Automobile affordability worsens as Americans are saddled up with monthly payments topping $1,000, and loan delinquencies are creeping higher thanks to increasing economic pressures thanks to the Federal Reserve's aggressive monetary tightening regime to rein in the highest inflation in 40 years. A Fed-induced downturn in the economy could end up bursting the auto bubble.
"We are seeing delinquencies start to increase," Ford Chief Financial Officer John Lawler told the Deutsche Bank 2022 Global Automotive Conference last month.
"We're looking for every indication and every data point we can to get a read on where the consumer is, where they're headed given everything that we see out there, the inflationary pressures, the economic issues, et cetera," Lawler said.
He continued: "So we are seeing some headwinds there a little bit when it comes to delinquencies as maybe a leading indicator."
Edmunds' executive director of insights Jessica Caldwell also noted, "auto loan delinquencies are expected to rise," adding consumers must "understand the risks associated with financing more than what they can afford."
Meanwhile, June data from Edmunds shows monthly auto payments topped $1,000. Cox Automotive showed the average monthly car payment reached $712 in May. These auto payments are higher than rent for one-bedroom apartments in Wichita, Kansas, and Akron, Ohio.
Combine auto, shelter, energy, and food costs that are soaring, and no wonder consumers have maxed out their credit cards and drained savings as they struggle to survive the worst inflationary storm in 40 years. This situation is expected to worsen as the Fed is determined to hike into a downturn and may trigger a recession in the middle of the second half of 2022, according to a note from Nomura.
What's surprising to Jack Liebersohn, an economics professor at the University of California, Irvine, is that auto payments are topping shelter costs for some consumers.
"Normally housing is the thing people struggle to pay — autos are typically an optional expense you can delay, so the phenomenon of car payments exceeding rent is surprising to me," Liebersohn told Bloomberg.
Given the souring macro economic backdrop, auto delinquencies are beginning to trend higher following a plunge in early 2020 and another in early 2021, thanks to auto loan deferment programs and stimulus checks. Now the safety nets are gone as consumers with insurmountable debts, paying the highest ever monthly payments, become financially paralyzed by the high inflation. This won't end well and could trigger a tsunami of delinquencies.
Banks have begun modeling possible scenarios in the event of an economic downturn and increasing delinquencies, leading to an increasing rejection of credit applications (this is broad, not just autos).
What's even more concerning are Google search trends for "voluntary repossession of car" have surged to the highest level since the summer of 2008. This can only suggest consumers with high monthly payments contemplate surrendering their vehicle to the bank to avoid falling behind on payments.
The last time search trends for "voluntary repossession of car" were this high, the stock market was halved in the second half of 2008 and didn't find a bottom until March of 2009.
The "strong consumer" narrative that President Biden and Fed Chair Jerome Powell pedal could be 'smoke and mirrors' as a wave of auto loan delinquencies could be nearing as recession risks soar.
For more color on what could happen next. Auto expert Lucky Lopez warns an "auto loan crisis" is about to unfold.
Besides an auto loan crisis, eight million Americans are behind on rent payments and face eviction.
Storm clouds are gathering.