See Article here:

http://wardsauto.com/industry/...48b492c85a8e575ae2f3

Rising Automobile Debt Foreshadows Impending Credit Crisis

INDUSTRY VOICES

May 8, 2017 Eric Totaro

Longer-term loans are helping consumers buy cars now, but they could take their toll on industry profitability down the road if automakers and lenders don’t find ways to reverse the trend in borrowing.

Euromonitor data shows U.S. consumer spending on vehicles grew 36% in real terms between 2009 and 2016, while disposable income grew just 15%.

In addition, the outstanding balance of consumer auto loans increased 36% in real terms between 2009 and 2016, while the outstanding balance of consumer loans as a whole decreased 7%.

JATO data shows a decrease in the number of passenger vehicles on the road in the U.S. between 2009 and 2016, which means the average auto debt per car in circulation rose from $5,700 to $8,200 in real terms between 2009 and 2016 – a 44% increase.

Despite automakers touting better-quality vehicles that last longer, the decreasing number of passenger vehicles on the road, combined with steady new-car sales, suggests automakers and lenders have become increasingly aggressive in driving sales. Morgan Stanley reports the percentage of subprime auto loan asset backed securities categorized as “deep subprime” (the riskiest category) has risen from 5.1% in 2010 to 32.5% today.

Auto lenders, burned by a credit crunch during the recession, gradually have relaxed their loan qualification requirements as the U.S. economy recovered. Moody’s reports auto lenders have allowed record levels of negative equity for both new- and used-vehicle purchases, which means outstanding consumer debt from previous vehicle purchases is snowballing instead of decreasing or even remaining steady at the time of their next purchase.

While automakers may benefit from increased sales in the short term, this vicious cycle, or “trade-in treadmill” as coined by Moody’s, is beginning to show signs of faltering: stagnating new-car sales, swelling inventories and declining used-car prices.

The U.S. seasonally adjusted annual rate declined to 16.8 million in April, and inventories were at their highest level for the month since 2004, according to WardsAuto data. The National Automobile Dealers Assn. noted the biggest drop in used-car prices in February 2017 since November 2008.

The good news for auto companies and lenders is the overall rate of auto-loan defaults is still relatively stable, which means there is an opportunity to course-correct before a credit crunch is inevitable. The S&P/Experian Auto Default Index is unchanged year-over-year and less than half of what it was in the depths of the recession.

Intelligent automakers and lenders must increase their conservatism now to protect themselves against a future car-credit bubble. Automakers, whose profitability depends largely on volume, should promote cheaper vehicles that consumers can afford by marketing less feature-laden models. Lenders, who increasingly have offered auto loans with lower interest rates but with long terms that often exceed the ownership period, should realize they are creating a negative equity bubble that will hurt profitability in the not-too-distant future.

Fewer subprime and long-term auto loans will result in slower sales in the short term but steadier returns in the medium and long terms. If automakers continue production at their current levels and lenders continue offering long-term loans to risky demographics, the negative impact will be twofold:

•Used-car prices will decline further as oversupply continues as a result of more and more vehicles coming off-lease. Consumers who have the means to purchase a new car may opt to purchase a slightly used off-lease vehicle for a significant cost savings, eroding demand for new cars. If a credit crunch happens, demand for used cars will rise at the expense of new cars, as consumers who are stuck in negative-equity car loans will be unable to afford a new vehicle.

•OEMs and auto-loan companies will look even more to the margins of qualified customers to drive sales. Risky lending increases the likelihood of auto-loan defaults and makes OEMs and lenders more susceptible to changing macroeconomic conditions. A small economic downturn or even a rise in interest rates could lead to an unsustainable borrowing situation for many customers and a plunge in sales to which auto lenders and OEMs will struggle to adapt.

Eric Totaro, Automotive Analyst, Euromonitor International



Interesting to find the percentage of sub-prime car loans at 32.5%

I know the technology in the modern vehicles have driven prices way up.

But it is getting really scary by the cost of some of the models out there.
You could buy a house in parts of this country for the cost of a new upper end vehicle not to even mention a pick-up.

Then what is the price you lose on it just after you drive it off the lot?

I went to a Car Hop lot in my town looking for a midsize SUV like a Chevy Trailblazer for say 10K to 15K. A daily driver that will still get me to some nice Fishing and Shooting areas.

There were a few on their lot. No prices on the window. They would not even give me a price or mileage on the vehicles there. They wanted to start with a loan application. I said I want to purchase using cash. They said they do not sell vehicles to cash customers.

I wonder how many people they are pushing into more car then they can really afford.

I left after a few loud words to the manager. There were at least 5 families sitting at little desks with agents. I felt sorry for them.

This message has been edited. Last edited by: ontmark,

If there's another big debt bubble that bursts, it will likely be student loans. At least car loans are secured.

The issue with the auto industry though, is that cars have likely reached the point of general affordability. People are increasingly not going to want or be able to pay what it takes to sell a car profitably. I've heard a lot of people want to move to cities with good transit systems, specifically to avoid having to own a car.

The biggest factor in used car sales is "can I make the payments?"

In financing sales, you can sell with a low price and a higher interest rate, or vice versa, or anywhere in between. The "paper" is worth its present value or some percentage of that.

Everything else is part of the show.

Agree with BBMW, student loans are going to be a big issue. Unless colleges lower prices it will only get worse.

I have been thinking about the new and used car loan bubble bursting for years.
The $19,000 pimped out 4x4 F150 I bought in 1997 now has a sticker price of $56K.

quote:

The biggest factor in used car sales is "can I make the payments?"

Absolutely...
But that's the sale... we are talking about the re-payment period which is AFTER the sale.
Just because the borrower appeared to be capable of making the payments at the time of the sale... doesn't mean they will.

When things start to slide they can snowball fast if you don't have a cushion and a lot of these people don't.

I'd say north of 25% of my coworkers are upside down on their vehicles. The worst are the new hires that immediately run out to buy a brand new top model vehicle because they're making good money now. A few months later most can't do the job well enough and they're out the door with $500+ payments in addition to whatever else they over extended themselves for.

quote:

Originally posted by jezsuiz:
Agree with BBMW, student loans are going to be a big issue. Unless colleges lower prices it will only get worse.

Yep. Somehow we had a health care 'crisis' because of rising costs. But the cost of college tuition was actually rising faster than that of health care. Then pumping the market with tons of gub-mint backed student loans just primed the pump that much more. Now we have kids "graduating" with degrees in Angry Lesbian Studies and Analytical Underwater Basket Weaving who have a quarter million in student debt. Then complain they can't find a job that will allow them to repay it (and post said bitching on their new Eye-Phone that has a 3 year unlimited data plan).

And there are a LOT of junk loans on cars too. People are financing their cars despite there being very limited real wage growth over the last decade plus.

quote:

Originally posted by jezsuiz:
Agree with BBMW, student loans are going to be a big issue. Unless colleges lower prices it will only get worse.

And a lot of colleges have tons of cash stashed back and they still raise tuition.

America's 10 richest colleges

The 10 richest colleges in the U.S. have endowments of at least $10 billion.

With $36.4 billion, Harvard has the largest endowment by far.

But the average investment return for colleges and universities across the country took a big hit in 2015, falling to 2.4% from 15.5% the year before, according to a new report from the National Association of College and University Business Officers.

It's not a complete surprise considering last year's weak market performance. And it's not as bad as 2012, when endowments averaged a loss of 0.3%.

Related: Billionaire gives Harvard record $400 million gift

But what's most concerning is that the disappointing year drags down the average 10-year return below what most colleges say they need to maintain, said William Jarvis, the executive director at the Commonfund Institute, an asset management firm that sponsored the report. That might lead colleges to use less money from their endowments each year.

"If we're now living in a low-return environment, the question that comes up is whether you need to adjust your spending rate downward," Jarvis said.

On average, colleges spent about 4% of their endowment last year, which covered about 10% of their operating budget. Those with an endowment larger than $1 billion funded about 17% of spending, according to the report.

Related: Stanford and Harvard got over $1 billion in donations

Endowment investment allocations did not change much since the year before. On average, more than half of an endowment's assets are in alternative strategies -- like derivatives, hedge funds and private equity. For smaller endowments, the share of funds in these more risky investments is less. About 19% of assets are in international stocks and 16% are in domestic, across the board.

The top 10 largest college endowments:

1. Harvard University: $36.4 billion
2. Yale University: $25.6 billion
3. University of Texas system: $24.1 billion
4. Princeton University: $22.7 billion
5. Stanford University: $22.2 billion
6. Massachusetts Institute of Technology: $13.5 billion
7. Texas A&M University system: $10.5 billion
8. Northwestern University: $10.2 billion
9. University of Pennsylvania: $10.1 billion
10. University of Michigan: $10 billion

http://money.cnn.com/2016/01/2...-college-endowments/

The colleges should back those loans, not the taxpayer.

Waiting for the next crash. On the road to building up savings so by the time the banks run the country into the ground again I should be in a place to buy a home maybe.

The Zero interest car loans are the best thing for Car sales, as people are less likely to be upside down. More people have some equity instead of just paying interest.

I read somewhere the other day (sorry, I forgot where and don't have a link, so take it as gossip from the street) that at the time of the subprime crisis there were 3 Trillion dollars in subprime loans and due to the real estate market adjustments there was insufficient collateral for many of the loans. The same article went on to state that there are currently 3.1 Trillion dollars in student loans and to ask the rhetorical question, "Now what is the collateral on those?"

quote:

Originally posted by MikeNH:
Waiting for the next crash. On the road to building up savings so by the time the banks run the country into the ground again I should be in a place to buy a home maybe.

If you are building up those savings in a bank, you might want to look hard at the bank's capital ratio, derivatives exposure, etc. Depending on how exciting the next go around gets, those of us who have funds in banks may enjoy the dubious pleasure of "bailing in" the banks. Under current laws (in the US anyway), depositors are essentially unsecured creditors of their banks.

We are definitely experiencing that ancient Chinese curse: "May you live in interesting times."

A Record 25% Of Used Car Trade-Ins Are Underwater

Nov 14, 2016

We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, loosening underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield.

Today, we find that Edmunds' "Q3 2016 Used Vehicle Market Report" reveals that many of the same problems also afflict the used auto market. The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values continues to spike and currently stands at an all-time high 25%. Moreover, the average balance of the negative equity also continues to rise and stood at $3,635 for Q3 2016, up from roughly $2,750 in Q3 2011.



Meanwhile, the average used car price also continues to rise and stood at $19,200 as of Q3 2016. This implies that, since most people simply roll their negative equity into their new loans (because, why not?), many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car.



But wait, there's more (think weekend CNBC infomercial). Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011. Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term. While interest rates have certainly come down from Q3 2011, they haven't declined nearly enough to offset a $3,300 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.

Of course, none of this is terribly surprising...just another ponzi scheme, courtesy of accommodative fed policies, which will all come crashing down at some point. And while timing when bubbles will burst is always tricky, with terms already maxed out, treasury yields spiking and used car purchasers extremely sensitive to monthly payments we suspect the time could very well be near.

http://www.zerohedge.com/news/...-signs-auto-industry

How can someone roll their negative equity into their new car, then trade it in with even worse negative equity, wash, rinse, repeat, while the car dealer is making money?

The dealer has to pay off the old car, finance the new one, with no cash down or not enough, pay commissions, etc.

Zero down sales merely substitute a higher price for a higher rate. The present value of the note is the same or very close. The car is worth what it is worth. Equity is illusory without significant down payments, because the value of the car is mostly lower with time.

quote:

Equity is illusory without significant down payments, because the value of the car is mostly lower with time.

The biggest factor in used car sales is "can I make the payments?"

The dealer couldn't care less if there's any equity in the deal. All they care about is getting someone to buy the paper.
After that, it's not their problem.

Let it correct itself. Used car and new car prices are ridiculous!

quote:

Originally posted by chellim1:

quote:

Equity is illusory without significant down payments, because the value of the car is mostly lower with time.

The biggest factor in used car sales is "can I make the payments?"

The dealer couldn't care less if there's any equity in the deal. All they care about is getting someone to buy the paper.
After that, it's not their problem.

Yep. As long as there is a market for the paper, it's good.

That's why equity is a concept in the imagination of the owner.

Coledge am gonna be free, just wait an sea!

+1, Agreed

quote:

Originally posted by rscalzo:
The colleges should back those loans, not the taxpayer.