The Automotive Bubble :: Wamhoff Financial & Accounting


The Automotive Bubble

The financial media and the political class continue to talk about the staggering $1.2 trillion balance in outstanding student loan debt. However, they are missing another debt bubble that is building in the United States automobile industry.

Based on data compiled by Experian from the 1st Quarter of 2015, the following records were set in the auto loan industry:

  • Average loan duration for new cars is 67 months
  • Average loan duration for used cards is 62 months
  • The average amount financed for a new care purchase was $28,711
  • The average monthly payment for new vehicles was $488

According to Experian, all of the data points listed above have set new all-time records. Right now the cumulative outstanding car loan balance for U.S. consumers is nearing $1 trillion. The chart shown below illustrates the total loan growth in the car industry.
Total Open Balances Graph 1
Chart Courtesy of www.experian.com. “This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”

Nationwide vehicle loan growth accelerated by 10.46% during the time period from Q1 of 2013 to Q1 of 2014. The growth rate from Q1 of 2014 through Q1 of 2015 was about 11.32%. Based on the chart above, not only is the aggregate automobile loan balance growing nationwide, but the pace of growth increased by roughly 8.22% year-over-year.

The other growing concern is the underwriting of new auto loans based on repayment risk. The chart shown below illustrates the breakdown of loan risk by segment in the car loan industry:
Super Prime to Deep Subprime Graph 2
Chart Courtesy of www.experian.com. “This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”

As can be seen above, the highest quality loans are actually declining over the past 3 years, while subprime and deep-subprime are growing rapidly. At the end of the Q1 in 2015, subprime and deep-subprime automobile loans made up more than 27% of the total loan pool.

Unfortunately Wall Street banks and financial firms have not learned their lesson from the financial crisis that occurred in 2008. These auto loans are being securitized into auto asset-backed securities (ABS) and sold to investors.

Last month the automobile based ABS securities represented almost half of the entire consumer ABS sector of the ABS marketplace. As I noted above, more than 25% of vehicle-based ABS are backed by subprime borrowers.

As the financial companies push to increase their fees based on asset securitization, there becomes a greater competition for creditworthy borrowers. As the quality credit pool dries up, financial companies will have to relax their standards to continue to securitize automobile loans. If this were to happen, the subprime portion of the automobile-based ABS market would increase dramatically.

While history does not always repeat, it sometimes rhymes. Let’s hope that the banks and financial companies on Wall Street learned their lesson. Unfortunately, based on the data above it appears they are close to creating another bubble in automobile loans. We all know what happened the last time a sub-prime bubble burst, all we can hope for is that this time will be different. Time will tell . . .

Sources:
http://www.cnbc.com/2015/06/15/the-high-economic-and-social-costs-of-student-loan-debt.html
http://www.prnewswire.com/news-releases/auto-loan-terms-reach-all-time-highs-300091348.html
http://www.experian.com/innovation/thought-leadership/automotive-q1-finance-trends.jsp
http://www.zerohedge.com/news/2015-07-21/presenting-americas-900-billion-auto-loan-bubble-6-charts