We’ve all had that moment of jumping into the car, and turning on the ignition, only to realise we forgot to fill up the fuel tank on the last journey. US auto sales data for April is flashing that same familiar orange warning light.
From the outside, everything looked fine with the data. Although there were warning signs – such as annualised volume below expectations at 16.5m versus 16.9m, and sales growth depending on utility vehicles and pick-up trucks, rather than autos themselves.
But the real concern came in a report from analysts Edmunds.com on the continuing increase in loan terms to finance car purchases:
- These used to be a standard 36 months, leaving the owner free to buy a new car after 3 years
- April’s average was 67.8 months, the longest in history
- Many companies now even offer loans on 80 or 84 month terms to keep sales rolling
This is clear evidence of companies’ growing desperation to maintain their volume. Anyone offering 7-year loans is essentially cannibalising future sales. A buyer who is locked in for 84 months won’t be back in the dealership until 2022. Even the now standard 68-month loan keeps them away till 2021.
Whereas in the past, the buyer would have been back in 2018.
Even more worrying is that 1 in 4 auto loans are now to subprime borrowers. And many are not only for 7 years, but also in excess of the value of the car. As the Office of the Comptroller of the Currency warned at a conference earlier this year:
“Let that sink in. That means it is not uncommon today for a family with subprime credit to take a loan at 110 percent of a used car’s value that they will be paying off for seven years.”
It seems, however, that the use of these longer loans is critical to companies’ ability to sell the more profitable larger cars. Buyers have been trained to think in terms of monthly payments, and so trade up without realising the full cost.
The chart above suggests that the underlying weakness in US auto industry is also impacting housing:
- The red circle shows annualised sales in the first period of US Federal Reserve stimulus in 2000-2007 (after the dot-com crash), and the green circle shows the period since 2008 (after the sub-prime crash)
- The 2000-2007 period led to a major increase in both auto sales (horizontal axis) and housing starts (vertical), as lending standards fell – until, of course, the sub-prime collapse led to 2008′s financial crisis
- Then the period since 2008 has seen ultra-low interest rates combined with sub-prime lending standards
- Even so, sales in both key areas have clearly failed to recover to the 2000-2007 level
The only question now, of course, is how long this pattern of extending loan terms can continue? Could they go to 9 years, or even 10 years?
As with an empty fuel tank, we can only guess at how many miles we have left before the auto sales engine stops.