The Auto Industry’s Check Engine Light Is On
Hey, auto industry. Your check engine light is on! A couple of weeks ago, we reported on the strained retail bubble. But that’s not the only balloon that Fed has managed to inflate with almost a decade of easy money.
For the last several years, the auto loan market has ballooned to record levels – nearly $1.1 trillion. That compares with $987 billion at the end of 2015. Over the last two years, the amount outstanding on auto loans has increased 21%. More disturbing is the rise in subprime auto lending. Deep subprime loans made up the fastest growing auto financing segment in the fourth quarter of 2016, increasing 14.57%. Subprime loan balances also climbed 8.62%. As ZeroHedge pointed out, “Deep Subprime” borrowers have increased by double the amount of any other bucket.” According to Bloomberg, about a quarter of all auto loans fall into the subprime category.
In other words, lenders are making a lot of risky car loans. Shaun Bradley of Anti Media put it this way.
“Teaser offers that allow people to get cars with zero money down and 84-month financing have fueled a wave of irresponsible spending. Americans’ tendency to associate success with having nice things has driven many people who can’t afford to buy a house to get the next best thing — a brand new car.”
And what happens when people borrow money to buy things they can’t really afford? Ultimately, they struggle to pay for it. And unsurprisingly, delinquency rates on auto loans are climbing rapidly, as MarketWatch recently reported.
“Subprime auto-loan default rates match those seen just before the 2007-2009 recession. It’s a red flag that’s been flapping for some time for analysts worried it could pose risks to the broader credit market, bank health and, ultimately, the consumer-driven economy.”
According to Federal Reserve numbers released last December, 6 million Americans were delinquent on auto loans. At the time, analysts said they expected those numbers to increase. This during a period of low unemployment and a supposedly healthy economy.
We also see other signs of stress in the auto industry. Passenger car sales plummeted in March, marking a third straight monthly decline. Sales fell 1.6%. The AP called it “a strong indication that years of sales growth have come to an end.” Inventory levels have started to climb, and dealers are piling on incentives trying to lure people out to the car lot.
“The LMC Automotive consulting firm said incentives hit a March record, averaging $3,768 per vehicle and the highest amount since March of 2009. In addition, cars and trucks are sitting on dealer lots for an average of 70 days, the highest level for any month since July of 2009 during the sharp economic downturn.”
That feeling of jeja vu, you may feel as you read this isn’t unwarranted. This looks a whole lot like the housing market in 2007, complete with the bundling of high risk auto loans into products similar to mortgaged backed securities. According to Bradley, investment fund managers have bought billions of dollars worth of this securitized debt. In fact, as Bradley points out, the parallels between the housing bubble of 2007 and the current auto bubble are downright eerie.
“Millions of borrowers who bought cars on credit could see the value of their vehicles plummet yet still have to pay off their full loan amount. It’s similar to 2008 when the mortgage market collapsed and plunged home prices across the country dramatically lower. Property values fell so much that people suddenly owed more on their homes than they were worth. Those homeowners then had to make the decision of whether to wait it out and keep paying their inflated mortgage rates or cut their losses and sell. Cars, on the other hand, have never been an investment, and this kind of situation in the auto industry would likely trigger an avalanche of private sales as people try to get out from under their debts.”
A deflating auto loan bubble alone probably isn’t enough to create a major crash like we saw in 2008, but you have to remember, this isn’t the only bubble floating around out there. We’ve already discussed the aforementioned retail bubble. Then you have the student loan bubble, along with a more general ticking debt bomb.
The Fed can keep right on telling us the economy is rolling along nicely and that it plans to continue raising rates over the next year. But we can all see that check engine light glowing on your dashboard. You might want to get that looked at.