Have We Hit Peak Auto Sales in the U.S. Market? – Reference Mark

The economy is rollicking along, with November reporting the lowest unemployment rate since 2007. The stock market is on fire, and new-car sales are in their sixth year of growth. So why are a lot of smart people looking concerned?

There are indicators that the good times might be coming to a halt. History repeats itself, and there are some signs that look familiar to the precrash days of 2007:

• A growing percentage of subprime auto loans being made;
• an extension of loan lengths to longer and longer terms;
• an increasing number of delinquencies and repossessions;
• and an increasing reliance on leases and big incentives to move sheetmetal off the showroom floor.

Taken singly, none of these factors would be cause for concern while auto sales sped well past 17 million units in 2016. But taken together, they represent a significant leveraging of consumer debt and a surge in consumers’ inability to pay off their loans. That’s bad news.

A big contributor to the concern is subprime loans, which are issued to those with poor credit scores. Usually a past bankruptcy means a customer has subprime credit. The fallout from the 2008 recession meant there were plenty of honest, well-meaning folks who were trying to get back on their feet but were tagged with that scarlet letter. And because of that, lenders have been aggressive in lending into this high-profit but high-risk sector.

But as we did a decade ago, and again now, we’re seeing the rise of “fog-a-mirror financing.” In other words, FICO score be damned. If you’re flipping burgers a couple days a week, you can get into that Camaro SS today.

Another sign: When folks are flush, they pay cash. But we’re running on two straight quarters of more than $1 trillion in outstanding auto loans. That’s never happened before—and a big chunk of it is subprime.

A big contributor to the concern is subprime loans.

Those loan terms are getting longer, too. It used to be that a 60-month loan raised an eyebrow because consumers often would be upside down on the loan—what they owed was more than the car was worth. Now 84-month terms are common because many consumers can only afford the lower monthly payment that longer loans allow. The loss exposure there is huge.

There is also a big push by automakers to keep their factories moving, whatever it takes. That usually means cash on the hood to help consumers make the down payment on the loan. Even some recently introduced vehicles that should sell on their merits are seeing incentives topping $10,000. One such vehicle is the Cadillac CT6, according to Automotive News.

A reliance on leasing also has come into play in nearly one-third of all new-car transactions. That many leases results in lots of lease returns into the used-vehicle market, and that churn drives down used-vehicle values. Those folks trading in an older vehicle they own to buy a new car will have to borrow more—and a desperate spiral begins.

In an interview, Hylton Heard, senior director of Fitch Ratings, which tracks these loan portfolios, urged to keep these warning signs in context. Although loan losses have sharply increased year over year, they aren’t close to their record highs.

Heard offered a caveat, however: The big subprime players Fitch tracks—GM Financial and Santander—have only seen slight loss increases. But many smaller, more aggressive players who Fitch doesn’t track are representing an increasing share of the market. And their losses are rising quickly.

How bad is it? The number of subprime loans 90 days past due is higher than it was during the early months of the 2007–2012 recession, according to the Federal Reserve Bank of New York.

Recently, both Toyota and Nissan declared “peak auto” for the U.S. market, signaling that they forecast future sales to be in decline. That’s a major declaration of a lack of confidence in the American economy and its ability to sustain growth.

Granted, someone defaulting on a car loan isn’t like losing his or her home. But these rising default rates are a sign of a potentially larger problem. They sky might not be falling, but it’s certainly looking darker.

–Illustration by Pep Montserrat

More by Mark Rechtin:

• What a Trump Presidency Means For the Auto Industry…and you
• Three Contestants, Six Weeks and a River of Gatorade
• Cadillac’s Future Design Highlighted in Escala Concept

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