Is The Auto Loan Bubble Ready To Pop?

Tyler Durden's picture

Submitted by Tommy Behnke via The Mises Institute,

On Tuesday, it was announced that over seventeen million new vehicles were sold in 2015, the highest it’s ever been in United States history.

While the media claims that this record has been reached because of drastic improvements to the US economy, they are once again failing to account for the central factor: credit expansion.

When interest rates are kept artificially low, individuals are misled into spending more than they otherwise would. In hindsight, they discover that their judgment errors wreaked havoc on their financial well-being.

This is a lesson that the country should have learned from the Subprime Crisis of 2008. Excessive credit creation led too many individuals to buy homes, build homes, and invest in the housing industry. This surge in artificial demand temporarily spiked prices, resulting in over four million foreclosed homes and the killing of over nine million US jobs.

Instead of learning from the mistakes that sent shock waves throughout most of the planet, the Federal Reserve has continued with its expansionist policies. Since 2009, the money supply has increased by four trillion, while the federal funds rate has remained at or near zero percent. Consequently, the housing bubble has been replaced with several other bubbles, including one in the automotive industry.

Automotive companies have taken advantage of the cheap borrowing costs, increasing vehicle production by over 100 percent since 2009:

Cheap Borrowing Costs Over the Years

Source: OICA

In order to generate more vehicle purchases, these companies have incentivized consumers with hot, hard-to-resist offers, similar to the infamous “liar loans” and “no-money down” loans of the 2008 recession. Dealerships have increased spending on sales incentives by 14 percent since last year alone, and the banners in their shops now proudly proclaim their acceptance of any and all loan applications — “No Credit. Bad Credit. All Credit. 100 Percent Approval.” As a result, auto loans have increased by nearly $80 billion since 2009, many of which have been given to individuals with far-from-stellar credit scores. Today, almost 20 percent of all auto loans are given to individuals with credit scores below 620:

Auto Loan Originations by Credit Score

Source: New York Fed

Not only are more auto loans being originated, but they are also increasing in duration. The average loan term is now sixty-seven months (that’s 5.58 years) for new cars and sixty-two (that’s 5.16 years) months for used cars. Both are record numbers.

Average transaction prices for new and used cars are also at their record highs. Used car prices have increased by nearly 25 percent since 2009, while new car prices have increased by over 15 percent. Part of this has to do with the increasing demand for cars generated by the upsurge in auto loans. The main reason, however, is that consumers — taking advantage of the accessibility of cheap credit — are purchasing more expensive body styles. This follows the housing bubble trend, when the median size of a newly built single-family home rose to 2,272 square feet at the start of 2007.

We all know the end result of the Great Recession - prices soared, millions of houses were foreclosed, and unemployment surged. Demand for homes then plummeted, and home prices ultimately dropped by 20 percent each month.

The auto bubble has yet to burst, but its negative effects are already starting to gradually appear.

For one, delinquencies on car loans have increased by nearly 120 percent, from just over 1 percent in 2010 to 2.62 percent in 2014. Since cars rapidly depreciate in value, this number is projected to spike. By the time these six, seven, and eight year no-money down loans are due to be paid in full, many of these vehicles won’t be worth paying off anymore — maintenance and loan costs will start exceeding the value of the cars.

According to the Center for Responsible Lending, one in every six title-loan borrowers is already facing repossession fees. If defaults sharply increase in the coming years as projected, the market will become flooded with used cars, and their prices will, with near certainty, fall to a significant degree.

At a time when labor force participation is at its lowest level since 1977 — at a time when real wages are rising less than they have since at least the 1980s — it is imperative that the Federal Reserve stop misleading individuals into making irrational investments. The economy is simply too frail to continue weathering these endless business cycles. Economists, politicians, and the general populace need to start learning from their economic history so they can begin recognizing that favoring debt over thrift isn’t beneficial to the country’s financial well-being. Failure to do so will simply lead to more bubbles, more malinvestment, and more economic headaches in the years to come.

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Hitlery_4_Dictator's picture

Real Estate agents getting desperate, email today, lol


"Happy New Year!  I wanted to check in and see how you were doing and also see if there was anything that I could help you with?  I know you were searching for a new property last year and I wanted to remind you that I can help you buy, sell or even rent a home.  Please let me know how I can help.  


Have a wonderful afternoon!"



My response.


"Happy New Year Jerome. I'm going to wait this out until Real Estate fully deflates. We are in the midst of another 2008 meltdown. Real Estate will likely drop 30-60% soon. Have a great day."

cheka's picture

AAA rated abs(auto backed securities)?  if so, the ratings agencies will be proven RIGHT again

frbny stands behind them - ready to bail out the pigmen that traffic in such

anti Oligarchy's picture

THe incentives are starting to come out more and more... first indicator of a real problem in automotive is when the incentives fly.  

Worst thing about automotive is once they pull back.. the ripple effect through the economy is fast - no one slows down faster than automotive.


El Oregonian's picture

The proverbial auto loans "Airbag" has been activated and is now deflated and limp, with the driver receiving two black eyes and a broken nose for his effort.

Yes We Can. But Lets Not.'s picture

This post got me to wondering what % of auto purchases are financed.  So I googled it, and a recent consumer reports piece says that 87% is the number, up from 80% five years ago.

87% of new car purchases are financed!  That is friggin' unbelievably high.  Only car I ever financed was used car I bought when I got outta college - I had paid my way and worked my way through school and was broke.  Have only purchased 2 new vehicles in the 30 years since, paid cash.  I'd never borrow to buy a car except to get the $500 finance incentive they offer and pay that off the next month.

Save up $500 and buy a beater truck at a farm auction.  Use it to make some money hauling stuff, get your $500 back, go from there.  Come on people, get of your asses and work for it, and live below your means instead of living above your means.

/Stepping down from soapbox.

Uchtdorf's picture

No need to step down from that soapbox when it's exactly the message people need to hear.

So many people who are unprepared for just normal life right now. What are the percentages on Americans who can't immediately put their hands on $2000? Astronomical, right? Especially when you consider that $2000 doesn't really buy that much any more. I mean, gold was $35 per ounce...IN MY LIFETIME...and I ain't that old.

Now what happens if the world reserve currency status is taken away and the economy tanks, as expected? The US will become like the Cambodian Killing Fields. Massive die-off as people operate under desperate conditions. As they commit atrocities on a massive scale.

AMongoose's picture

They have to offer more incentives. The American consumer is going broke (if not already) and those long loans of 5-6 years are longer than the car lasts. Buyers need more to be able to afford the rollover of the old car loan into the new one.

PTR's picture

Loan (for first new car buy)- 60 months (all I could afford at the entry-level job I had, AFTER a $6k down payment.)

Car- 11yrs and running strong.  Go Subaru.


Go ahead and lambast me for new-car depreciation, etc, etc.  I got a car with no issues, basically no wear and tear, and serious peace of mind.  The only expenses have been oil changes, new tires, a 25k maintenance, and a tune up.

American Psycho's picture

Still schlepin' around in my 96 Nissian Maxima.  Just turned 200,000 miles.  Fill up the tank once every two weeks and pay ~ $20 / month in liability insurance. 

anti Oligarchy's picture

THe incentives are starting to come out more and more... first indicator of a real problem in automotive is when the incentives fly.  

Worst thing about automotive is once they pull back.. the ripple effect through the economy is fast - no one slows down faster than automotive.


commishbob's picture

Pun intended, anti Oligarchy?

Dr. Spin's picture

Also consider this:  If you take out the number of vehicles that were purchased either directly or indirectly* with taxpayer dollars, the number would look very very different.

* purchases by pubic servants, pensioners, corporations that suck primarily from the public trough, etc. etc. ad nauseam.

Very few vehicles get purchased by legitimate buyers,,,

Spoctor Din

new game's picture

is a crash still a crash? air bags are the fed...

NoDoomForYou's picture
NoDoomForYou (not verified) Hitlery_4_Dictator Jan 11, 2016 12:58 PM


Insurrexion's picture




You might have forgotten your salutation...

BTW, Jerome, fuck off and get a non-existent, part-time job in the industry of your choice.

Hitlery_4_Dictator's picture

Sadly, Jerome did not get back to me, LOL. This is telling as it's in Austin - which is supposed to be booming. Of course it's in a huge bubble. Of course I'm in the Country.  I feel for those California sheeple in Austin, I really do.

12357111317's picture

Jerome, thank you, and if you really want to help, would you like to wash my windows?

glenlloyd's picture

That's an awesome response you sent him.

A house not far from me closed a while back. A RE agent bought it and is doing a lot of improvements and then will flip it. I had a bit of a discussion with him about it and he seemed to think that there wasn't any trouble on the horizon until after 2017. I asked him what he saw that he felt so good about and he couldn't really come up with anything.

I told him in parting that I believed he'd miscalculated and that if it wasn't done / on the market in the spring he was looking at a problem.

edifice's picture

I get the same thing from car dealers, in print junk mail. I'll keep rocking my 2003 Civic, with 230k miles.

Seasmoke's picture

Easy on Jerome. We dont want to find him hanging in a coat closet in the next house he spends his whole Sunday afternoon trying to find a buyer

Hitlery_4_Dictator's picture

I don't wish that on anyone, hopefully he will look into what I said and save / make himself a lot of money. 

JRobby's picture

Nahhhh! Let Repo's peak later this year. 4 or 5 more months of "astounding job recovery" numbers should do it.

Let's go to the auto auction! We will meet the finest sorts there!


Dave Thomas's picture

I remember when the rate hike happened, all these real estate fluffers told everyone that this is a CRUCIAL TIME TO BUY so you can lock in those LOW RATES before they SKYROCKET! Oh dear! Snicker!

chilller's picture

Realtors are high paid used car salespeople...

I was looking at a house with a realtor one day and I think she forgot I was a BUYER and not a SELLER.

She says, "Lord knows I've done my best to keep prices high".

That was the last time I saw her...

The next realtor I was with said she couldn't present the seller with a low ball offer because the house had only been on the market 6 months. "But think of it this much more equity you'll have in this house in 2 years" she said. She was immediately kicked to the curb as well. Housing prices continued to skid for 2 years but I never forgot her words and sent her an email jogging her memory of the incredibly stupid remark she had made and that she should find a line of work she was qualified to be in.

All crooks...

JRobby's picture

She was trying to get her meds balanced. Still is....................

Hitlery_4_Dictator's picture

They are trash balls for sure. Watch Wallstreet - Money never sleeps. to see for yourself. 

JRobby's picture

An early Saturday Morning drive is worth the effort so you can catch them when they are putting out the "open house" signs. Nail one and its good for 24,000 death race points.

Jerome is a bonus points eligibility qualifier.

Rikky's picture

know someone in town who owns a real estate company they're big thing is chargin 4.5% commission in a town that sees tight supply and high demand.  she just bragged about how the new home she's buying has the largest kitchen in a town of 40,000.  talk about obnoxious.  to think we reward with such wealth someone that only needs a half brain to open and close a door to show properties to people.

NoDebt's picture

"At a time when labor force participation is at its lowest level since 1977 — at a time when real wages are rising less than they have since at least the 1980s — it is imperative that the Federal Reserve stop misleading individuals into making irrational investments."

Son, if it wasn't for irrational investments we'd have no investments at all right now.  Maintaining the illusion is critical.

gaoptimize's picture

Forget the car.  How much for the fair-skinned, blue-eyed radhead?  Biggest regret in my life is not being able to make strawbeery blode babies with a woman of that make and model.

12357111317's picture

I clicked on "up" and apparently that changed the score to "1 up" and "1 down".  Weird.

NoDoomForYou's picture
NoDoomForYou (not verified) gaoptimize Jan 11, 2016 11:55 AM

I have a green eyed SB....  Not what it's cracked up to be.  They're fucking crazy.  Have had a couple of red heads (natural ones...), besides being crazy they have an odd smell to them.



edifice's picture

That is true! Had a redhead, who smelled like week-old quiche. :P

sgorem's picture

had one too. she tasted like chicken.

Montani Semper Liberi's picture

 Had a serious thing going with a drop dead gorgeous (IMHO) green-eyed, freckled redhead when I was in my early 20s. I f*cked that up royally, totally my fault. BTW, she smelled heavenly to me.

 Thanks for the tip, gaoptimize, I don't usually go to the printer friendly version.

yogibear's picture

The Federal Reserve has created so many bubbles by fostering reckless, non-productive lending. 

Next Fed stimulus will have to be much larger.

Each bubble and it's destruction is larger.

skinwalker's picture

No one has ever satisfactorily explained to me why it's a good idea to finance a personal vehicle. 

NoDoomForYou's picture
NoDoomForYou (not verified) skinwalker Jan 11, 2016 11:53 AM

Mainly because we all can't save up 25 - 40K to buy one new.   Yeah, yeah, but some folks don't want a used someone else's problem under them.


Look in the South; you can get land, warmth, an outbuilding and a house for less than a new truck.  Somethings seriously wrong there.

Spitzer's picture

Its all R vs K gene selection theroy . Easy money breeds R selected genes. That is why so many ppl are metally R selected retarded. If you are a reader of ZH, you are probably K selected. So none of this easy money shit makes any sense to you and never will.

cheka's picture

have to analyze opportunity cost vs interest rate paid

or if buying junker -- opp cost vs interest rate and liability only insurance

Neil Patrick Harris's picture

Hopefully the burst in the auto bubble coincides with an inflation of the bitcoin bubble... I've got my eyes on a brand new Lexus.

NoDoomForYou's picture
NoDoomForYou (not verified) Jan 11, 2016 11:51 AM

The peep's don't care though.  Every Tom, Dick and Harry around me is driving a $50K truck or $40K SUV.  Someone's gotta be paying for it somewhere.

Me, I bought a 95 F150 5spd with 136K on it and a good body, shit - even came with a camper.  I'll get that in shape and the 40, 50 and 60 thousand dollar trucks can suck it.

And have you seen the financing now? EIGHTY FOUR months!!!  Holy Crap!!!  You lose 10% just driving it off the lot.  Add in all the costs of maintenance on these very, very high tech P.O.S. and it ain't worth it.

Hitlery_4_Dictator's picture

No doubt, bought a 2003 King Ranch with 62k miles, mint. I can get 10-15 years out of it. 

Spitzer's picture

Rear buckets with cup holders ?

Hitlery_4_Dictator's picture

Yep. You can eat off of the engine. Tow package, white / tan. Moon roof, everything I wanted. Seat Heaters.  Traveled all the way to Alabama to get it. 

FreeShitter's picture

Love Ford trucks and suv's. Old ones/newer ones.

DrewJackson's picture

Yeah but 84 months at 0 interest is not a bad way to float money.