Did you know that between 2010 and today, the percentage of car buyers (leased vehicles) that have a FICO score of 550 or less has risen from 5% of all leased automobiles to nearly 33%.
In terms of size, its still "manageable" at US$ 200 billion (yeah yeah) its still not that much, but it could still hurt, if 20% of those borrower default -- and this is not an unreasonable number, if you consider that's mostly junk credit (30% to 40% default is not unusual -- check Moody's default rates)
However, the problem is serious for other reasons: channel stuffing -- the car manufacturers have "convinced" dealers to accept almost unheard numbers of cars --about the same level as of 2008 crisis -- 74 days average inventory, while the economy is not in a crisis...so the absolute number of cars on dealer lots is large
The impact on the investors losses are important, but also the auto industry is a major employer in the US (and Mexico too).
Investors, in the hunt for yield, have bought the idea that sub-prime auto loans were a good idea because the yields were so much better than the prime stuff. Who does this sound familiar? It sounds familiar because it's exactly what brought the 2008 financial crisis -- granted there it was exotic securities but they were based on the same flawed logic, that sub-prime borrowers would, in general pay their leases -- because they need them (the cars that is)!
In terms of size, its still "manageable" at US$ 200 billion (yeah yeah) its still not that much, but it could still hurt, if 20% of those borrower default -- and this is not an unreasonable number, if you consider that's mostly junk credit (30% to 40% default is not unusual -- check Moody's default rates)
However, the problem is serious for other reasons: channel stuffing -- the car manufacturers have "convinced" dealers to accept almost unheard numbers of cars --about the same level as of 2008 crisis -- 74 days average inventory, while the economy is not in a crisis...so the absolute number of cars on dealer lots is large
The impact on the investors losses are important, but also the auto industry is a major employer in the US (and Mexico too).
- Lots of loan delinquency will lead to a lot of repossessions which means a lot of used cars competing with new cars -- price for used cars is almost certain to fall...
- Dealer "giveaway" are substantial, and over the past 5 years car prices have, on average, fallen somewhat
- Dealer inventories are near historical highs
- The negative implication for manufacturers is significant; as an example the share price of Ford (NYSE:F) stands at $11.25 today against a peak of $17 in MARCH 2013
- Sidebar: Did you know that Tesla Motors' market capitalization stands at $52 billion Vs. Ford Motor that stands at $48 billion. One manufactured 3.5 million cars the other 83,000 guess which!
It is hard to quantify the size of the problem. However these are the important factors:
- Since a very large percentage of cars are sold as leases, and
- that the quality of borrower has declining dramatically,
- The price of used cars could fall by 30-40% (drop of 1.8% and 3.6% in 2016 & 2017)
- The investor's portfolio losses will result in a tighter lending standards
- That will make it more difficult for the manufacturers to sell their new cars
- Add the arrival within 3/4 years of self driving cars -- that could itself transform the car industry
- Figures are complicated but the number of people in the car industry is around 3 million or 2.4% of America's labor force
- The car industry could be at an historic inflection point -- where the auto industry is completely reshaped.
Then again, it could be nothing! I don't know, Trump could decide to help his friends at Ford & GM and make electric car illegal
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