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Keep an eye on rising delinquency rates.
Will rising auto loan delinquency rates automatically trigger consumer debt problems? Perhaps they are an early sign of an economic meltdown ahead. But when you put the data into the right context, you can see why consumer debt isn’t trying to blow the economy’s engine. Take a look under the hood with us!
Those witnessing an impending credit crisis say the recent rise in delinquencies on auto loans is a sign that households are in dire straits. It stems from long-standing concerns that auto loans have become the new subprime, mirroring his mid-2000s surge in loans to homebuyers with questionable credit.[i] Alleged data shows credit chickens are returning to their roost: Trade-ins show rising trend of negative capital – amount of debt left on car exceeds its value Very expensive car A combination of falling prices and rising auto loan rates has resulted in more people submerging themselves in their cars. Buyers are taking out larger loans to finance their car purchases. Sometimes he extends from an average of 6 years to 7 years.
Delinquency rates on these loans are currently rising. Loans that were 60 days or more past due in January rose 20.4% year-over-year, reaching his 1.89% of all auto loans, the highest rate since 2006, according to Cox Automotive.[ii] Some argue that this shows that exorbitant car payments are competing with other household needs and becoming less affordable.
There is no question that some households have been hit hard. But for a broader perspective, the New York Federal Reserve presents Household Debt and Delinquency Rates for everyone. It represents 9%. However, while balances increased by 16.6% from pre-pandemic levels, Exhibit 2 shows that the severe delinquency rate (90 days or more delinquency, as defined by the New York Fed) increased from 5.0% in Q4 2019 to Q4 2022. It shows that by the quarter it had fallen to 3.7%. He peaked at 5.3% in the fourth quarter of 2010 as the 2007-2009 recession emerged. Perhaps the delinquency rate will actually be higher in the next few quarters. However, in our view, a return to pre-pandemic rates is normal and not surprising.
Exhibit 1: Auto loans account for 9% of total household debt
Source: Federal Reserve Bank of New York, as of March 3, 2023. Quarterly Report on Household Debt and Credit: Total Debt Outstanding and Composition, Q1 2003 – Q4 2022.
Exhibit 2: Delinquency Rates by Household Type
Source: Federal Reserve Bank of New York, as of March 3, 2023. Quarterly Report on Household Debt and Credit: Percentage of 90+ Days Delinquent Balances by Loan Type, Q1 2003 – Q4 2022.
That said, it’s not guaranteed that arrears will escalate from low levels. Cox Automotive data shows that credit standards are tightening. A subprime buyer accounted for just 5.2% of sales in December, compared with his 13.9% in 2017.[iii] They represent a decreasing percentage of total auto loans. New York Fed data reflects this. Exhibit 3 shows the relatively stringent underwriting standards from year to year. Low-scoring borrowers have remained fairly constant, while high-rated borrowers have increased. Credit scores aren’t perfect, but in terms of broadly reflecting a borrower’s ability to repay, the majority of auto loans made in the past two years have come from creditworthy buyers.
Exhibit 3: Auto loan originations by credit score
Source: Federal Reserve Bank of New York, as of March 3, 2023. Auto loan originations by credit score from Q1 2004 to Q4 2022.
Taken together as a whole, total household delinquency rates hit their lowest in at least 20 years last quarter (partly due to the temporary suspension of student loan payments). (Exhibit 4) Overall default rates also remain historically low. The monthly S&P/Experian Consumer Credit Default Composite Index, which combines auto loan, mortgage and credit card default rates, fell from a record low of 0.37% in November 2021 to 0.69% in January. soared to[iv] It is still below pre-pandemic levels (1.02% in February 2020) and far from its December 2012 peak of 1.72%.
Exhibit 4: Household delinquency rate and composition
Source: Federal Reserve Bank of New York, as of March 3, 2023. Quarterly Report on Household Debt and Credit: Percentage of 90+ Days Delinquent Balances by Loan Type, Q1 2003 – Q4 2022.
Of course, low delinquency and default rates don’t mean smooth sailing. So think about the overall household budget today and the average. Debt service for Americans, including other financial obligations (rent, property taxes, homeowners insurance), as a percentage of disposable personal income, was just 14.5% in the third quarter of last year, also pre-pandemic. With household incomes covering financial debt at historically high levels, we believe this is no accidental delinquencies, and default rates remain low. In our view, Americans’ debt burden is unsustainable and concerns about interest costs spiraling out of control are far from reality.
Exhibit 5: The financial burden on households is historically light
Source: Federal Reserve, as of March 3, 2023. Financial Debt Ratio, Q1 1980 – Q3 2022.
[i] I agree that subprime was part of the backstory, but as if market accounting rules (FAS 157) weren’t forcing banks to mark illiquid and hard to value assets , I don’t think it spiraled. I had no intention of selling it at the latest comparable selling price. According to research by former FDIC Commissioner William Isaac, this is what caused nearly $200 billion in loan losses to escalate to about $2 trillion in exaggerated and unnecessary write-downs, resulting in several major financial It caused a liquidity shortage that bankrupted the institution.
[ii] “Auto Market Weekly Summary: February 13,” Jonathan Smoke, Cox Automotive, February 13, 2023.
[iii] “Dramatic Change: The U.S. New Car Market Is Becoming a Luxury Market,” Staff, Cox Automotive, February 23, 2023.
[iv] Source: S&P Global, as of March 3, 2023.
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