It was less than a month ago when we showed a series of "10 charts revealing an auto bubble on the brink", and which laid out several very troubling trends, including i) the average new vehicle loan hit a record high $31,099; ii) the average loan for a used auto climbed to a record high $19,589...
... iii) the average monthly payment for a new and used vehicle hitting an all-time high of $515...
... iv) the average auto loan hit a duration of 69 months, while the average used vehicle loan has a term of just over 64 months, both rising to new record highs for yet another quarter.
... v) the average price paid for a new vehicle also hitting an all-time high of $35,176, according to Edmunds.com, almost entirely as a result of a massive expansion in consumer credit and record amounts of auto loans.
Summarizing the above is simple: cheap credit leads to easy lending conditions, and record prices as everyone floods into the market with lenders hardly discriminating who they give money to.
But, as we said in March, the key data which seems to suggest that the auto bubble may have run its course came from the following charts which showed 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.
Commenting on these trends, Melinda Zabritski, Experian's senior director of automotive finance solutions warned that "we're certainly at a point where affordability is a question. When you look at how much income you need to support that payment, it certainly is higher than your average individual income." And nowhere was this more obvious than the auto sector's overreliance on stretched subprime borrowers, who remained the marginal source of auto demand as long as rates remained low.
However, with short term rates rising, with Libor soaring, low rates are increasingly a thing of the past.
"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."
And, as we said last month, it will mean for a sharp drop in demand, especially among the most stressed consumer groups.
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Today, this was confirmed when as Bloomberg reported this morning that "Subrprime new-car buyers suddenly go missing from US showrooms."
Just as we expected, between record prices (courtesy of what until recently was easy, cheap debt), record loan terms, and rising rates, shoppers with shaky credit and tight budgets have suddenly been squeezed out of the market. In fact in the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9 percent, according to J.D. Power.
Confirming our observations, Bloomberg notes that while lenders took chances on consumers with lower FICO scores after the recession, partially on the notion that borrowers prioritize car payments ahead of other expenses, several financial companies started to tighten their standards more than a year ago. The result is a surge in the amount of captive financing shown in the chart above, which as we warned is the clearest indication yet of the popping car bubble.
And so, the quiet withdrawal of what was arguably the most important marginal US auto buyer - whose entire purchasing power came thanks to cheap, easy debt - means that carmakers are about to report sales for March which slowed to the most sluggish pace since Hurricane Harvey ravaged dealerships across the Texas Gulf Coast in August, which boosted an auto replacement buying spree and kicked 6 months of life into the struggling US auto sector, according to Bloomberg’s survey of analyst estimates.
But back to the subprime bubble, which some refuse to call it what it is:
"There’s not a bubble of subprime. But as interest rates rise, it’s going to affect” those customers first, said Dan Mohnke, senior vice president of U.S. sales for Nissan Motor Co. “That’s the part of the market that’s really coming down.’’
Call it whatever you want, but the outcome is clear: even the recent modest increase in interest rates has made it prohibitively expensive for most "stressed" households to purchase cars on credit, meaning that the higher rates go, the fewer subprime-driven demand there will be.
Westlake Financial Services has specialized in subprime lending since its founding in Los Angeles thirty years ago. Subprime loans now make up just 55% of its portfolio, down from 75% five years ago, said David Goff, vice president of marketing.
“Subprime losses increased maybe to pre-recession levels a year or so ago,” Goff said in an interview last month. “That caused you to require a little bit more from the subprime customer. And those people, instead of buying a new car, are switching over to a used car.”
Which also explains why used car prices, until recently, were at all time highs. After all, if it is very easy to get the required subprime credit, why discriminate based on cost: just buy.
And now it's payback time, as the long-overdue disappearance of a major source of auto demand -the US subprime buyer - means the long-overdue market clearing "price correction" (one can use a harsher term here as well) is imminent.
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There is a silver lining: those responsible buyers who waited until prices dropped, will soon have a bonanza of options as the millions of "lightly used cars" and SUVs are now coming off lease, providing a good supply of better-equipped, nearly new models at falling prices.