Market Pulse is a monthly podcast by Equifax, in partnership with Moody’s Analytics. Equifax hosts bring you interviews with industry experts on the latest economic and credit insights that can help drive better business decisions. Whether you’re in financial, mortgage, auto or another service industry, we help make sense of the latest economic conditions that impact you. This podcast series supplements our Market Pulse webinars, which occur on the first Thursday of each month.
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Market Pulse podcast
Ep. 40 Transcript
Scott McMahon:
Hi and welcome to today's Market Pulse podcast from Equifax. I'm Scott McMahon, an alliance manager for the automotive partnerships team here at Equifax and your host for today's episode. In my role here at Equifax, I have the opportunity to work with leading service providers within the automotive space and partner with them to help improve how dealers, lenders, and manufacturers work better together to meet the changing needs of consumers. And today, I have the incredible honor of following up a conversation that we had on the last Market Pulse webinar back in February, where we had the chance to discuss some of the most critical trends and happenings in the automotive space with a very prestigious panel of experts. Topics we in, we included during that session were things like how consumer affordability is changing the automotive landscape, expectations of the vehicle inventories, and how that actually is affecting affordability issues and opportunities within the EV market, the electric vehicle market, and some of the key themes to watch out for in kind of like the short run from 2024.
Scott McMahon:
If you miss that last discussion back in February for Market Pulse, I encourage you to go ahead and take a visit to our website at equifax.com/market Pulse and grab a listen. If you did get the chance to listen during that, that webinar I'm sure you would agree that we had just enough time to scratch the surface. There was so much happening in, in the automotive market that really just a couple of topics were all we had time for. So today we'd like to go ahead and continue where we left off with this talented trio of automotive experts. And they include the prestigious team of Steve Greenfield general partner at the Automotive Ventures Marguerite Watanabe president of Connections Insights, and Jeremy Robb, the Senior Director of Economic and Industry Insights at Cox Automotive. Welcome to the podcast everybody.
Steve Greenfield:
Thanks for having us. Thanks for having us.
Scott McMahon:
Oh, it's my pleasure. So, but before we get started with our questions, let's pause for a brief moment and take a quick update from David Fieldhouse, the director at Moody's Predictive Analytics, so he can give us a little bit of insight and give us some ground speed for our next conversation. Okay. Alright, excellent. So I really appreciate that insight, David. It was always great to hear from Moody's and the perspective that you guys offer. So now back to our panelists here. So Marguerite, Jeremy, and Steve, let's go ahead and jump into a few topics that I know are, you know, near and dear to your heart and have a lot of thinking around this and a lot of value to our industries that that are listening in. So, the first topic I wanted to cover, which is something that is a growing trend.
Scott McMahon:
I'm hearing again, from my perspective, working with the industry platforms that are, that are working with dealers and lenders as well as manufacturers that there seems to be from the numbers, the facts, and the perspective, the, the perspective we're getting from the industry that fraud and identity continues to be a growing issue. Now it's a big issue across many industries, but certainly automotive is no exception to this. You know, things from first party you know, fraud, you know, all the way through to even synthetic I identity, which is growing at really kind of scary rates and perspectives. But wondering what it is that, that you're hearing from your vantage point on how things are playing out in the market from a fraud and identity perspective. And Steve, let's go ahead and start with you since you have a, a very well-rounded perspective on the the marketplace.
Steve Greenfield:
Well, thanks Scott, and thanks for having me today. It's exciting to be back with you. Yeah, I think that what, what's getting reconciled is the fact that the automakers who have been watching Tesla for 10 years in terms of being very software forward and having, having great delightful integrations with the consumer experience are, are, have decided that the future is going to be largely unlocked by sort of what they're calling a software defined vehicle and spending billions of dollars. And, you know, hiring thousands of software developers, making sure that they, they can lead with software. The cabin experience is going to be very, very software first. And at the same time, this is going to unlock the ability to not only conduct recalls and service work for via over the air updates, but more importantly for their bottom lines unlock sort of unbundling of features and options on the vehicles into monthly subscription services.
Steve Greenfield:
So what, what this all means is that, that the surface area around the, the software on these vehicles is growing sort of exponentially, which allows a lot more opportunities for cyber attacks. And we're seeing some of that in the press, et cetera. Some, sometimes you know in terms of ha having consumers personal information at risk. But oftentimes the, the, the, the cyber attacks can lock down the vehicles brick, the vehicles, or, or even worse, you know, how the people take over the vehicles. And I think that we we're, we're, this is only going to get worse and it will be a game of cat and mouse as software becomes more important over t over time in terms of it sort of practical applications. This is one of the reasons that we invested in a company in Atlanta called Privacy for Cars, that allows a fleet owner an OEM or even a dealer to ensure that the PI is wiped off of the vehicle at the end of lease or during a trade-in process.
Steve Greenfield:
And you, you see dealers buying more and more compliance software to make sure their, their flanks are protected, right? Because what we don't know is where there is risk yet and where there may be potential lawsuits at the, at the dealership level, but compliance software has become a fairly hot space because dealers want to make sure, inevitably, as they take on more risk, because of these vehicles that have more of the surface area they, they want to make sure that they're covered. So I, I suspect that we're going to hear more, largely because the OEMs are going to continue to pack more software into these vehicles, but at the same time, downstream from that, whether it's a fleet company, a consumer, or a dealer, there's going to be more risk of hacks.
Scott McMahon:
Yeah, that's, that's great perspective. But to, not to steal some of the, the, the logos and sayings out there, but it's really technology on wheels. It's not so much a car anymore. So to your exact point it's a, it's amazing how much information's now being kind of captured and shared for good purposes, but sometimes sometimes cat get in the way. , . I appreciate that. So Marguerite, then, why don't we go ahead and move over to you real quick, and maybe from the lender perspective and the financing side of things, what are you seeing on, on that side of the shop?
Marguerite Watanabe:
Well, you know, fraud has been around for a long time and in multiple forms, and it comes, you know, we see it sometimes with consumers. We even have dealer fraud, typically more of a one-off, you know, kind of bad apple in the dealership versus systemic fraud. But it, it does exist. And now we have the criminals and they're getting more and more sophisticated across the board. So, you know, and that includes everything from the application, originations, fraud, all the way through to the backend. So, mm-hmm, again, for lenders we're somewhat used to it. It's, it's, again, trying to be able to manage it all very quickly. And so you have traditional fraud like straw purchases and income and employment, you know, kind of inflation that you might have titling problems that we've had. And as you mentioned earlier, the, the synthetic IDs, which has been around for a while now, but it's gotten extremely common, something that we have to deal with all the time.
Marguerite Watanabe:
And so as an industry, there's been increase in the number of verification that goes out there, al the use of alternative data scoring tools that you can use. So we have tried to get as sophisticated on the fraud detection, but it takes even more than that. You see more of the consortiums and the industry dialogue to say, okay, what are you seeing out there? You know, there was a article recently, a recently on payoff, so, you know, how can you then talk about it as a group, as an industry to say, what can we deal do together to really, you know, not have to keep, we're going to have to keep battling it, but what can we learn from each other? And so the key now will be able to use the new technologies, but it has led to greater cost, and we know that that's the case. And so OPEX goes on with that, you know, goes up with that. So it will be an ongoing struggle.
Scott McMahon:
Yeah, that's a, that's good. A complete fact. And, you know, we're seeing in the marketplace the, the need for, to your point, you, you made mention where dealers and lenders are working more closely together to go ahead and combat it to a kind of a mutual respect for making sure that you know, the, the loans are holding more effectively to the best of our abilities. And to your point more data, more insights more perspectives. We'll go ahead and help drive that. Jeremy over to you real quick, I know you have a, a you know, obviously with Cox Automotive have a lot of purview on what's happening in the marketplace from a fraud perspective. Any, any thoughts on your side?
Jeremy Robb:
Yeah, absolutely, and thanks for having me here today too. It's, it's great to be back, you know fraud just continues to grow, just like everyone's been talking about. And at Cox, you know, it's, it's pushing us to create solutions that we can implement in our business units. You know, every day. Just this year, back in February, we created this thing called synthetic fraud id, it's an indicator we launched really to help us protect dealers against fraudulent transactions. But earlier in the process of f and i at the dealership, it integrates with technology that we get from Equifax, uses machine learning programs and algorithms there marries up with some proprietary data that we have. And it really tries to, you know, detect those synthetic behaviors earlier in the process. Really helping us to address fraud risk, establish, you know, better procedures, secure and, and end-to-end process.
Jeremy Robb:
We can validate a consumer earlier in the process, really before we move them along and like get 'em more ingrained in, into everything. So that kind of helps out too. And then really for dealers, it can help them from these potential chargebacks, from lenders. And those can be up to $15,000 a pop every time, you know, so it can get really costly quickly, just to marguerite's point about, you know, adopting and, and adding more opex, it does add opex in, but, you know if you, if you do have an issue, obviously it's going to cost you a lot, and that really matters. So, you know, these are, this is an example of a solution we're trying to do in our own business units to try to give some more peace of mind out there to all parties involved.
Scott McMahon:
Yeah, that's a great perspective. I mean, you know, to your point, adding, adding more cost, but the savings associated to it, right? It's the cost of not doing something probably that we need to worry about more than the actual cost of getting to, to some of these insights and information doesn't matter. Yeah, definitely, definitely exciting itself. Yes.
Marguerite Watanabe:
The, the risks are even greater than just financial these days, right? You got reputational risk. Mm-Hmm. , you got credit risk, you got legal risks, you got right. Regulatory risk. I mean, it, we could name a lot of different types of risks. So the costs are qualitative and quantitative. Yeah. So both, you know,
Scott McMahon:
Both, and, and to Steve's point, as far as, you know, then that fraud kind of slipping outside of even the auto industry and affecting it, you know, consumers and how they, they evolve into their risks. So this is, this is a very big issue. It's why it's one of the, the main conversations that we have in the marketplace. It's really why we had this conversation today. You know, on that same parallel in some ways we're seeing obviously for, for some time now, for a good while, we've been moving into more of a digital landscape when it comes to the automotive space. I mean, it's been years of getting listings online, getting pricing online, and starting to get kind of more of a collaborative coordination between consumers, dealers, manufacturers, and, and consumers and loyalty buyers and things like that.
Scott McMahon:
Even lenders reaching out, working with their consumers through a digital lens. And so now we have this trifecta of everyone trying to support through a kind of a, a digital mechanism. And so that obviously brings into more considerations of fraud, but it also, you know, brings in opportunities for efficiencies and other types of types of opportunities. So, Jeremy, sticking with you since Cox Automotive obviously is one of the big providers of, of digital solutions out there in the marketplace. Any perspective that you guys can share from, from the Cox Auto side of things would be very helpful.
Jeremy Robb:
Yeah, sure. You know you think about technology digitization and growing, and it's been growing for decades, you know, but we're hitting a bit of a fever pitch with some things. Ai you think about all these different things, how they, how they're working out there now, and how technology has continued to evolve and consumers adoption of tools and software increases. And, you know, it just, it's, it's constantly moving. We see consumers really wanting a digital first experience. That's kind of what, kind of how we talk about it. You know, they shop online that might be on their phone or on your computer, you know, but there are a lot of apps that are dedicated to help consumers shop and look at vehicles and, and financing all that online. They can do research, read reviews, compare products, vehicles, things like that, just across a host of spectrums.
Jeremy Robb:
So we see it, you know, from a consumer standpoint, they're, they're kind of shopping and starting online, but then we also see where consumers will kind of start the finance process early. And a lot of times, digitally too, before the transaction occurs, they may get pre-approved see where, where rates are and where they may be in terms of a payment there. But at the end of the day, the research and data that we have says that most consumers still want to see and touch the vehicle before they pull the final trigger. You know, some people are going, you know, soup to nuts, 100% digital. But that's pretty a, a small portion of the total vehicle transactions right now anyway. But a lot of the front end work and research is done digitally on the retail side, and then the dealer and consumer come together at the end to finalize the deal.
Jeremy Robb:
On the wholesale side, you know, like we, we have the same thing kind of going on too at, at Manheim. We transitioned to a 100% digital environment at Manheim when the pandemic hit out of necessity and stayed that way for quite some time before we, we started launching some physical lane runs again things when, when everything calmed down, there's a lot of benefits in the wholesale markets and the automotive space to, to run digitally and safety is one of the biggest ones both for workers out there, but then for dealers and buyers that are in the lanes, you know, we, we continue to have, we've cut down on it, but we have some, you know, instances that happen. And, and so safety is a big issue of that too. But there are certain products in the wholesale world, world that do gain a little bit more interest and attraction if they're physically run down the lane. You know, but the digitization of that marketplace has continued to grow and, and probably will continue to grow for a long time.
Scott McMahon:
Yeah, no, great way perspective on both the, the retail side as well as the, the backend wholesale side. I agree. It's just the, it's really kind of feeding more of a more efficient process. So it's excellent stuff. Agreed. How about over to you? What's your feelings on the digital landscape? I know you've been thinking about this.
Marguerite Watanabe:
It, well, that's part of our life, and it has been for a long time. You mentioned that earlier, Scott and Jeremy, I agree. It, it kind of covers from the lending, lending side of it. It starts with the marketing originations, and then all the way through remarketing, right? So kind of the retail wholesale side of things for both the consumer and for the dealer financing that, you know, when you think about it, we've been doing this for a while. I mean, we went from hand scored credit score, you know, scores to now where you can get it in seconds, right? Yeah. We've done application processing earlier this decade when, you know, route one and dealer track, you know, started doing the, the application processing. We've had alternative data. We've had LPR you know, payment processing. So again, from originations through the whole remarketing side, we've seen bits and pieces of it, and some of it has been adopted earlier than others.
Marguerite Watanabe:
We also have had e contracting for a long time, and finally, numbers are starting to go up. But boy, that has been a long process, and you still have dealers saying, why aren't we doing more e contracting? We look and say, is it the dealer side, the lender side, , we have e titling. How can we have e titling in the US at, at the pace we are right now, where there's so much opportunity to make that a better a, a better, whether it's digital or automated or paperless or cloud-based, or, you know, now Web3, there are a lot of different ways, and we really, in my opinion, have to still step it up because some of these processes are taking too long, and we're in a state now, whether it's because of the costs that we have or the efficiencies or customer satisfaction or regulatory pressure, we really have to be able to take these issues one at a time and say, okay, what is it going to take? Because when you're looking at a digital purchase of a vehicle on the finance side, we're long from that. We still have trade-ins to deal with. We have loans versus leases. We have the credit quality of the person, right? The collateral built into it, and we're really not there yet. E contracting is still the contract and not all the ancillary ducks, right? So I just like to think we have lots of opportunity for improvement. How's that ? Yeah.
Scott McMahon:
No, I agree. We know the destination is just the puzzle pieces to get there are, are a bit more challenging. We had some acceleration obviously during covid but I think, you know, once, once that has kind of lessened the, the necessity of it all, it we've settled back into some maybe, you know, some, some old habits,
Marguerite Watanabe:
Right? And, you know, it's, and we can actually learn from folks around the world, right? Who never had telephone polls and they went straight to cell phones. We need to have that mentality of how can we, yeah. You know, again, quicken that pace around this, it would be great.
Scott McMahon:
Yeah. No, I totally agree. And speaking of quick pace so Steve on onto you, what's your perspective on this digital world? You've been in here for a good while trying to promote digital.
Steve Greenfield:
Yeah, I don't have a lot to add. I think Jeremy and, and Margaret have done a great job characterizing it. But, you know, I would say that we had this unique experiment during covid where in many states, dealers weren't even allowed to sell retail. You know, the digital retailing tools, some of which accident at really like high multiples to some of the usual suspects. You know, when we look now, we fast forward a couple of years coming outta Covid here. I, I would say it's kind of a non-event. You talk to dealers, they aren't selling any vehicles online for the full transaction. I agree with, with what Jeremy said, much more of the, the digital searching for a vehicle and configuration may maybe getting, you know, credit report ahead of time finding if I qualify for these rates and incentives that, that, that more of that's being done on online.
Steve Greenfield:
But we, we have an interesting sort of opportunity to continue to watch Carvana’s tr progress and CarMax's progress. And between the two of them, very few used vehicles also are, are selling on online full transaction right now. Carmax reports out on what the omnichannel transactions are quarter, and it's, it's very small. You know, I think that having said that, you know, we've made progress. I mean, Scott, you and I worked together 10 years ago at Autotrader. We were trying to digitize some of the transaction and, and data online. And it, it's true this industry moves at a glacial pace. Marguerite, I sense sort the frustration of some of that, whether it's with titles or more of the process online, but it, it's a space for innovation. And I think we're seeing that manifest most recently with the Amazon and Hyundai deal, right?
Steve Greenfield:
That, that that'll, that'll be the one to watch. And that they're, I think they, they're having challenges and they'll continue to have challenges, but they've stated that, you know, by the end of this year, they're hoping to have 10 automakers total on that experience in a test. And if, if they can, if anyone can figure out online transactions for a new car and eventually a used vehicle, it's Amazon. So I think that we, we, we need to watch them. They effectively have unlimited budget and money and software developers to throw out the problem. And I, I don't know how that that's going to work out, but I mean, if we make any progress in the next few years, I think it's going to be under the umbrella of what Amazon's bringing to market.
Scott McMahon:
Agreed. Yeah. It's definitely is, is a, to your point, a very slow process. And I think we're trying to change behaviors. Technology I think is a hundred percent there. We could, we could do it obviously, through Amazon is selling toothpaste, so why can't we just sell cars, right? And through other Amazon and beyond marketplaces. But there is a lot of, a lot of change and, and behaviors and perspectives and maybe trust in the process. And then, you know, it's a complicated process to, to Marguerite's point about bringing trade in values to this and the negotiation process. There's just a lot more to it than just technology. So we can't just lob it onto you know, people, you know, buy large ticket items in other ways. Why can't they just do cars? It's certainly it's, it's unique and different, and we're learning that as we go. And it's in the, it's one of the things I actually love about the automotive space is because of the complexity and the chest maneuvers that need to be played out here. So I appreciate that perspective from all three of you guys,
Marguerite Watanabe:
And hopefully the industry as a whole can kind of come together. So often you have a situation where dealers and lenders might not be in agreement, or they could be, right? So we have to have that dialogue to say, okay, where are the friction points? Or, you know, in the case of titlings, we have the, you know, state motor vehicle associations, right? The groups there, we have the associations that are involved in this. We have OEMs, we have the auction houses, and they all have a piece of it. But if we work together with it, you know, on solving some of those issues, it makes it a lot easier. So I think we have, again, lots of opportunity there.
Scott McMahon:
Absolutely. And speaking of opportunity, I wanted to kind of, you know, focus a little bit more on the economic outlook of things we've heard through the last market pulse and through what David had shared about where we are with the, with the marketplace. And certainly we have kind of a confidence in the sense of inventory levels or within reasonable stability timelines right now. And the supply is, is healthy and hopefully improving. But at the, at the, also the same token we have the, the anticipation that the interest rates will eventually start to, to kind of creep down. And so the, the thinking here is that there's some pent up demand that might possibly be turned over to, and that includes, you know, the EV market and looking into that space and some of the, the pent up demand to go ahead and move in that space. Wondering, you know, what is, what is the, the thoughts, Marguerite, from your perspective on where you see kind of the short run, the next, you know, 11 months at this point now, or, or 10 months to look at what you know, some of the changes that we're having and how fast that will have an impact on consumers behaviors?
Marguerite Watanabe:
Well, I think there have been a number of factors that still cause great concern on affordability, right? Mm-Hmm, , that's going to be the big factor for so many people, because on the negative side, right? We've had the interest rates gone up, we've had the negative equity in cars right there. So many consumers are going to be coming outta their cars saying, wow, I owe so much. We've had the inventory shortages that have caused the prices to gone up and just the everyday cost of living. I mean, it still blows me away every time I go shopping for something and how much the cost has gone up for everything. So, right. We're, you know, whether it be daycare or food or just everything. So consumers are facing that on, on the positive side. And I always like to try to think there's, there's always that light somewhere, right?
Marguerite Watanabe:
And so, yes, we have the rate cuts that are anticipated. We see more of the OEM incentives, right? They're coming back. We have some of the government exp incentives for the ca, you know, for the EVs. And really from a lender's perspective, the values being high have helped with recoveries, right? There's always a positive to everything. So hopefully some of that can translate into some good, but the impact on performance on delinquency, right? Mm-Hmm. number of repos is undeniable. Yeah. And it's not something that came upon us one day and wow, we are all surprised. We've seen it. We track with it, right? Yeah. Every day. And so we know that it was coming. So it then leads to the issue around, you know, the lender community and how much of that community can provide credit. You know, Jeremy's company, Cox, you know, comes out with a great index on that.
Marguerite Watanabe:
We can always look at what's happening with it. And it's going to have, we have to keep just getting more, you know, improve on our processes to, to get that down again. And we do have the tools to make that happen. We also have to keep an eye on the, you know, consumers and what their choices are now because they are looking at new versus used in ways that they never had before. Mm-Hmm. or, you know, again, because of the incentives, possibly EVs, possibly not, right? Should I take a loan or a lease again based on sometimes incentives or not? So tracking what the choices that the consumers are making them are going to be important. But when it comes down to it, I think one of the things we have, we can do some more of is having the lenders and dealers work together to put the consumers in the right car, right truck, right?
Marguerite Watanabe:
That's just so important to not put them in a situation that's going to have them make bad choices, because in the end, it, we all have to pay for it, whether it's their next vehicle, their, their delinquencies, or whatever it may be. And we have some of the digital tools that could help possibly get us to that point. And we also have to just work. I mean, the collections right now, I always say the pendulum swings one way or another. You know, it's all on the loss management side for lenders right now, they're working very hard to get to the top of the payment, our hierarchy. They wanna be number one. And unfortunately, cell phones, I think are still at number one right now. , everyone needs that first. And then on a longer term goal, we need to look at, continue really pushing financial literacy so that consumers can say, yes, I know what goes into that, this vehicle purchase, what it's going to mean for me, and then how I can make again the most, you know, educated decisions. So
Scott McMahon:
Yeah, it's, it's all about affordability and making sure that the, the persons involved with getting people in the right cars is, is doing their job of making sure. So I think it's a very healthy perspective. Hey Jeremy, on over to you now, what's your thoughts on, on where the, the market will be this year and really more importantly, how it will react to some of the anticipations that we have?
Jeremy Robb:
Yeah, absolutely. You know, like Margarite said, affordability is, is really the name of the game this year was last year too. We've seen some price declines in, in new car pricing. Incentives are up a little bit. We've seen some price declines also in use vehicles year over year too. But they're relatively small. That does help affordability, you know, but interest rates just continue to ma remain really high. But if you kind of pull back the onion on interest rates and kind of in the vehicle market itself, there's some kind of interesting dynamics going on. What's happened in the past six to seven months, we think about benchmark interest rates, like the 10 year treasury yield, you know, it peaked out last fall at about 5%. I think around October. And it's come down, it's off about 75 basis points, give or take, you know, where, where it might be right now.
Jeremy Robb:
That's good. But then if you look at the consumer rates for both new and used, you know, they barely budged over that time period. So what we're seeing is the spread between what a lender can borrow money at has gone down, but what they're lending money at remains very high. And so there's a bigger buffer there too. And I say that because I think that can matter. As we look out later this year and into next year, we could get some relief in consumer loan rates, you know, if, if lenders are willing to kind of like bring that spread down a little bit. But consumers don't want to take out a high rate loan, you know they, they're doing everything they can to avoid that, putting off a purchase, putting more cash down using like a home equity loan or something like that.
Jeremy Robb:
We see cash transactions, you know continue to grow there too. Another part that I think is really interesting when we think about affordability and EVs also obviously EV prices have come down a lot over the past year, and we saw that used EV prices got hit a lot with the changes in new, the new car pricing on EVs in 2023. But this year, because of the way the tax incentive can be applied with dealers at the point of sale, you know, you can get up to $4,000, and that's moving the needle on a lot of used retail transactions for EVs. And I think that really matters because it shows you right, that affordability for consumers is a huge issue. And if, if it can get some type of product that is more affordable to them, then they're willing to go out there and make that purchase.
Jeremy Robb:
So, you know, pricing has come down, but affordability for that space helps out some too. Those factors though, talking about interest rates is one more point I want to talk about. It relates to delinquency. And it's, it's really interesting, you know, high interest rates have put a real dent in loan growth. When we look at originations year over year, we've actually seen four straight quarters of lower loan vehicle originations year over year. And if you look for subprime, it's even worse than that. I think they've declined for six quarters in a row now. And, and why does that matter? Well, you've got a loan base out there in the marketplace, and Equifax, I know has all this great data on that. And if that base isn't growing, we have loans that mature every month. You know, you can, you can start to get a loan base that's contracting overall, and you apply that to thinking about delinquencies and defaults and repossessions, most delinquencies and, and repossessions occur and, you know, from 12 to 24 months in that window, right?
Jeremy Robb:
What, why is that? Well, loans typically have higher negative equity earlier in their life. And as, as that loan amortizes, a lot of times we move to positive equity. But if you're not getting a lot of loan growth right out there, and more loans are falling off the books, it kind of does put a somewhat of a, a limiter on how much of those defaults you see. And with lower subprime, subprime makes up the vast majority of all defaults out there. It, it just, the, the loan base is at a higher credit quality, right? And you just don't have quite as many, even though we have a lot more delinquencies and defaults right now than we had versus the last couple of years. And, and delinquency is very high too. I think it's one part of the market and the lending market we have to keep our eye on. It's just the size of that loan portfolio overall.
Scott McMahon:
Exactly. No, it's a great, great perspective. Obviously very, very complicated on how this will play out. There's lots of moving parts, so I really appreciate that, that perspective. Steve, over to you. What what, what's your thoughts on, on consumer behaviors and reactions here?
Steve Greenfield:
Yeah, may, maybe just a couple things to compliment Jeremy and, and Marguerite. You know, we're going to continue to see inventory mount over the course of the year. Many of the OEMs that were you know supply chain constrained during covid now can be running the factories at full production. And we're starting to hear more OEMs talk about market share, again, which wasn't a, a thing. It was more focused on profitability or during covid. I, but inventory's going to mount, which means that we're going to see greater discounts, greater incentives, and as we're starting to see with some of the automakers, some of the usual suspects, more, more venting sales into fleet overall. Mm-Hmm, . And we know historically what, what that's done for residual values, right? Number two would be, you know, watch the EVs because, you know, there isn't enough demand for all the production that's coming online.
Steve Greenfield:
We're al already hearing, anecdotally talking to dealers that they can't make any profit on the front end. And in many cases, they're losing front end gross on every single EV that they're selling. The, the legacy automakers and their EV divisions, they're, they're bleeding, right? Losing sometimes $30,000 per vehicle sold. And because of the tax incentives right now somewhere, somewhere north of 60% of EVs, new EVs are being leased. Well, we're, we're punting a problem two or three years down the road when those EVs start coming back. We're going to have a, a, a big challenge with residual values and inventory coming through the auction lanes as well on, on affordability, I, I'll echo everything else that's been said today. You know, I think with interest rates with being higher when consumers are coming back in to buy their current vehicle, coupled with consumers being upside down, in many cases, remember that during covid, if I bought a new car 90% of the time I was paying more than MSRP.
Steve Greenfield:
Well, now we're back to regular depreciation curves and consumers are coming back into the market and they're shocked at what their current values of their vehicle's worth when they're looking to trade trade in the vehicle. And that's coupled with, you know, consumers have much less savings, cash savings in their bank than they did during Covid Mm-Hmm, . So that combination with higher interest rates being upside down on my vehicle, much more dramatically than I had thought, and having less savings to like roll into my, my, my payment or, or make hold my negative equity. I think for prime customers, this is going to mean they're going to come in, get shocked, keep the car longer, so the holding period for that new vehicle's going to be longer. I think for a subprime customer, you're going to start to see more customers potentially just handing back the keys and saying, there's no way I can work out of this negative equity situation.
Steve Greenfield:
My credit score is so low anyway, I don't really care. And, you know, dealers are already starting to feel a little bit of that anecdotally, and I think that's going to mount over the course of the year. I think all, all of this will mean for, for the dealer, you know, expect more profit margin compression, you're going to immediately feel that on the new car margin. But I think you're going to start to feel on unused cars as well. And then the last thing, Scott, I'll add is like, all, all, all of the incentives around EVs are, are unknown because this is an election year, and, and Trump has already threatened to effectively unwind the inflation reduction act. And, you know remove a lot of, of these incentives, if not eliminate them entirely. And I think we're going to see we're, we're seeing in the press literally every week, you know, EVs is going to be a political football this year for Republicans and Democrats, and there, there isn't, there isn't going to be any position to win in, in the middle of all that. So I, I suspect that you're going to see a, a lot of infuriating conversation as, as EVs are scapegoated over the course of the year. And depending on who's in the White House come November, I think that the IRA is at great risk, which means that if you remove the incentives, I don't, I don't know what natural demand for EVs are.
Marguerite Watanabe:
I ask a question, could I Yeah, go for it. For Jeremy and, and Steve too, around hybrids, right? I think, yeah. You know, we talked about hy, we've had hybrids around for a long time now with this whole kind of evolving EV side of things. You see e hybrids going up, right? Suddenly every, so I think the prices there are going to, or, you know, yeah. Are going to start to change. I don't know, just kind of curious at your thoughts on that.
Jeremy Robb:
Yeah, we've seen in the data, like prices for where, where payments for hybrids are, are like one of the fastest growing and strongest and indicative of, of their pricing. And leasing on hybrids is the lowest, it's lower than ice and, and EV products too, so because it's the same thing. OEMs don't have to, you know, sve that those, those residual values and things. And because the demand's there,
Scott McMahon:
These are definitely exciting times, for sure. not nothing is staying steady. One of Steve and i's old leaders, you know, no, no resting on your laurels is what his famous slogan was. And so that's exactly where we're at right now. So, and I appreciate that perspective. I know we're running close on time just to be respectful of your time and the audience's time. So, you know, we have just one last question I wanted to ask, and maybe we'll kind of do like a lightning round on this one. Just last time we talked about what you saw in the, the 12 month period of time as far as a hot topic major trend to, to watch out for and be concerned with. Now let's look a little further down the road. I know we can hardly predict, you know, what's going to be six months from now, as Steve mentioned, election year, it might be a very changing time, but kinda looking down like three to five years you know, Steve, let's start with you. Where do we see that that the, you know, the marketplace in like three or five years? What's like a one or two big things that you would see?
Steve Greenfield:
Yeah, so checking off the regular boxes, right? Level five, full autonomy, not going to happen for passenger vehicles. Great use cases for, you know, mining and agriculture, but on, on streets, with all due respect to Waymo and cruise, not, not going to be widespread adoption. The, the agency model OEMs will not be selling directly. They had their chance during COVID and N. Now, if anything, you're hearing new automakers who are coming out or are embracing the franchise model. The franchise model has proven itself to be very durable and defensible. I think that you, I talked about earlier, mo monetizing the connected car will be something to watch through subscriptions, albeit with, you know, as you said, Scott, fraud and cybersecurity will be an issue. But the, the automakers have very aggressive goals, goals around unbundling vehicle options and selling those options to consumers on a, on a monthly basis.
Steve Greenfield:
Electrification, while, while there are headwinds now, I think, you know, 50 years from now, every car will be electric. We'll be able to charge them in a few minutes. They'll have long ranges. We'll have gotten over all this short term hump. But in the short term, in the next 18 months, two years, a lot of headwinds, not the least of which is the election year. Yeah. But a lot of headwinds, a lot, a lot around electrification. And as Marguerite said, the, the, the good stop gap technology is, is, is hybrids for the time being. I think dealership margins three to five years will be a lot lower than they have been during COVID. They'll con continue, continue to see, you know attacks across the various profit centers. Margins will come down. It's a durable business model, but margins will be lot, a lot lower than they are today.
Steve Greenfield:
And as a result, the last thing I'll say, the reaction to that will be there, there'll be a lot more focus on removing costs. So a lot of process automation using ai, trying to figure out, you know, a dealer's cost structure today is about 80% human, human capital. So as we look at robotics and we look at automation there'll be a lot more focus on how does a dealer take costs out of their cost structure. So while they're suffering from margin compression they can remove costs and maintain or actually grow profit over time.
Scott McMahon:
Yep. Yeah, totally agree. Onto you Jeremy what's your perspective on the, the kind of like the mid to long-term horizon?
Jeremy Robb:
Yeah, and I, you know, in the sake of of time, I'll try to keep it to two, two main points here. But the one I think for everybody, you know we talk about affordability and interest rates. Interest rates could probably come down a little bit, but I don't think they're going to come down a lot. So I think everyone needs to reframe our thinking longer term of where we're going to be with interest rate policy. Highly unlikely that we go back to, you know, 3% mortgage rates that we saw back in 2021 and things like that, which was an anomaly. You know, where, where are we a five, 6% mortgage long-term average is fairly normal, you know, and I think you see consumers getting their heads around that of, because they've lived with it for a little while, but the, you know, fed is probably going to have rates higher for longer, even if they do pull them down as inflation hopefully continues to come down.
Jeremy Robb:
And the market. And I just say that, because obviously it affects lending and, and automotive, but affects a lot of these companies and startups in the automotive industry. And the automotive industry is always getting disrupted. You know, when money's cheap, it's easier for those things to occur. And then secondly, and a big thing that I've been thinking about a lot more lately, and you're kind of seeing play out, is I think they're really big demographic shifts that are going to be highly influential to our economy and our marketplace. And you think about over the last decade, a lot of us have talked about, we're going to see all these baby boomers retiring. Well, we're here, we know we're in that, that phase. And we see that in all of the data. We see it in labor force participation those kind of things.
Jeremy Robb:
But the corollary to that is as they get older, that that segment, right? We have this other really big segment, the millennial segment, and they're, you know, somewhere between 25 and 40 ish right now. And they're coming into prime years where they'll have major influence on policy politics, all kinds of things in our, in our world, in our environment. And I don't know that the decisions that they made will be the same as kind of what we've had in the past, you know? And so I just think that's a really important thing for us to kind of keep our eye on as we go through this big shift to, to stay close to, to watch how all it plays out.
Scott McMahon:
Yeah, it's funny you mentioned anomaly, and it feels like we've been living in probably a decade or more of anomalies. There's just, so I think in your, you know, pointing out than three to five years from now, we'll have more anomalies, . So we're, we're definitely, we're definitely stacked well for keeping ourselves entertained with with complicated issues as we try to resolve and and improve this industry. Appreciate that. So Marguerite, over to you. Just to kind of close this outta this question, where, where do you see, you know, three to five years being probably some of the most important things to keep in focus?
Marguerite Watanabe:
Well, if we go three, you know, next several years, I agree with Steve about the technology. We have to be able to use technology processes, you know, something that's going to help us get into a more a competitive advantage, right? Give us the competitive advantage to be profitable, right? To con, you know, control op xs that are really kind of going out of control. So my goal in life is really to create a company that Steve's company can invest in. That's really what I'm looking for, right? Steve . And then I, we haven't said it yet, or we, maybe we did, but I haven't said it enough. We probably still have to really keep an eye on the regulatory environment, because that can change a lot for all of us, every one of us, from the lender to the dealer, to the OEMs auctions, everybody.
Marguerite Watanabe:
So that's always going to be there for us to deal with. And then probably longer term, right, we really have to think about data ownership. So whether it be you know, the consumer information that we were talking about with privacy, or if we're talking about the subscription, the OTAs right now, data ownership is something that's there we've talked about for decades, but I think it's going to come to a really tough point at, at some point for us to all decide you, you can think about it from a global perspective too, and some of the makes that are coming over from, you know, China and how that might have, you know, an impact on vehicles as well. And so the subscription models, you know, again, that we were, that Steve had mentioned. So there's a lot going on around that. And how are we going to maintain the ownership rights? How are we going to share them when it's necessary? I mean, there's a lot going on there. If I had a, someone coming outta college now, I'd tell them, Hey, look, take a look at that. I can give you job security for a long time. .
Scott McMahon:
Well, I know, it's, it definitely is, and I appreciate that all of your guys' perspective on things. And when you say, how are we going to do this? We're going to do it through people like, like yourselves who are, are thinking deeply about the industry, the complexity of the industry, the needs taking, taking technology into consideration, but also the marketplace that's so crazy unique to, to automotive. It's, it's hard to have any parallels when it comes to industry comparisons. And some people do get frustrated over the, the, the glacial kind of speed of, of change. But at the end of the day it's again, great minds like yourselves adding really fresh perspective to things, keeping us on our toes to think through what the complications are, what the opportunities are. I think it's really just a very concerning yet exciting path ahead for the next 12 months for sure. And even beyond that. So I greatly appreciate your team's perspective and, and adding to to the value of our conversation. Is there anything else, closing remarks anybody felt like they had to say that wasn't, wasn't mentioned otherwise? We'll close things out.
Marguerite Watanabe:
Well, thank you for the opportunity for us to all, to get together to have this dialogue. Yeah,
Steve Greenfield:
Absolutely. Thanks for having us, Scott. Really appreciate
Scott McMahon:
It. It's my extreme honor. I mean, you guys are phenomenal just partners in this space. And again, just one of the, you know, the, the great, you know, think tanks on this call right now, that I think people really need to listen to and understand and contemplate on the insights you shared. So I really, really greatly appreciate it. So let me close out then for the rest of the team. So, you know, just, you know, I appreciate all the people listening in on this conversation and really thank you for, for spending your time with us and you know, just enjoying this market pulse and, you know, look at other market pulse podcasts and webinars that are on our site. So if you go to the Equifax website, it's equifax.com slash market pulse to go ahead and see this broadcast as well as other broadcasts from within auto and outside of auto as well. So we try to bring in as many industry experts as we possibly can to give you the healthy perspective you need to go ahead and run your business. So with that said, I'm Scott McMahon. On behalf of the entire Equifax team, I appreciate you listening. Take care.