Auto Market Crash looms over the US Horizon: A Looming Disaster
Looming Threat to Financial Markets: The Growing Vulnerability of the U.S. Automobile Industry
Get ready for a potential economic storm brewing on the horizon. The US auto market is experiencing a dangerous correction, causing waves of concern among investors and economists alike.
Dollar signs flash despite warnings
The auto loan market has reached unprecedented numbers, with a staggering $1.66 trillion in outstanding loans by the end of 2024. This figure not only outpaces 2020's total by 20%, but it also surpasses student loan debt, making auto loans the second most significant consumer debt category after mortgages. Red flags are waving.
Record-breaking prices, rates, debt - all in one package
The pandemic years have brought disarray to the automotive industries, causing supply chain issues and price hikes for new and used vehicles. Meanwhile, automakers are focusing on high-end models, leaving many consumers with no choice but to take out high-interest loans or forgo buying a car altogether.
Here's the ugly truth: The average loan for a new car now stands at a whopping $42,113, marking a nearly $10,000 increase from 2019. Meanwhile, sky-high interest rates mean that many households are shouldering monthly payments of over $1,000 for their vehicles.
Delinquencies are on the rise, and fast
Things are looking particularly grim for subprime borrowers - those with weak credit histories - as delinquency rates for these loans have reached a 30-year high. In January alone, an incredible 6.56% of subprime loans were more than 60 days past due. Even loans for customers with favorable credit histories are seeing an uptick in delinquencies, with the rate of severe delinquencies (90+ days) rising to 2.96% - the highest level since 2010.
Are auto loans the next ticking time bomb?
It's essential to remember that cars are not rare real estate investments. However, what sets them apart is their quick and easy repossession. If someone is struggling to make monthly car payments, they may cut back on other expenses, affecting the domestic economy. And as the labor market relies on mobility, the domino effect could prove catastrophic.
Adding fuel to the fire, nearly a quarter of all new car buyers are "underwater," meaning they owe more on their cars than their vehicles are worth. On average, they carry an additional $6,838 in debt, with a quarter owing over $10,000 - a vicious cycle that keeps spiraling.
Will the Fed's intervention save the day?
With the potential for a storm cloud on the horizon, some investors are pinning their hopes on the Federal Reserve to step in and lower interest rates to ease the financial burden. However, central bankers are hesitant to make such a move due to ongoing inflation concerns.
The financial markets remain calm about the volatile auto loan market for the time being. The market for subprime ABS (securitized auto loans) is even thriving, with $40 billion in securities issued by October 2024 - a 17% increase from the entire previous year. But will this complacency prove to be the downfall of an already fragile market?
Our verdict: The storm is coming. It might not be here yet, but the signs are apparent. Consumer debt is soaring, delinquencies are on the rise, and speculative securitization is becomingmore common. It's frighteningly reminiscent of the times leading up to the housing crisis.
On the bright side, this time, it's not just commercial real estate that's at risk. As an American lawyer once said, "You can live in your car and still go to work - but you can't drive your house to work." Whether the auto market will crumble remains to be seen. But one thing is for sure - when the storm hits, it will likely shatter illusions of invincibility, leaving no stone unturned.
- By 2024, auto loans are expected to reach a mammoth $1.66 trillion, surpassing student loan debt, indicating a worrying trend in consumer debt.
- The average new car loan stands at an astonishing $42,113, an increase of nearly $10,000 from 2019, and many households are paying over $1,000 monthly for their vehicles.
- Delinquency rates for subprime loans have reached a 30-year high, with 6.56% of these loans more than 60 days past due in January alone.
- Nearly a quarter of new car buyers are "underwater," meaning they owe more on their cars than they're worth, leading to a vicious cycle of additional debt.
- The Federal Reserve's intervention to lower interest rates to ease financial burdens could be an attempt to avert the impending auto loan market crisis, but ongoing inflation concerns might deter such action.
