Car depots are exploding. It’s a bad omen.
The Federal Reserve’s jobs report and June meeting minutes were the economic highlights of the week, but they are, respectively, a lagging indicator and old news. This column instead digs into the auto market, where there is an underestimated ticking time bomb.
Lucky Lopez is a car dealer who has been in the business for about 20 years. In recent meetings with bankers, where he bids on repossessed vehicles before they go to auction, he noticed some common characteristics of defaulted loans. Most loans on recently repossessed cars were taken in 2020 and 2021, when issue dates are normally scattered as people go through hard times at different times; loan-to-value ratios, or the amount financed compared to the value of the vehicle, are around 140%, compared to 80% more normally; and many of the loans went to buyers who had temporary increases in income during the pandemic. Those monthly earnings fell — sometimes by half — when pandemic stimulus programs ended, and now they look even worse on an inflation-adjusted basis and as commodity prices in particular rise.
Part of the problem is that some consumers’ incomes were temporarily high as the pandemic prompted debt forbearance, pandemic stimulus checks, enhanced unemployment benefits and, in some cases, canceled loans from the relief program. paycheck protection. Lopez says he recently bought a Bentley, a McLaren and two Aston Martins, all bought by buyers using PPP money as a down payment, and all repossessed after little or no monthly payments.Another recent acquisition: a Silverado repossessed from a borrower with a solid 700 credit rating who made two payments.
Banks’ auto lending standards, meanwhile, disappeared, and then lenders jumped on the overpayment bandwagon for cars, Lopez says. “Everyone thought the free gravy train would never end,” Lopez says.
Now he says he’s never seen so many people making $2,500 a month and owing $1,000 a month in car payments. That’s about double the maximum portion of income that many financial advisors recommend going towards paying for a car. “The idea that the economy is strong? Anyone who actually does business sees things aren’t solid,” Lopez says. “We had a housing bubble in 2008, and now we have an auto bubble.”
Consider data from car-buying app CoPilot, which monitors the daily online inventory of dealerships nationwide to track what they say is the difference between a car’s list price and what it is. ‘it would be worth if it weren’t for extraordinary pandemic dynamics. In June, used car prices rose 43%, $10,046 above expected “normal” levels, according to the company.
As Danielle DiMartino Booth, CEO of Quill Intelligence, says, companies in the auto repossession space are among the first to know when economic trouble is brewing. And now these companies are buying car lots to manage the flood of repossessed used cars on the market, because what they see is a longer and harder recession, she says. Lopez says banks are in turn leasing more land to accommodate an expected increase in car repossessions.
Some auto executives hinted at turbulence. Earlier this year, Vickie Judy, Chief Financial Officer of
(ticker: CRMT), discussed rising car repossession rates in an earnings call. In June,
(F) Chief Financial Officer John Lawler said the company has started to see delinquencies rise.
Lopez says it’s hard to track vehicle repossession rates because banks are reluctant to talk about it. But based on what he says he’s seen from banks, subprime repos have nearly doubled since 2020, to about 11% on average. The biggest red flag is for prime repos, where borrowers have higher credit scores. Lopez says typically about 2% of prime loans are repossessed. Now that rate is around 4%. Part of that can be explained by pandemic support temporarily making some consumers look like better borrowers. But that probably doesn’t fully explain the rise in delinquencies, suggesting that more consumers are struggling despite stories around deep cash cushions and a strong job market that protects consumers. households as inflation bites, interest rates rise and financial markets melt.
Pamela Foohey, a law professor at Yeshiva University’s Cardozo School of Law, warned in 2021 of a car loan crisis. She then wrote that as the pandemic approached, auto loan outstandings were at record highs and auto loan delinquencies were hitting new highs almost every quarter. The bubble was about to burst, it seemed, but government responses to the pandemic meant the bottom of the car loan market was not falling. The measures were temporary, she warned then, and the bubble has only grown since then.
Barrons checked with Foohey last week. “The bubble is starting to show signs of bursting soon,” she says, pointing to the overall spike in car prices that has led to larger loans and higher repossession rates.
What’s bubbling in the auto market reflects broader economic issues. The question: how could the bursting of an auto bubble affect the entire US economy? Data released in May by the New York Fed shows Americans’ auto debt rose $87 billion for the year ended March to $1.47 trillion. This represents about one-tenth of total consumer debt, which has increased by 8.2% over the same period.
One place where the problems start to show up, Lopez says, is on banks’ balance sheets. He says banks that used to give car loans with LTVs of around 140 are now getting around 70 at auction, which means they are losing a lot of money. Foohey says the increase in auto loans and the rise in delinquencies and defaults follow an increase in delinquencies on personal loans and credit cards.
There is a silver lining in that the weakness in the economy that the auto problems reflect and portend should cool inflation. But it may not be so simple, at least not right away. “A lot of banks, they are smart. They control the market, like diamonds,” says Lopez. “As rests flow in, they only release them so often,” he says, meaning auto prices are likely to remain bullish even as economic growth declines and more rests mean more car inventories. opportunity.
This will also remain the case for inflation in general, with stagflation being the only alternative to a deeper than expected recession.
Write to Lisa Beilfuss at [email protected]