The news emerged last week that an all-time high number of Americans are now behind on car payments. Last Tuesday, the New York Federal Reserve published its “Household Debt and Credit” report. This much-anticipated publications covered the 2018 fourth quarter.
There was more disturbing news in the report still. Indebtedness has at last reached record amounts too, finally surpassing levels not seen since the point immediately predating the Great Recession. At the same time, Americans are struggling more to keep up with their current debt loads.
The market where this has become most painfully obvious is the American car market. It seems that over seven million Americans are now minimally 90 days late on their car payments, per the New York Fed’s report. How does that measure up to the last record in auto payment delinquencies at the peak of the financial crisis in 2010? Today’s delinquencies are a full one million higher than the 2010 delinquency prior high.
With their usual penchant for downplaying a brewing crisis, the New York Fed stated that auto loan sector performance is now “slowly worsening,” with:
“Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans.”
The tragic news is that this is supposed to be happening in the middle of a great economy. Yet one economist based at the New York Fed more honestly admitted that:
“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector.”
In a scary parallel with a decade ago, the past ten years in the car market has much in common with the housing market run up prior to the crash of 2008. In both cases, the Fed forcing interest rates to zero and keeping them there (while simultaneously engaging in three quantitative easing rounds) flooded the market with cheap and easy money. In no time at all, car lenders were simply giving loans out to riskier borrowers, destroying the once-healthy subprime auto market in the process.
With the Fed pushing interest rates higher starting last spring, the fiction in the auto lending market began to crack. Bloomberg reported that besides devastating operating conditions for subprime car lenders, suspicions of under reporting their losses and committing fraud were rampant:
“Growing numbers of small subprime auto lenders are closing or shutting down after loan losses and slim margins spur banks and private equity owners to cut off funding.”
Bloomberg went further in reporting that the suffering among small car lenders drew “parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming.”
Yet despite the dangerous delinquencies surging on, the auto finance firms are still making loans. Total car loan debt increased by $584 billion for the fourth quarter of 2018, per the New York Fed’s report. The reasoning behind this is that the typical consumer can not afford to pay cash for a car. As occurred with the home prices pre-2008, rising car costs have priced consumers out of the market through pushing up sticker prices.
Consider what the disturbing statistics put together by ZeroHedge reveal about car prices today. Average used car prices are at an all-time high of $19,589 while average new car prices sit at an all-time high of $31,099. The average monthly car payment for both used and new cars is at an all-time high amounting to $515 each month, even as the average term for car loans has reached another all-time high of 69 months in duration.
Is Your Retirement Portfolio Prepared for the Collapse of the Subprime Auto Loan Market?
ZeroHedge wrapped it all up with a sad commentary on the condition of the car market:
“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.”
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