|Everybody Is Chasing That Short-Term Fix|
Of course, all this is being pushed by automakers continuing to add production facilities and higher inventory levels as they fight to gain market share. This means dealers want and need to get the iron off their lot to make room for more. Basically, everybody is chasing any short-term fix they can use but sooner or later they must face the fact that too many cars are chasing too few customers. Up to now they have those lusting for a new ride and cheap credit to thank for keeping sales moving. Unfortunately, delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks long friendly to this sector have pulled back from the auto lending business. To top it off, state regulators are circling the industry and looking at whether it preyed on borrowers and put them in cars they couldn’t afford.
|Bad Loan Write-Offs Are Mounting In The Subprime Sector|
This means that private-equity firms that plunged headlong into subprime auto lending are discovering just how hard exiting this market might be. Near the end of 2017, it was reported that Almost 9.7 percent of subprime car loans made by non-bank lenders and private-equity backed firms catering to car dealers became 90 or more days past due in the third quarter. The delinquency rate is back near recession levels for these lenders according to the New York Fed’s quarterly report on household debt and pushing seven-year highs.
|Millions Of Cars Coming Off Lease Now Flooding Market|
The recent decline in automobile sales while largely ignored is already an indication of the future consumer debt crisis starting to emerge. The main areas where household credit still growing are student loans, which are essentially government guaranteed entitlements and auto loans which are collateralized by the car. Issuing billions of debt to subprime borrowers for housing proved to be a disaster and going forward we should expect the same trend to reveal itself in autos. For a long time, I have had a problem with those pointing to the auto industry as proof that the American economy is on the road to health. The auto market continues to face the issues of oversupply and this means lower prices. Until now this has been lessened by wave after wave of subprime auto loans that have allowed a buyer to purchase a car even when it makes no sense financially.
It is hard to deny, auto sales and low monthly lease payments have been driven by artificially low interest rates. While we hear claims that the auto market is hitting on all cylinders we also hear of far too many unemployed students living off their student loans buying new cars. Unnoticed by many is following Trump's victory small businesses in a wave of optimism leased trucks and cars to position themselves for growth, however, this wave of new sales has begun to wane. The final Failure to focus on where the sales are coming from or the amount of profit per car sold is a mistake and does not bode well for the smaller players in this industry that constantly demands a company invest huge sums of money to stay competitive. To those investing in companies such as Tesla, it is logical a difficult sales environment will only make the company's mission more challenging.