Is The Auto Loan Bubble Ready To Pop?
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:
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:
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.
(13 votes)
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True, but if you take that financing deal YOU WILL NOT MAKE YOUR BEST DEAL ON PRICE. You get your best deal finding the exact new vehicle you want on a lot, find out one or two more area dealers with the same exact vehicle, and then start negotiating as an all cash purchaser and playing them off against each other till you find out which dealer is hungriest.
IMO.
And sometimes the dealer gets an additional bonus for getting the buyer to finance. Each deal is different -- some dealers will consistently choose borrowers over all-cash buyers, even if it means offering a lower price to the borrower because they know they will make more in the long run.
NoDoom...
you are so right. the cushiness of the work trucks now is simply insane.
I'd be afraid I'd get the @#$@#$@ leather seats stained.
Just get a couple credit cards so you can pay one off with an advance from the other one.
You better buy a new car now or you'll be priced out of the new car market forever!
Best auto investment right now is old(er) trucks in good shape. Fix them up a bit and they sell big.
"You better buy a new car now or you'll be priced out of the new car market forever!"
There's never been a better time to buy, sell or trade!
Hah! Love that NAR blather.
Used to be you bought a car for 36 months and after the new smell wore off you had about 30 months (2 1/2 years) of aggravating payments remaining. Now its 67 months average and 5 years of payments remaining? Yikes.
well by using your math, they did improve and the extend the new car smell by 1 month
according to phil lebeau on cnbc, there is no auto loan bubble
and according to the venezualan finance minister, there is no inflation
and according to the obama administration, healthcare is more affordable now
and according to tony soprano, there is no mafia
If I read the chart right, there's been roughly $80B lent to the bottom 3 tranches of credit scores (below 720). That's an annualized $320B, or about $1000 per every person in the U.S.
Cue Steve Carrell's Mark Baum: "There's a bubble..."
What I witnessed after the last crash was typically Americans buy that big overprced new car right before they go on welfare.
why would they do that ??
"why would they do that ??"
Bigger trunk. Have you ever seen how much shit you can buy with foodstamps?
I had a buddy who was on welfare, every handout you could imagine... They had steak on the grill every weekend. The wife ate filet, while the husband ate strip. All free. Pretty good, if you ask me.
With the average EBT benefit at around $3/day, maybe the entire $21 budget went to the steak that weekend -- with ramen noodles for the other days.
why do we have a financial system based on fucking TRICKING PEOPLE !!!!!!!!!!!!!!!!!!!!!!
I bought one new vehicle in my life in 1988. Never did that again.
Glad some sucker does though, so there are plenty of good used ones to choose from.
Some people have a car payment all their life. Hard to imagine, but it is true.
The repo-man going to be busy.
Long on Lizard Lick.
it is imperative that the Federal Reserve stop misleading individuals into making irrational investments.
Since when is a car an investment?
Perhaps when its 1966 GTO (Ferrari or Pontiac take your pick) or a Cobra etc etc
Classic cars another bubble waiting to be pricked.
In 2008 watching the Barrett Jackson auctions, $20-30,000 would get a nice Corvette, or Mustang. It went insane again the last couple of years.
While reading this article, I happened to notice the ad on this page, Zero Down Auto Loans. SMH
Incestuous, isn't it?
Where are the adverts?
Go long....tow trucks.
Hey, here's an idea. Why don't we bundle these bad auto loans and turn them into some form of deriviative and................never mind.
When will "Chinese Financing" become fashionable again - you know, wun lump sum?
I'm pretty sure last night watching the game I heard an advert for 100 month LEASE! (200 //mo) ISUZU?
Maybe you heard Joe Isuzu in your dreams, because Isuzu hasn't sold a passenger vehicle in the USA for over a decade.
us auto loan balances, 30 days late; put out by the ny fed...quarterly. last update was june 2015, they seemed to have skipped novembers release.
balances 30 days late: cycle low was Q1 2012 at $10.53 billion. lately Q3 2014 was 18.3B Q4 was 19.83B Q2 2015 was 20.04B This is $ balance of loans 30 days late. I expect to see it spike continually.
SC is the ticker for Santander Consumer....the biggest pure subprime autolender, CACC is another lender who keeps alot of loans on their books...then there is the car dealers Autnonation, carmax . I was surprised at how many publicly traded car dealerships there are. then of course manufacturers. F TSLA GM TM
enjoy the show
is there any special licensing to become a Repo specialist? tow truck, cdl and biz lic? anyone know? its gonna be HUGE!
Scrapers used to get $300 a ton for carbon steel. Now they get $50. Ask them how our economy is doing. Workers in our factory can spot recessions. 30 years of seeing them firsthand teaches everything you need to know.
at $31/ barrel....and dwti at $323/share. every penny down in oil, is .31 higher in share price ahahahahahahahahahahahahahahahh
POSIT:
Everybody goes out and buys a new car right now and never makes a single payment.
What happens?
Supply glut is lessened.
No worries Wall St can package the lot as Collateralized Crap Obligations or CCO's for short, and sell them to your pension fund. If that does not work the FED will always buy them on your dime.
We have too many cars and we need a war to boost the economy. I propose we start the Car Wars. I'm not even sure what that means, but I like the title.
"Car Wars" is a great Steve Jackson game, actuAlly.
"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."
^^But Zerohedge would have nothing to squawk about, and go out of business, though.
I'm doing my part to crash the Global economy by continuing to drive my 1996 Monte Carlo, and I hope all Z/Hers are doing likewise.
Note: When GMC offers me a brand new GMC Sierra for $10.00 I will trade my Monte Carlo in to the dealership. And if their free coffee tastes like shit I will cancel the deal and wait for an offer from Ford as long as the price is close to $5.00 for a brand new half ton with all the bells & whistles.
die, die, die, America!
"Failure to do so will simply lead to more bubbles"
DOT.COM BUBBLE
HOUSING BUBBLE
HEALTHCARE COST BUBBLE
STUDENT LOAN BUBBLE
CAR LOAN BUBBLE
my favorite......the BATHTUB FART BUBBLE.....aaaaaaaaaaahhhhhhhhhhh................
... with only 50 side-shows worth of wear!
... with only 50 side-shows worth of wear!
oh good, obamy waves his mAGIC wand and its all okay. or it would be if that damn fox news got taken off the air
Remember, Thelma and Louise? We are getting close to the final scene. Good luck to all - les jeux sont faits.
I'm going for a 40 year car loan. The 30 year is just too much pressure.
What bubble
no problem
Moar Bubble Moar QE
Enjoy
Cheers