by Peter Schiff, Schiff Gold:
A record number of Americans have fallen behind on their car payments.
On Tuesday, the New York Federal Reserve released its Household Debt and Credit report covering the fourth quarter of 2018. Not only has indebtedness hit record highs, eclipsing levels seen on the eve of the Great Recession, but Americans are also having a harder time paying their bills. This is particularly apparent in the US auto market. According to the New York Fed report, more than 7 million Americans have fallen at least 90 days delinquent on their auto loans.
That’s more than 1 million higher than the previous peak in auto delinquencies back in 2010, at the height of the financial crisis.
New York Fed said performance in the auto loan sector is “slowly worsening.”
Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans.”
But aren’t we supposed to be in the midst of a “great” economy? As Peter Schiff put it, “I guess people are doing so well in this booming economy that in all their excitement they forgot to make their car payments, three months in a row!”
To ask the obvious question more directly: If the U.S. economy is really so great, and good jobs so plentiful, why are a record number of Americans delinquent on their car payments?
According to an economist at the New York Fed, “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 some ways, the auto market over the last decade parallels the housing market during the runup to the 2008 crash. As the Fed pushed interest rates down to the zero bound and held them there and launched three rounds of quantitative easing, easy money flooded the marketplace. It wasn’t long before auto lenders were handing out money to riskier and riskier borrowers and a robust subprime auto market developed.
That began to unravel last spring as the Federal Reserve nudged interest rates higher. As we noted in a report last April, “Small subprime auto lenders are starting to go belly-up due to increasing losses and defaults.” And a Bloombergreport noted that not only were subprime auto lenders facing tough business conditions, there were also allegations of fraud and under-reporting of losses.
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. Summit Financial Corp., a Plantation, Florida-based subprime car finance company, filed for bankruptcy late last month after lenders including Bank of America Corp. said it had misreported losses from soured loans. And a creditor to Spring Tree Lending, an Atlanta-based subprime auto lender, filed to force the company into bankruptcy last week, after a separate group of investors accused the company of fraud. Private equity-backed Pelican Auto Finance, which specialized in ‘deep subprime’ borrowers, finished winding down last month after seeing its profit margins shrink.”
That Bloomberg report went on to point out that the pain among small auto lenders “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.”
Even with the surge in delinquencies, auto finance companies continue to make loans. Total auto debt rose $584 billion in Q4 2018, according to the New York Fed report.
That’s because average consumers can’t afford to buy a car. Remember how the price of houses climbed through the roof in the years before the 2008 crash? Easy money has a way of pushing up prices.
ZeroHedge compiled a number of statistics that reveal just how unhealthy the automobile market in the US has become.
- The average price for a new vehicle is at a record high $31,099.
- The average price of a used car is a record high $19, 589.
- The average monthly payment for new and used cars has hit a record high of $515 per month.
- The average auto loan has hit a record high of 69 months.
Notice the theme here — record high.
ZeroHedge summed it all up.
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.”