The outstanding loans and leases balance increased due to much higher vehicle prices but much lower sales volume.
By Wolf Richter for WOLF STREET.
In 2020 and 2021, consumers used their stimulus money and their extra unemployment benefits and their PPP loans and the money left over from not having to pay rent or mortgages or whatever to catch up on their car loans. And the rate of auto loans past due for 30 days or more fell from historic low to historic low and finally bottomed out in Q4 2021 at 5.0%.
Since then, this delinquency rate has started to rise from the historical low. In the second quarter of 2022, the delinquency rate rose to 5.6% of total auto loan balances, according to data released today in the New York Fed’s Household Debt and Credit Report. It remains below the pre-pandemic low of 6.4%.
The delinquency rate is now normalizing, returning to the old normal, which hovered around 7% during the good times:
Note how the delinquency rate began to rise in late 2005, alongside the housing crisis, more than two years before the recession, as people in mortgage trouble also fell behind on their car loans. The delinquency rate continued to rise as the mortgage crisis triggered the financial crisis when Bear Stearns, Lehman, AIG, Fannie Mae, Freddie Mac and other financial companies collapsed (some were bailed out, others Nope). Delinquency rates peaked in 2009 at nearly 11% and then declined.
Crime rates during the Great Recession show what can happen when 10 million people find themselves unemployed at the peak.
Auto loan balances: soaring prices, falling sales.
Auto loan and lease balances rose 6.1% in the second quarter year-over-year to $1.5 trillion in the first quarter, driven by much higher vehicle prices and volume of much lower sales, which means fewer loans, but with higher balances.
The used-vehicle CPI rose 6.1% year-over-year in June, and the new-vehicle CPI rose 11.4%, according to the Bureau of Labor Statistics.
The average new-vehicle transaction price, which takes into account changes in the vehicle lineup in addition to price increases, jumped 14% year-over-year in June to nearly 46%. $000, according to JD Power data. And those more expensive vehicles had to be financed, and so loans went up.
But new vehicle sales, in terms of the number of vehicles sold, in the second quarter were down 21% year over year. And used-vehicle retail sales were down about 10% year-over-year.
Thus, auto loan balances increased by 6.1% in the second quarter due to this combination of higher prices and lower sales, resulting in fewer but larger loans:
“Car depots are exploding” No.
A few weeks ago, an article on a major financial news site proclaimed in the headline that “Car pensions are exploding”. The article was spread everywhere, and yet it was devoid of any real repos data, it had no repos chart, and was really just clickbait. Most people who spread this thing on the internet never read the article; they just read the clickbait title, and that was pretty good. The internet is a strange place.
But the whole auto industry and auto finance industry had a good laugh about it. Before there is a repo, the borrower must be delinquent on the loan. If the borrower is behind on the payments and cannot catch up and therefore cannot remedy the delinquency, the lender will repossess the vehicle and auction it off.
So, before the number of repos can climb, the 30+ day delinquency rate has to climb, because it comes first.
As we saw with the data from the New York Fed today, there is no “explosion” of delinquencies, and therefore no explosion of repos. Pensions remain low compared to historical levels. They have risen from last year’s record lows and are rising to more normal levels.
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