Subprime Auto Bubble Bursts As "Buyers Are Suddenly Missing From Showrooms"

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.

* * *

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.

* * *

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.

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Comments

E5 Ghost of PartysOver Mon, 04/02/2018 - 11:23 Permalink

 

You can pay people to sit at home.

or

You can pay people to make planes, trains and automobiles.

War comes and one set of people can make combat vehicles.

 

There are literally not enough jobs for the people to support a competitive environment.  Even lawyers are making 20 an hour and kept at under 29 hours a week.

These stories of "too many jobs" beside "too many cars".... makes you go hmmmmm

 

In reply to by Ghost of PartysOver

greenskeeper carl NidStyles Mon, 04/02/2018 - 11:36 Permalink

Smart buyers won't have to wait long. Prices are already coming down. Even things listed as 'great deals' on the price checking websites are sitting there for months. I've been shopping lately. I've actually been waiting for this exact thing to happen. My current vehicle, purchased at 4 years old about 10 years ago, is getting kinda long in the tooth and up there in miles. Wanting to get another 4-5 year old full sized 4WD SUV and been patient. Looks like it's getting about that time. 

In reply to by NidStyles

I am Groot IntelligenceActs Mon, 04/02/2018 - 11:48 Permalink

I agree. The "crash" is coming. Anyone with common sense can see that this next financial instability will not be a simple correction like we had in 2008-2010. Every financial market ie, car, housing, student loans,etc, has been subprimed to the hilt. Cars and houses with be significantly reduced in price. Banks had so many empty houses in 2010 that instead of handing them off to mortgage property managers they started bulldozing them. Anyone buying  a house now or car unless absolutely necessary is a moron for not waiting.

In reply to by IntelligenceActs

whatswhat1@yahoo.com DaBard51 Tue, 04/03/2018 - 11:35 Permalink

One of my friend's parents owned an "upscale" American Motors Ambassador model with 975 miles.  The car was a few years old and they were a lot more than a few years old.  They put about 200 miles per year on the car.  They were too old to drive after five years and turned the keys over to my friend, their son.  He attempted to make some minor repairs and all of the bolt heads were breaking off.  He drove the car to a mechanic and was advised that the car was unsafe and should be crushed.  I always wanted a Nash Metropolitan built by American Motors.  The AMC Eagle, introduced in 1979, was the first crossover. 

In reply to by DaBard51

greenskeeper carl Chauncey Gardener Tue, 04/03/2018 - 01:39 Permalink

Ya thats the shitty thing about buying a used vehicle. Never know who owned it, even one that hasn't been repo-d. I was looking at one at a dealership, a nice Infiniti, but it had smoked/blacked out tail light covers. I bailed. I can make a pretty good guess at who was driving that thing, and I don't want to buy one that probably wasn't taken care of. Why people do goofy shit like that to a truck that cost over 60k new is beyond me, but such people tend ot not take care of things. The next one I buy I plan on keeping for 10 years or more like my current one, so I'm being picky.

In reply to by Chauncey Gardener

Adolph.H. greenskeeper carl Tue, 04/03/2018 - 06:54 Permalink

If repo vehicles give you the creeps, get an OBD2 reader and let it run while you're test driving the car. Most of the time you'd see instantly if something is wrong with the engine. Then inspect chassis bodywork tires (pay attention to asymmetric wear as it shows parallelism is bad) and possibly break pads etc visually. You should get a good idea of the car after that. 

In reply to by greenskeeper carl

jin187 Chauncey Gardener Tue, 04/03/2018 - 03:39 Permalink

You should have just junked it, and had a lawyer standing over the fuckers every time they made a dime, to make sure a nickel of it always goes into your pocket until the remaining $7300 + legal fees and interest was repaid.

My former brother-in-law did that shit.  Bought a 40k custom Mustang, with $500 a month payments he thought he was gonna make working at Gamestop.  [pause for laughter] When he wrecked it a year later, and had it repo'd, they sent him a bill for 32k, and now every time he gets a paycheck, 20% of it goes to FMC, pretty much until he dies.  The interest probably compounds faster than his garnishments can pay it.

In reply to by Chauncey Gardener

jin187 COSMOS Tue, 04/03/2018 - 04:42 Permalink

Yeah he did, when he drove it off the lot.  Then came the typical fail cascade from people that buy cars they can't afford.  First you stop doing maintenance, then you stop paying insurance, then you fail to register it, then when it breaks down or gets impounded, you're like "fuck it", and stop making the payments.  He actually had the sheriff come take the plates off his car shortly before it was repo'd, because the check he wrote for his plates had bounced, and the notices to pay for that were ignored.  And of course when he wrecked it the month before, it was like 2 weeks after his insurance lapsed.

This dumb nigga was putting his entire Gamestop salary towards paying for the thing, and had my sister handing over her checks too, just to barely keep up.  The car was probably costing them about $1100-$1200 a month total.  With part-time minimum wage jobs.  He fucked around, and got fired after maybe a year, and just those couple weeks out of work were enough to get him impossibly far behind.

In reply to by COSMOS

kbohip whatswhat1@yahoo.com Tue, 04/03/2018 - 00:55 Permalink

Me too.  I bought mine when it was 4 years old 12 years ago.  There's nothing wrong with the car.  No rust.  Paint looks new.  It drives fine, everything works as it should, and it still has more power than all of the econoboxes that cost twice what I paid in 2006 for it.  Only one problem.  I really don't know what I'll replace it with.  

In reply to by whatswhat1@yahoo.com

swmnguy NEOSERF Mon, 04/02/2018 - 18:43 Permalink

I take the opposite approach.  I don't leave anything in my cars; I drive a manual transmission; and I never lock my car doors.  Once a year, over the first warm weekend, I'll come out and the stuff in the glove compartment is dumped out on the floorboards but that's it.  If the door's unlocked they don't smash a window to find out there's nothing in the car to steal, and they can't steal the car because the people who bother with stealing out of cars can't figure out a clutch.

In reply to by NEOSERF

Beltain swmnguy Mon, 04/02/2018 - 22:45 Permalink

You got the clutch statement right. I check in new cars day after day for a dealership group. I see em all. Been doing this for years but after I get em checked in, stock numbers assigned etc. and send em off to the various lots for the techs to get em ready to sell I park em for one of the small army of lot boys we hire to move em where they need to go. Only the white country boys or men over 40 (we get one ever so often) can drive a standard transmission these days. The country boys quickly move off to an open tech or body shop job and I am left teaching some young kid how to drive a standard. On the bright side I see maybe a fraction of new cars with standard transmissions these days too so I usually only have to teach one lot boy how to drive em and those are all small cars now as Ford stopped putting standard tranny's in their trucks for good as near as I can tell.

In reply to by swmnguy

jin187 Beltain Tue, 04/03/2018 - 03:46 Permalink

Manuals are pretty much just for nostalgia nowadays.  Back in the 80's and 90's a competent driver could outperform an automatic when it came to gas mileage, and wear.  Now it's swung the other way with all the computers.  Even supercars usually just come with automatics now, and paddle shifters for "track mode", unless you specifically request a standard transmission.

In reply to by Beltain

swmnguy A Nanny Moose Mon, 04/02/2018 - 18:46 Permalink

There are a few features of certain Mazdas that make them very hard to repair.  On my 2000 Protege you almost had to pull the engine to replace the fuel filter.  It's been a few years so I forget some of the other delights of that vehicle, but maintenance got a lot easier when my wife dumped that car and got a Toyota Corolla.  Much better in snow too; the Mazda had wide tires and handled about like a hockey puck.

In reply to by A Nanny Moose

jin187 Pool Shark Tue, 04/03/2018 - 04:00 Permalink

People downvoting you because 'Murica.  Probably hitting the downvote button on their Samsung phone or Smart TV.

As for me, I'll take the Kia, made by tech savvy Asians, and not a 'Murica mobile, assembled by lazy UAW trash, out of parts 99% sourced from wherever the slave labor is cheapest.  Even if you did want to support 'Murica by buying "our" cars, all you're really supporting is a bunch of Indonesian and Malaysian slave masters, international shipping companies, and the fat cat UAW Democrats that turned Detroit into a dumpster fire.

In reply to by Pool Shark