Summary: Modern history consists to a scary extent of boys with toys. Powerful tools used irresponsibly: Atomic weapons, nuclear power plants, debt, and (God help us, genetic engineering). The decades of the Cold War featured several terrifying close calls with nukes. Now we’re suffering the effects of imprudent debt accumulation, and are likely to for another decade. Today we look at auto loans (a follow-up to our November post). Along with student loans they’re a hot front in the household debt crisis.
- The secret to rising auto sales
- The bad news about those loans
- Perhaps the slowdown has already begun
- For More Information
(1) The secret to rising auto sales
November’s post pointed to a disturbing Bloomberg article about auto loans: “Good Job Is Good Enough as Subprime Car Buyers Lift Sales“. Car loans are being made with an average maturity of 62 months and high loan-value levels (80%), so that a high fraction will have no equity if they default. And to make that more likely, lenders were boosting sales by increasing lending to sub-prime buyers. During the past 5 months the problem has grown worse.
Why is this important? Because auto sales have been one of the major drivers of the recovery. As shown by Atif Mian and Amir Sufi in “Another Debt-Fueled Spending Spree?“, at their website, 31 March 2014:
With little growth in real wages for most Americans since 2009, how have we managed to splurge on new cars? Mian and Sufi show the answer: a surge in auto loans:
(2) The bad news about those loans
Auto loans, like all debt, serve a valuable purpose unless improperly used. As they are today.
(a) “More car loans exceed 6 years as prices rev“, USA Today, 12 March 2014 — Excerpt, describing the madness (car loans of 72 – 84 months!):
That came as the average amount financed for a new car was the highest since 2008, averaging $27,430 in the quarter, Experian says, with an average monthly payment of $471. Long-term loans make costlier cars seem more affordable, but leave buyers with higher overall costs for the car and more time owing more than it is worth.
J.D. Power’s Power Information Network (PIN) found the long-loan trend continued into last month with a record 33.1% of loans at 72 months or longer, with 84 months or longer at 3%.
PIN also found more cash-strapped buyers getting lower payments by leasing, which hit a record at 26.5% of new-car transactions last month.
Both trends point to how expensive new vehicles have become. The transaction price — what customers actually paid — was $32,319 last month, 2% higher than a year ago, Kelley Blue Book reports.
(b) “Out of Gas: Most Americans Can’t Afford New Cars“, NBC News, 25 March 2014 — Excerpt:
For many Americans, new cars are driving out of reach. Jose Hernandez, 24, lives in East Los Angeles and makes $26,000 a year working the front desk at a clinic. After trading in his previous car with $6,000 in negative equity, he financed a 2013 Civic EX for $25,000 at 2.3% for 6 years, paying $379 in monthly payments, plus $100 per month in insurance.
… Car ownership has long sat at the core of what it means to “make it” in this country. If you want to get to and around the suburbs, you’ll need to drive.
It’s an aspiration that’s slipped from the grasp of most, as a new report finds the average new car unaffordable for the average American family in 24 of the 25 largest U.S. metro areas. Except for Washington, D.C., median-income households in those areas fell shy of the $32,086 in annual salary required to buy an average new car, the Interest.com analysis found.
(3) Perhaps the slowdown has already begun
Large numbers of subprime loans on cars with negative equity, driven by people who need a car but cannot afford new cars (often, cannot afford even recent used cars). It’s a song similar to one we heard before, and one that does not end well. Without gains in jobs and wages, this trend cannot continue much longer.
These loans might not default in large numbers, even in a recession. But car sales driven by rising subprime loans suggest that economists’ rosy forecasts for auto sales might be disappointed — eliminating a major driver of US economic growth. If subprime growth slows, instead of the widely expected “Red, White, and Boom” taking the US economy to “escape velocity” after years of slow growth, 2014 might give us another year at stall speed (that’s 2%; GDP in 2013 was +1.9%).
The new subprime boom might already have played out. From “Subprime Auto Loan Performance: The Best Is Behind Us“, Amy S Martin and Naveen C George, Standard & Poor’s, 26 February 2014:
In our opinion, we’re at a turning point with respect to subprime auto loan performance, similar to where we were in 2006 (at the peak of the previous expansion).
The numbers support their conclusion.
- The 60 Day Delinquincy rates are rising. The rate on prime auto loans is at a 2 year high. The rate on subprime auto loans has risen strongly since the early 2012 trough, and are now at the highest since early 2010.
- Net Loss Rates (below): Both prime and subprime made a trough in early 2012. Both are now rising; subprime is the highest since early 2010.
- Recovery Rates (below): Prime hit a peak in early 2012 and are now the lowest since early 2010. Subprime is at the lows since early 2010.
Graphs from “US Auto Loans ABS Tracker”, S&P, 25 March 2014
(4) For More Information
Posts about debt:
- Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
- A picture of the post-WWII debt supercycle, 26 September 2008
- Debt: the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- A look at our government’s debt – rising because we like to spend, 29 December 2009
- Rising consumer debt driving the recovery: boon or bane?, 10 November 2013