U.S. auto sales have hovered well north of replacement rates for several years now on the back of an improving labor environment and more importantly an extremely accommodating financing market characterized by $0 down, 0% interest loans to subprime borrowers, with perpetually longer maturities to help manage monthly payments...because if your monthly payment is $515 you should be able to afford it.
But, according to data presented in Experian's Q4 2017 auto financing market update slides, the auto market may finally be on the brink of running right off the other side of Ford's proverbial "Plateau."
First, as we've warned numerous times, inflated auto sales continue to come solely from an unprecedented expansion in consumer credit...
...even if in the 4th quarter there was a modest slowdown in deep subprime loan issuance.
Composition aside, Experian found that the average new vehicle loan hit a record high $31,099, while the average loan for a used auto climbed to a record of $19,589.
"I think we're certainly at a point where affordability is a question," said Melinda Zabritski, Experian's senior director of automotive finance solutions. "When you look at how much income you need to support that payment, it certainly is higher than your average individual income."
With auto loans hitting record highs, the average monthly payment for a new vehicle hit an all-time high of $515...
... while the average used auto loan payment also hit a record $371 per month.
And with auto OEM still largely reliant on further penetration of the 'Deep Subprime' and 'Subprime' borrower universe as a source of their marginal buyer of last resort - a sweet spot where OEMs are finally feeling some resistance - it's only logical that the term structure of auto loans on the lower end of the credit spectrum would continue to get stretched. On average, Americans are extending a new car loans over 69 months, while the average used vehicle loan has a term of just over 64 months. Needless to say, both are record high for yet another quarter.
Consumers are stretching out both the size and duration of loans because prices paid for new vehicles has climbed more than 10% over the last five years. In 2017 the average price paid for a new vehicle was an all-time high of $35,176, according to Edmunds.com. That price is up from $33,532 in 2015 and $31,773 in 2013.
And while one reason people are spending more is because they are buying more trucks and SUVs, which are sold at higher price points, a far more important factor, especially in the last year, is the rise in interest rates.
"For some buyers, this is going to come as a surprise," said Jessica Caldwell, executive director of Industry Analysis for Edmunds.com. "For buyers with average credit scores, the rates are higher than a couple years ago and that will mean a higher monthly payment."
In February, the average interest rate for new financed vehicles was 5.2 percent, up from 4.9 percent a year ago and 4.4 percent five years ago. As Experian shows, there has been a rise in rates across the entire loan market, with average loan rates charged ranging from 5.11% at the end of Q4 for all new cars, to 8.84% for used cars, all the way to 11.48% for independent used cars: these have increase by 37bps, 30bps and 11 bps Y/Y respectively.
As Edmunds Jessica Caldwell ominously concluded, "We're starting to see a trickle-down effect from the rate increases happening at the federal level."
Meanwhile, as monthly payments keep rising to the point of unaffordability, delinquencies continue to grow across the country.
But the key data which seems to suggest that the auto bubble may have run its course comes from the following charts which reveal that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.
And while some can claim that this is just a natural result of healthy competition between lenders, what is likely causing sleepless nights at banks who have tens of billions in outstanding loans, is the coming tsunami of lease returns which will lead to a shock repricing for both car prices and existing LTVs once the millions in new cars come back to dealer lots...