Auto sales in the U.S. economy look solid on the surface. According to Autodata, in November, the annual rate of auto sales in the U.S. economy was 16.41 million units. In October, the annual rate of auto sales was reported to be 15.23 million and in the same period a year ago (November 2012), it was 15.32 million. (Source: Autodata web site, last accessed December 10, 2013.) Cleary, auto sales are increasing.
By looking at the auto sales numbers, one could be easily tempted to suggest consumer spending is increasing. But this is not the case. A deeper look at the numbers reveals a large increase in subprime lending to finance consumer auto purchases.
According to Experian, an information services company, loans issued for new vehicles to nonprime, subprime, and deep subprime borrowers made up 26.04% of all auto loans in the third quarter of this year. In the same period a year ago, this number was 24.84%. For used vehicles, loans issued to nonprime, subprime, and deep subprime borrowers made up an astonishing 54.95% of all auto loans in the third quarter. (Source: Experian, December 4, 2013.)
But this is not all. We are also seeing more and more consumers interested in buying vehicles on credit. For example, in its “Household Debt and Credit Developments” report for the third quarter of 2013, the Federal Reserve Bank of New York reported that in the third quarter, 168 million inquires for auto loans were made. In the second quarter of 2012, that number was only 159 million. (Source: Federal Reserve Bank of New York, November 2013.)
All of this shouldn’t be taken lightly. We know what happens when this kind of behavior prevails. Just look at what happened to the housing market of the U.S. economy when subprime borrowers became so prevalent. A significant amount of money was lent to subprime borrowers, they defaulted, and we saw a housing crash.
Auto loans in the U.S. economy are increasing. In the third quarter of 2013, auto loans reached their highest level since the third quarter of 2007; they increased to $97.4 billion.
I question if auto loans are taking on the shape of a bubble.
Low interest rates in the U.S. economy have encouraged consumers to borrow to buy cars, hence the increase in auto sales. But lending to subprime borrowers can be problematic when interest rates increase. Another bubble, this time in auto sales? I’m afraid so.