Off the Lot: Forecasting performance in 2024

Welcome to 2024 and to my new column in Auto Finance News , which we are calling “Off the Lot” because it’s intended to look at our industry from both the automotive retail and finance sides of the business. What better way to start a new column than in January, when we look forward and make predictions? I must admit to some trepidation about doing this in writing because, at the end of the year, you’ll have this column to use as a cudgel and remind me that — no matter how hard we try to get it right — how wrong we’re likely to be. [caption id="attachment_57334001" align="alignright" width="200"] Bruce Newmark, Vroom [/caption] First, a quick introduction. I started in a small consumer finance company in 1976, migrated into retail auto, held roles in finance and insurance (F&I), and then went into sales and general management. I was partner in Ford and Lincoln-Mercury dealerships before later rejoining the finance side of the business as national sales director, chief operating officer, and president of successful indirect sub-prime lenders. I have been told that what’s unique in my experience is the ability to look at both a finance and car deal from “both sides of the desk.” This experience allows me to understand both the finance side and the world of auto retailing and how a car deal is constructed, as well as the consumer dynamics of the transaction. My goal for this column will be to bring visibility to real-world issues of both sides of the auto finance transaction and to showcase industry leaders who are looking to the new directions in which this business is evolving. History is likely to repeat itself Before we project likely outcomes of 2024, some history is necessary to frame and validate the conclusions and projections. We’ve all rehashed the Covid period, but the results of that time are real and to some degree have rippled through the economy and the auto finance business longer than some may think. A look back at history provides a glimpse at what to expect next. Interestingly, most people of the baby boomer generation believe that the period of highest inflation was in the late 1970s and early 1980s, when Paul Volker was chairman of the Federal Reserve . In fact, the highest inflation in the last 125 years was in June 1920, when inflation peaked at 23.7% and was followed by two years of deflation, according to the Federal Reserve Bank of Minneapolis . So, what happened? The U.S. experienced the Roaring ‘20s coming out of the Spanish flu pandemic and World War I, which led to high inflation, then normalization a few years later. A similar story is playing out in the auto market today. The pressures of inflation have stressed consumers who purchased vehicles during Covid. Government incentives provided liquidity to buyers similar to a two-year extended tax refund season. This increased vehicle demand at a time when manufacturing production was low, and consumers couldn’t find the vehicles they wanted. Rental car companies were buyers in the secondary market — instead of sellers — adding to the pressure on used-vehicle prices . This resulted in appreciating vehicle values rather than normal depreciation and extended loan-to-value ratios (LTV) from lenders. Pressures should ease in 2024 As we go forward, continued market normalization in new-vehicle production , supply availability and used-vehicle depreciation should serve as a comfort to lenders. In 2024, the industry is already seeing reduced used valuations as manufacturer production normalizes and new inventories rise to 70 days’ supply, about 50% higher than the same period last year, according to Cox Automotive . Higher interest rates have increased payments on vehicles, which has to some extent reduced demand. Similarly, higher production combined with less demand should result in lower prices. This reduces the value of used vehicles and as such the severity of losses for lenders’ 2022 portfolios. Many lenders began tightening LTVs in 2023 in response to deteriorating credit performance on 2022 vintages, which should help performance during the latter part of 2024. Higher interest rates will pressure profits so efficiency, good cost controls and servicing effectiveness will likely result in better profitability later this year when the Fed begins lowering interest rates. For companies looking to project profitability, look to 2006 and 2007, when Fed funds rates averaged just below 5%. Interest rates will likely hover here for most of 2024 following the Fed indication in December that it could cut rates this year by as much as 75 basis points. Looking at the 2008-2017 period to forecast profitability is an unrealistic measure, largely because interest rates were much lower than they will be in the next year. An additional positive is low unemployment. Generally, the consumer is healthy, which should lead to a stronger economy. There was a time, not long ago, where full employment was thought to be 5%. The rate of unemployment has been 5.7% historically since 1948, according to the U.S. Bureau of Labor Statistics . Today, we are at 3.7% due to labor shortages, retiring baby boomers and lower volumes of immigration. While many consumers came to rely on stimulus funds to pay bills, many also are seeing increased income due to wage inflation. Everything will be OK Projections in writing are always dangerous, but I anticipate: Auto prices will be lower; Inventories will rise and transaction prices will come down during this year; Lender portfolios will continue to experience stress from the 2022 vintages until late this year; Availability of the capital markets may further constrict growth in 2024; Loss frequency may be lower, but severities will be higher than usual due to the LTVs of the Covid period; and Higher rates will pressure profitability on the lender side and consumer affordability. When looking ahead, keep in mind: We’ve been here before. We’ve survived. And we profited. We’re not in a bad place, and so long as lenders keep thinking about how to drive down costs, gain operating efficiencies, and maintain LTV discipline, auto finance companies should yield good results. Maybe even coming out of Covid, our economy will enter the second Roaring ‘20s. Bruce Newmark , formally chief adviser of Vroom and United Auto Credit Corp. , is now retired and a consultant to the industry. Newmark has more than 45 years of experience in automotive retail and finance. Before joining Vroom, Newmark’s tenure spans leadership roles at Fimanco, Inc. , Ford Motor Co. , Hankey Automotive Group and Westlake Financial . Early Bird registration is now available for the second annual Auto Finance Summit East , May 1-3 in Nashville, which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross-section of industry players. Early Bird pricing ends March 15. Visit AutoFinance.Live to learn more.

Off the Lot: Forecasting performance in 2024

‘Off the Lot' with Bruce Newmark is a new monthly column from Auto Finance News

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