of this, I am certain that used vehicle values can be used as a leading indicator for inventory management at the manufacturing level, at the retail dealer level and certainly as an investment tool. However, I humbly hold that current used vehicle value indexes sources are not good enough. There is a very specific group of vehicles that can be monitored in order to better project results. The Manheim and NADA index both have too much noise i

Used Vehicle Values - The Foundation For The Automotive Industry

The Perfect Storm By Daniel Ruiz Blinders Off, LLC Please start with the following video to better understand my analysis: Auto Market Projections The following topics all have their part in fueling the storm to come: 1) Trade Cycles and How They Affect New Vehicle Sales Velocity Used car values determine in large the velocity of new car sales. Most new car transactions involve a trade. The level of equity in the trade oftentimes determines whether a new vehicle transaction will be successful or not. Inclining used car values lead to faster trade cycles while declining used car values lead to slower trade cycles. Dismal new car sales volume during our last recession created a shortage of used cars. This created a large supply and demand imbalance that made used car values soar from 2009 till 2014 as seen on this chart. This time period was extremely favorable for new car sales because consumers found themselves in an equitable position on their