In this episode of Motley Fool Money, Motley Fool analysts Yasser El-Shimy and Asit Sharma discuss:
- CarMax's (KMX 5.40%) earnings miss and the state of the used car market.
- The growing trend of buying homes unseen.
Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp continue their conversation with Ron Lieber, personal finance columnist for The New York Times and the author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on April 12, 2022.
Asit Sharma: Inflation is up, used car sales are down, and millennials are buying homes blind. You're listening to Motley Fool Money. [MUSIC] I'm Asit Sharma sitting in for Chris Hill, who's on vacation. I am joined today by Motley Fool analyst Yasser El-Shimy. Yasser, how are you doing?
Yasser El-Shimy: I'm doing very well. Thank you, Asit.
Asit Sharma: Consumer price index numbers came in this morning, Yasser, and they were hot.
Yasser El-Shimy: Yes, they were. Inflation is a hot wire right now, everybody is talking about inflation. You can feel it at the gas pump, you can feel at the grocery store, you can pretty much feel it everywhere in all aspects of our lives. You can blame supply chain disruptions, labor shortages, energy prices, and so on and so forth. But really, we've seen very high numbers, not since January 1982 have we seen consumer price index this high, 8.5% from a year earlier, and that is following 7.9% annual gain in February, a 1.2% month-over-month increase. It's not just the year-over-year comparisons are bad, but prices are just literally increasing on a monthly basis. Of that increase, about 18% gain came from gasoline prices. Gasoline went up by 18% year over year. People are really feeling the pain at the pump here, and I guess if you are lucky enough to have an EV, maybe you're not suffering as much. As we know when we talked about those supply chain disruptions, actually being able to place an order for an electric vehicle and actually getting one are two different stories. These are just high numbers across the board, and the consumers are really feeling it.
Asit Sharma: OK, but help me out here. I happened to check the market before we taped today and stocks are up.
Yasser El-Shimy: That's right. Basically, stock market performance on a day-to-day basis or in the short term, it's really like an expectations game. Analysts came into today expecting roughly this much increase in the CPI numbers. When it came in-line, basically it was a green light that this is already priced in and some analysts are even starting to call this a peak point on inflation here. Effectively saying this is likely going to be as bad as it gets. If it's true, if they are correct, that inflation is as bad as it gets right here, that means that it should start normalizing and slowing down a bit over the coming months and therefore, taking some of the pressure off the Federal Reserve in terms of hiking all those interest rates, month over month.
Asit Sharma: Prices aren't the only thing that are rising, yields are also rising as well.
Yasser El-Shimy: That's correct. Because the Federal Reserve has signaled to us that it is going to be on the long-term rate hike cycle, that it is going to be raising rates and not just by 25 basis points. Every time they are saying maybe even more in order to try and get inflation under control. This means that the yield that investors expect on long-term assets like a 10 year Treasury, for example, is also rising. Investors are demanding more yield for their investments on elongated assets. Because the Federal Reserve is effectively telling everybody, "Hey, we're going to be raising rates for a while, so we just hit 2.75% yesterday." Many observers anticipate that yield to rise to about 3% in the not distant future. As we're talking here about yields, higher yields, what that translates into in real life, is effectively higher financing costs for consumers. The borrowing costs for consumers are higher, and you can see that across the board in terms of let's say, the housing market, for example, you have, mortgage rates have more than doubled since the pandemic close. They reached roughly 5.25% yesterday. Even as home prices were up nearly 20% year over year in February. Consumers are getting hit from both directions, both by higher inflation, higher cost of goods, and higher financing costs at the same time.
Asit Sharma: If prices are going up, financing costs are rising. What are the potential outcomes for demand in this economy?
Yasser El-Shimy: Well, it is possible that we may have something that economists like to call demand destruction. Demand destruction basically means that prices have gone up so high that consumers simply just bulk and retrench. I don't know about you, Asit, but I personally have been reviewing some of my expenses recently and trying to cut down on some of those perhaps discretionary items and spendings and thinking, for example, some streaming channels that I may not be watching as much, just anecdotally, I purchased airline tickets to go visit my home country of Egypt for the summer. I bought those tickets in early January. Now, just since January, those same tickets will cost you 40% more than when I bought them. I know other friends who are rethinking their travel plans in light of just how expensive airline tickets have become, for example. Therefore, that's what economies start to think about when they talk about demand destruction, that prices are just going up so fast, so high that people simply, change their consuming decisions.
Asit Sharma: CarMax earnings out today, Yasser, and on the sales front, the revenue front, they look strong to me.
Yasser El-Shimy: That's right, Asit, and yet the stock is down. CarMax actually beat on revenue estimates, its sales are up 49% year over year, but it did miss on the bottom line with net earnings down 23%from a year ago. Now, this happened due to a plethora of reasons, including again, higher labor costs and shortages and so on. But also having because people are buying fewer used cars. In fact, the volume on those, it's down about 6.5% year over year. But they are buying them at a higher average selling price, which is why the revenue is up. I imagine this is not going to last for very long. CarMax is going to have to start discounting its inventories in order to achieve a higher turnover. Still, it was not all bad news for CarMax, though as their national market share did grow in this quarter, which meant that they outperformed the overall used car market, which is showing signs of decline.
Asit Sharma: This is interesting in relation to what we saw with the consumer price index numbers from this morning.
Yasser El-Shimy: That's absolutely right. CPI numbers reveal that March was actually the second month in a row where used car prices declined, and in fact analysts have been warning for a few weeks now that the used car market may have already peaked in January. I think it'll be interesting to see how other used car retailers like Carvana, for example, do in this environment. Carvana was a huge beneficiary of the migration online of car buyers since March 2020, both in terms of volumes of cars sold as well as revenue, but they are facing the same environment that CarMax is facing now. CEO Ernie Garcia was kind of pressed on that during the last earnings call they had for Q4 2021, but he tried to dispel concerns about the prospective decline of sales prices moving forward and he noted that Carvana actually stands to do better and that is because Carvana has to compete with other dealerships to source costly in hard-to-find used vehicles. If that is no longer the case, the company may be able to source those cars at a lower cost and have a greater selection variety for buyers. Finally, it's probably better on his view for the used car industry to have prices go down in order to offset those rising costs of financing. If it costs the average consumer more to finance a car, maybe that ticket should come down a little bit to make it a bit more affordable, and he did note a discrepancy between the share of growth in terms of vehicle sold between two cohorts. A cohort that makes less than $50,000 a year versus a cohort that makes over $100,000 a year. Needless to say, the former category of people making less than $50,000 a year, they are really feeling the pain and they have really cut down on their expenses, including obviously buying a used car here. Perhaps a more normalized used car market is not bad news after all.
Asit Sharma: Redfin out with the survey that had a very interesting observation about the habits of homebuyers in 2020.
Yasser El-Shimy: That's right. According to Redfin, 63% of homebuyers in 2020, mostly millennials, made an offer on a home without seeing it in person. Again, this is the largest purchase for most people in their lifetime, buying a home and yet, 63%, let me repeat that 63% of homebuyers in 2020 made an offer on a home without seeing it in person. This is enabled, thanks a lot to advances in technology you can go to websites like Redfin and Zillow and others to just browse listings of homes. Take tours inside of those homes if you want, sometimes 3D tours even and look at photos and sometimes supplement that also with satellite images from above that can tell you what the house looks like from above, but also what the neighborhood looks like from above. Armed with all these resources, buyers especially millennials and younger generations are moving online into some of the high ticket priced purchases that they would have to make in their lifetime.
Asit Sharma: I used to think this is a generational thing but, Yasser, it seems like the technology has improved so much that even people who grew up physically inspecting cars, houses, big ticket items, refrigerators, I think that the edge technology gives you is replicating that physical experience while you're sitting in an armchair at your kitchen table. Do you think that this will only increase as time goes on or maybe people who are buying what could be near market top might have some regret later on that they didn't take more time with their purchases or maybe have some buyers who are most after moving in?
Yasser El-Shimy: No, these are good points, Asit. I think that we definitely saw a spike during the pandemic and the lockdowns where people had to sit at home. They couldn't go to work, they couldn't go, say, for example, for car buying, they couldn't go to dealerships for perhaps home purchases. Maybe they couldn't travel to another state in order to look at houses in order to buy that second home or that rental property that they are going to invest in. I anticipate some of that to normalize, but I also see that consumers have experienced the utility and convenience and, in fact, safety of doing a high ticket transaction online without getting scammed necessarily or without sacrificing too much. Whether they pay too much or pay too little, I think only time will tell, although for homebuyers who bought in 2020 I think they're setting on some pretty hefty gains already, but I do expect that trend to continue and we have seen that trend of consumers buying high ticket items online be that in the real estate market. For example, through iBuying on platforms like Redfin or Opendoor or in the used car market, so platforms like Carvana, for example. Again, something that increases people's ability to purchase cars, maybe when they do not necessarily want to go from one dealership to another and looking for that perfect car, instead they literally have a national inventory of over 20,000 cars at their fingertips. Also in the luxury apparel space. We're talking here about $800,000 sweaters, for example. It's definitely not a cheap purchase and people used to have to go to those luxury apparel stores and so on in order to try them out, feel them before they commit that much money to a purchase like that, but now with platforms like Farfetch and others, consumers don't have to make those trips. They can buy and feel confident about their buying decisions because they can always return but they bought at least in the case of the car and the apparel, I don't know about the houses but I see this trend [inaudible]
Asit Sharma: Yasser El-Shimy. Thanks so much.
Yasser El-Shimy: You're very welcome, Asit. Thank you. [MUSIC]
Asit Sharma: Next up, Allison Southwick and Robert Brokamp continue their conversation with Ron Lieber on how to talk to your kids about money. Lieber is a columnist of "Your Money" in The New York Times and is the best-selling author of the Opposite of Spoiled.
Allison Southwick: Last week with the help of Ron Lieber, you learned how to answer some tough questions that your kids are probably at some point going to lob your way. Questions like, why don't we have a vacation home? Or insert really anything there for vacation home. How much do you make? Well, Ron Lieber, thankfully, is joining us again this week to answer three more tough questions that your kids may ask you. He is going to offer advice on how you can use these conversations as an opportunity to instill the values that you want them to carry with them for the rest of your life. Just something light and friendly like that. Hi, Ron.
Ron Lieber: You always sound light and friendly to me.
Allison Southwick: I know. It gets so heavy. We're jauntily going to talk about money. But then it's like, and by the way, you are instilling values that your kids will carry with them for the rest of their life. So don't mess it up.
Ron Lieber: This is the thing. We can take this. It's possible to take it too seriously. It's also possible not to talk about it enough or to be afraid of it. But really, there's no reason to be afraid. Good values make for good conversation, so no fear.
Allison Southwick: I've set these questions up to grow as our kids grow. Our next question here, we're going to start dealing with our kids actually having money of their own to deal with. Our next question that you are going to help us answer is, what is this weird piece of paper grandma stuck in my birthday card? [laughs] You and I know it's a check. I don't know if our kids know what that is, but can you talk a bit about working with your kids, helping them now that they're starting to get money to spend themselves?
Ron Lieber: Yeah. I was just thinking about this this morning because our 16-year-old is going to have a real paying job this summer. I was trying to puzzle out if she gets paid by paper check, No. 1, she doesn't know what a paper check is because she has gotten that weird money stuffed in her card. But then, what is she going to do with it? Does her teen debit card app, can they even deal with paper? I don't actually know how? [laughs] I got to figure that one out but in terms of the check that comes for the 6-year-old or the 8-year-old or the 10-year-old. It's often a difficult thing to explain. It's a little abstract. You can say, well, this piece of paper is the same thing as the green cash money you've seen before. But you can't take this piece of paper and spend it at Claire's on hair accessories or at the video game store or at the bakery. You have to give the piece of paper to me and I take out my phone and I take a picture of it and then it magically turns into money at our bank. Then we can pull some money out at one of those machines that spits out the green cash money, and then I can give it to you and you can use it. They'll probably be a little confused about that. But if they ask questions, great, because then you can explain the banking system.
Allison Southwick: You actually do value that cold hard cash for kids to actually hold it and physically do something with it.
Ron Lieber: Yeah, here's why I like green cash money. It's visual and it's also visceral. It's a visual because you can watch the single dollar bills accumulate in a savings jar or spending jar, giving a charity jar. But it's also visceral in that you can take it out and hold it and count it. There's some math stuff in there. But there's also a real beauty. We just did this with the 6-year-old, actually. She saved up six or eight months of giving money and she decided she wanted to donate it to the PTA at her school because they were buying a whole bunch of oversized soft blocks to have on the playground. I know you've seen these things, but they're like four or five feet tall and they build crazy stuff with them and it doesn't hurt you when they fall in your head. They wanted to spend, I don't know, like $10,000 on a whole set of this like [inaudible] and Violet took her $52 or whatever and she brought her jar, and she headed off on the corner to the treasurer of PTA. She felt so great about herself. There was this pile of money that she could see and she could feel and she was giving it over to a person who was going to do something cool with it for the community and that was cool.
Allison Southwick: When I read your book way back in the day, I had a 3-year-old on my hands maybe, but as soon as I could, I did what you said. I got her the three jars. One was give, one was save, one was spend. Thankfully, she has very generous grandparents who don't know what to buy her, so they often just give her money. It really has been so great to be like every time she gets money, we say all right, you've got to do the math. You got to divide it into the three jars. This is your money that you get to spend. This is what we're saving long term. She said she saving for a horse, but no, I'm not going to help with that. Then the give jar, which she usually gives to the animal shelter. We had this interesting moment, I was talking to a mom who is her best friend's, my daughter's best friend's mom. We were talking about how we just bought you a gift for Hanna's birthday because Hanna bought us a gift and blah, blah, blah, blah, blah. I was like yeah, Hanna wanted to buy Sylvia a gift so she bought Sylvia a gift. Sylvia's mom was like, we'll know, but you bought it. I was like, no, no. Hanna bought it. She wanted to do it. I'm done buying her presents for her friends. She's got her jar of spend. She gets to do it, if she wants to get our friends a gift, she is paying for it. The mom was like so taken it back. I was like, yeah. I'm done paying for that. She has to do it on her own and it was such a great feeling. Thank you, Ron Lieber, for that one.
Ron Lieber: [laughs] Gladly take credit for any and all of it.
Allison Southwick: For our next question, it is, can I have an allowance, or generally speaking, what's your philosophy on chores, allowance, paying your kids, that whole thing?
Ron Lieber: First of all, the answer to that question is pretty much always, yes. Unless your kid has proven irresponsible in a way that's relatively unusual. There are kids who eat the money, there are kids who rip up the money or turn it into art. Once you get beyond the gobbling of the coins and the scissoring of the 10-dollar bills, then it's cool. I like a couple of things about this three jar approach, save, spend, and give. It allows kids to begin to understand the concept of trade-offs. Because that's how we grownups budget our money, even if we don't really think about it that way all the time. It gives them practice in learning the patience and perseverance around saving and the prudence in the thrift around spending only on the things that make you happy and then giving to people who have less than you do or who need it more. This is all good. I like that allowance connects to values. One of the questions people asked most often is what should they have to do an exchange for it? I think other than not eating it or not cutting it up, I think the main thing that they should have to do is actually nothing. A lot of parents want to pay for chores because they think that that instills a good work ethic. I guess I would rather see kids go out and get jobs in the community where it's not their blood relatives who are the bosses. I think kids should do chores for free. The same way the grownups do because that's what we all do to try and maintain an orderly living space. We do that because we love one another in addition to the fact that we value order. The problem of paying for chores is that if you create an employer-employee relationship, at a certain point, the kids who we're good savers are going to be like, well, I have enough money for a while so I'm not going to do the chores. Then you are in a pickle. Don't back yourself into that corner. If you're looking for leverage over them, the best way to get them to do what you want is to turn off the internet. [laughs] Not to punish them or take away money. Just take away the things they want to do and most kids want to be online and somebody should perform.
Allison Southwick: Great, that's what's probably happening instead of the chores. They're not just sitting in their room counting money.
Ron Lieber: [laughs] Creates more time and space for the chores, that is true.
Allison Southwick: All right. Our last question we have for today. Will you buy me a car? Or perhaps it's maybe more accurately phrased as, when are you going to buy me a car? Everybody I know has a car. At least that's the tone I imagine my daughter is going to take when she's 15. Hopefully not.
Ron Lieber: Yeah. I needed to be educated a little bit on this one because I grew up in a city with a lot of public transportation and I live in a city with a lot of public transportation now. The thing that people like me tend to forget is just how much time parents spend as chauffeurs from the ages of 0-15 and 364 days. When kids turn 16, it can feel like liberation for the parents and you've got all of these hours back again that can be used for leisure or to make more money. There's a way to economically justify buying a kid a car, that feels to you like buying back your own time. I don't want to discount that element of it. I think it's real. We all chuckle when we think about it that way, but it has more than the ring of truth. I don't feel like you're spoiling your kids just because they have a car. Now, I think it's possible to go too far. Parents may talk themselves into the fact that kids need to have the most modern version, iteration of the best possible safety equipment because they're spending too much time looking down at their phones no matter how hard we try to keep them from being distracted generally and distracted driving as particular. We want all the collision avoidance stuff and the lane wondering avoidance stuff and that's all well and good. But the answer is not a 2022 Lexus or whatever. If you can afford such a thing or are willing to borrow for it. The answer is not that they get a newer car than you have. I actually went and looked at this for a New York Times column a couple of years ago now and I think if you google 2015 Chevy Malibu, what you'll find is that all used cars out there up to and including five- or six-year-old ones have the safety equipment that we want our kids to have. This stuff is actually now been around for long enough that a three- to five-year-old used car of many makes and models will do the trick. They do not need a new model sedan to do this. Then to the extent to which they're using it for leisure, you can ask something of them. Maybe they're paying for their portion of the radically increased insurance premium or maybe they're paying for gas or they're paying for maintenance. You can work it out in whatever way you want.
Robert Brokamp: I will just totally agree with the whole buying your freedom. My goodness gracious, the day that we didn't have to drive our kids all over the place to and from school was certainly a liberation. I did want to ask you though one other thing though, it was from your book, it was the Dewey rule, which really just addresses the whole idea of the question of when the kid decides while everyone else has this, why don't I have it? As I remember, it was based on a fellow by the name of Bramson Dewey who had a penny-pinching father, thought he was poor, but then he took over the family business and found out he was rich. So Mr. Dewey came up with a rule about when a kid should get some sort of new thing, a new technology. Can you remember what the percentile was on that?
Ron Lieber: Yeah. When Mr. Dewey was younger, they wouldn't even let him play youth hockey, they wouldn't even buy him the used equipment because they just felt like it was extraneous. They felt like it was unnecessary and he always felt deprived by that. Then when his dad died, it turns out dad was sitting on like a $30 million Manhattan real estate portfolio and he inherited a third of it and from that point forward, he never had to work another day in his life for money and he didn't, he hung it up. But then he had a couple of kids and he had to figure out, OK, I don't want to overcompensate 180 degrees on this. He basically settled into this idea where if there was something that his girls really wanted other than hockey, which he made sure they could do on day one [laughs] when they wanted to, that they were going to be like the seventh out of 10th of their good friends to get the thing. Because what he found out was that by the time the fourth or fifth kid gets the thing, the first kid had sometimes moved on to the next thing or those fourth or fifth kids have realized that the thing isn't really all that cool or interesting anyway. Often even you have to buy that thing. But if it turned out to be a thing that had some staying power then they would have the conversation about what's the need version of the thing, what's the want version of the thing and what's an appropriate amount for me and mom to contribute and how much toward the nicer version of the thing? Are you going to pitch in right out of your save or your spend jar and that's where he settled it.
Allison Southwick: Ron, thank you so much for joining us. Do you have another book coming out? You must at this point because you've written about the Opposite of Spoiled. You've also written a great book about paying for college. What's next?
Ron Lieber: I have a big idea that I'm not going to share in a public forum that could start as a book, but would require one or two years of just full-time wind up. So what I really want to do is have a TV show. That's all I can say for now. It's very much about money and it's about something that every single one of us has thought about before, but the vast majority of us have never experienced.
Allison Southwick: Okay. Well, coming to a TV near you, but in the meantime, [MUSIC] of course, you can find more of Ron Lieber at The New York Times. Ron, thank you so much for joining us.
Ron Lieber: It's always a pleasure. Thank you for having me. [MUSIC]
Asit Sharma: As always, people on the program may have interests in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Asit Sharma. Thanks for listening. We'll see you tomorrow.