Stop The Madness!

Insanity reigns these days, or so it seems. Customers continue to make ridiculous offers or expect miraculous finance options, regardless of circumstances.

I am bombarded daily by customers who view our inventory on our website, and offer to purchase a vehicle for thousands less than we have it listed at, with the caveat that “I’m paying cash!” It seems that many consumers believe that we are so cash strapped that we will take any offer, so long as it’s in “dead presidents”. They are amazed when I graciously decline their offer, explaining that when we advertise a vehicle on our website, we list it at the lowest price we can sell it for. After all, why spend money to advertise something if you can sell it cheaper than you advertise it for?

It makes sense to me to advertise on the Internet the lowest sale price for a vehicle. The Internet allows us to reach well beyond our local marketing area, and although many of our local customers find us through our website, we sell to customers all over the US as well as the world. In the last thirty days, we sent vehicles to Tennessee, Mississippi, Maryland, and South Carolina, as well as Nigeria and the Caribbean. Our advertised prices are typically among the lowest on the web, and our out of town clients appreciate the fact that we sell vehicles at reasonable prices.

Our local clientele are the ones who tend to make ridiculous offers. I’ve had customers offer cash deals, but then not have the cash. Finance customers who can’t, or better yet, won’t prove their income. And out of state or even out of the country customers who want BHPH on a $23000 vehicle with $1000 down!

The biggest obstacle these days seems to be first time buyers with overzealous expectations. Trying to convince these customers to consider a more reasonable vehicle than a $17000 or $18000 vehicle is an obstacle we consistently have to overcome, albeit with less success than we would like to be enjoying. The “you’ll do anything to make a deal” mentality still permeates our marketplace, especially since we are the foreclosure capital of the nation! Many of our customers are past due on their mortgage, or in foreclosure, and think that lenders should overlook this fact. After all, isn't everybody in the same boat?

Once upon a time, people with bad credit felt some remorse over their situation. “Bad things happen to good people” we used to say, and customers with credit issues understood their options were limited. Many realized that there were dealerships out there that were willing and able to help them get a car, although some used tactics and techniques that were less than honorable.

Ultimately, many of the unscrupulous dealerships and there people were caught and punished, and in many instances, those folks responsible for abuses and fraud ended up in jail. Of course, the local news shows love nothing more than a car dealer or his employees getting taken away in handcuffs in front of the camera!

I wish the media would stop telling people that we dealerships are in dire straights, that we are all facing bankruptcy or about to go out of business. While some independents down here in south Florida have closed their doors, most of us are still in business and doing pretty good, if not flourishing. Is traffic down? Yes! Is it harder to get inventory? Absolutely! Are lenders tightening their standards? Without a doubt! But regardless of all these issues, we’re still selling cars and making money. And isn’t that what it’s all about?

Coming: A 3rd Wave of Foreclosures

The next group of Americans to lose their homes seemed to have good credit and affordable loans. But those families have been walloped by the recession.

By Michael Brush -MSN Money

There's a simple reason you shouldn't get too excited about the "green shoots" of an economic turnaround.

In the housing market, a lot of prime mortgages are becoming subprime as a new wave of foreclosures begins to hit. Mainstream homeowners -- those previously "safe" borrowers with sound credit who have conservative, fixed-rate mortgages -- are getting into trouble at an alarming rate.

In the first quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%. For the first time in the housing crisis, these homeowners accounted for the largest share of new foreclosures.

Job losses are a major reason once-safe borrowers are falling into trouble. With unemployment likely to rise, the problem will only get worse. So the core challenge at the heart of our economic crunch -- a poor housing market that infects banks and the whole credit system -- is not going away soon. That's bad news for the stock market and the economy in general.

"A couple of months ago, a lot of people had hoped that the housing collapse was about over," says money manager and forecaster Gary Shilling, a well-known bear who called the housing problems early in the cycle. "But it was more hope than reality."

The 3rd wave of woe

Economists call rising delinquencies and foreclosures among prime borrowers the third wave of trouble. The first two waves were housing speculators going bust and subprime borrowers -- those with poor credit histories and some version of no-down or low-down adjustable-rate mortgages -- getting into trouble.

Mark Zandi, the chief economist for Moody's Economy.com, calls the third wave a "significant threat" to the economy. "It is gathering momentum," he says. "The problem is now well beyond subprime and deep into prime."

It will cause at least three problems that could shrivel the "green shoots":
-Mounting foreclosures among prime borrowers will destroy their credit ratings, making it tough for them to contribute to growth by spending on credit.
-Rising foreclosures will add to an already high level of housing inventory on the market, pushing down home prices even more. That will make people feel poorer, so they'll spend less. It also will tempt more people to walk away from mortgages, adding to the problem.
-Foreclosures will mean more loan losses at banks, deepening the problems in the financial system.

Investment opportunities?
How do you play this as an investor? Well, if you missed the 30%-plus move off the bottom since early March but you're still confident enough to tiptoe back in, don't do anything more than that. Average in on down days.

Better yet, wait for the market pullback that this third wave makes more likely. Shilling has a bearish forecast of a trip down to 600 for the S&P 500 Index, more than a 30% decline from recent levels of 940.
Investors confident and daring enough to short stocks -- selling borrowed stock with the hope of buying it back later at a lower price -- may find profitable targets in the housing sector and among the regional banks. Homebuilder stocks look particularly tempting; they have risen more than 50% off their March lows on hopes for a quick recovery.

Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund who also spotted the housing crisis early on, was recently short KB Home, Lennar and Toll Bros. in housing. He also has bearish bets against regional banks Regions Financial, First Horizon National, Zions Bancorp and New York Community Bancorp.

The 'subprime society'
Shilling suspects many so-called prime borrowers are now going bust because, well, they really weren't so prime to begin with. The same lax standards that created a zoolike atmosphere in subprime lending infected prime mortgage lending to some degree. Many prime borrowers still stretched to qualify, and they lack the financial reserves to sustain any personal setbacks, Shilling says.

A few months of unemployment will throw them into default. The official unemployment rate stood at 8.6% in April, and many economists believe it will top 10% as the recession drags on.

How much worse will the foreclosure crunch get? Credit Suisse analyst Rod Dubitsky predicted last week that 8.1 million mortgages, or 16% of all mortgages, will go into foreclosure over the next four years. A weak economy, continued declines in home prices and rising delinquencies among prime borrowers all but ensure that foreclosures "will march steadily higher," he says.

Dubitsky thinks such a high level of foreclosures could transform the U.S. into a "subprime society." The large number of people unable to borrow because of impaired credit will keep the consumer-spending engine on low idle.

Zandi predicts that a rising number of troubled prime borrowers will keep the number of distressed mortgages aloft for at least 18 more months. He thinks the number of mortgages in default or behind by more than 30 days (the definition of distressed) will rise to 9.2% in the current quarter from 9.1% in the first quarter, then stay above 7% through most of next year.

To put that into context, from 2000 through the end of 2006, 2.7% of mortgages were distressed, on average, at any one time.

Inventory overhang
A big problem stemming from all those foreclosures will be that huge excess inventories of homes for sale will continue to push down prices, Shilling says. "As long as you have those excess inventories, you have downward pressure on prices. It is no more complicated than that," he says.

The combined inventory of new and older homes on the market remained relatively constant at about 2.5 million for many years. Now, it's officially around 4 million, but Shilling thinks it could be higher because of miscounting.

In his bearish scenario, the inventory overhang will push down home prices so much that up to 25 million homeowners will be "underwater," meaning they will owe more than their homes are worth. That would be a huge increase over recent levels of 13.5 million homeowners and bad news for the economy.

Homeowners who are underwater can't borrow against their homes to fuel a rebound. They're reluctant to spend. And they are more tempted to simply walk away from what looks like a losing prospect.

2 more waves
Bad enough? Well, this third wave of prime borrowers going bust will be followed by two more waves of credit-related problems, Tilson says:
In a fourth wave, more homeowners with "jumbo prime" loans will go into default. These are loans to buy high-end homes that once boasted price tags upward of $1 million. "All over the country, the high end is starting to tip over," says Tilson. This wave will also bring more problems with home equity loans and second mortgages on homes.
A fifth wave will carry rising defaults on commercial-real-estate and business loans.

Like Shilling, Tilson believes all of these waves of credit-related problems spell the most trouble for homebuilders and regional banks. "Homebuilders are going to face severe headwinds trying to sell homes at least for a couple of years," he says.

Regional banks will have problems because they got heavily involved in commercial-real-estate loans when they lost so much of their home-mortgage business to upstarts vying for a piece of the subprime action during the boom. Regional banks also lack the income from wealth management and trading that's helping big banks such as JPMorgan Chase earn their way out of trouble.

There are 'green shoots'
There are some glimmers of hope in all this. For one thing, homes are more affordable than ever. Mortgage rates are still extremely low by historical standards despite a recent increase. So the cost of buying a home compared with average income levels is as low as it has been in nearly three decades.

And intriguingly, a housing sector analyst who first started warning of trouble back in 2003, way ahead of most people, now predicts a reversal is at hand. Stuart Feldstein, the president of SMR Research in Hackettstown, N.J., thinks home sales and prices are turning and will be in an uptrend soon.

One problem here is that Feldstein was early -- even if impressively prescient -- the last time around.

And of course, housing affordability doesn't mean much if so many people continue to lose their jobs. Goldman Sachs Group economist Ed McKelvey doesn't expect the jobless rate to peak until after 2010 -- in a sluggish economy that he expects will grow at a paltry 2% in the second half of next year.

With economic conditions like that, no matter how cheap houses get, it'll be tough for anyone to buy them.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.