by Doug Casey, Casey Research:
The car sales boom is coming to an end.
This might surprise some folks. After all, the auto industry has been one of the economy’s bright spots since the financial crisis. Sales have grown each year since 2009. Last year, carmakers sold a record 17.47 million vehicles.
Many folks see the booming auto industry as proof that the economy is getting better.
E.B. Tucker, editor of The Casey Report, sees it differently. He says the auto industry boomed because of cheap money. But, with the economy slowing, the easy money is drying up. According to E.B., this will put an end to the auto industry’s seven-year boom.
As you’re about to see, it looks like a crisis could already be underway. That’s because the auto loan market is starting to crack.
Today, we’ll show you why this is a threat to your wealth even if you don’t own a single “car stock.” We’ll also show you how to turn this potential crisis into a money-making opportunity.
• The Federal Reserve made it incredibly cheap to buy a car…
That’s because the Fed has held its key interest rate near zero since 2008.
This has made it cheaper than ever to buy a car. In 2007, the average interest rate for auto loans was 7.7%. It’s now 4.3%.
Because it costs almost nothing to borrow money, everyone is buying cars on credit. According to Experian, 86% of people who bought new cars in the fourth quarter of 2015 took out a loan. That’s up from 81% in 2010.
• It’s also never been easier to buy a car…
Lenders will give money to practically anyone these days. According to Experian, “subprime” loans now make up more than 20% of the auto loan market. Subprime loans are loans made to borrowers with bad credit.
Lenders haven’t just loosened their standards. They’ve also stretched out loan terms to get more folks to buy cars. E.B. Tucker wrote in this month’s issue of The Casey Report:
According to Edmunds.com, the average length of a car loan hit 68.3 months last November. That’s up 8% from a decade earlier. Credit reporting firm Experian says 30% of new car loans had terms of 73–84 months in early 2015.
E.B.’s even seen one dealer offer a 0% interest loan for as long as 84 months. In other words, they’ll let you drive a car for seven years before you have to pay a penny in interest.
• Cheap credit and lax lending standards have caused the auto loan market to explode…
This year, the value of outstanding auto loans topped $1 trillion for the first time ever. It’s now 42% bigger than it was in 2009.
The subprime market has grown even faster. The Wall Street Journal reported in April:
Auto lenders have been increasingly comfortable lowering credit standards. They gave out 6.1 million subprime auto loans in 2015, up 8% from a year prior and up 118% since they bottomed out in 2009, according to credit bureau Equifax. New subprime loans totaled $109.5 billion in 2015, the sixth consecutive annual increase, and up 11% from the year prior, according to Equifax.
• Last month, JPMorgan Chase CEO James Dimon said the auto-lending market was getting “a little stretched”…
Dimon warned that “someone is going to get hurt.”
The Office of the Comptroller of the Currency, a watchdog for the lending industry, also thinks auto lending is getting out of hand. Last week, it called the incredible growth in auto loans “unprecedented.”
It warned of rising delinquencies. (A loan is delinquent when a borrower falls 60 days behind on payment.)
• Auto loan delinquencies are already soaring…
In February, subprime auto loan delinquencies hit 5.16%. That’s the highest level since October 1996.
The next month, E.B. said we would see “a lot more” delinquencies. He was right.
Last week, The Wall Street Journal reported that subprime lenders are bracing for huge losses:
Eighteen percent of auto-loan principal dollars securitized by subprime lenders in 2015 aren’t likely to be repaid, according to a report by credit-ratings company DBRS Inc. If so, that would mark a sharp rise from 14.4% in 2014 and 12.8% in 2012…
Also up: Loss expectations for loans securitized by nine smaller subprime issuers that either launched or restructured after the financial crisis. Just over 19% of their auto-loan dollars securitized last year are expected to not be repaid, up from 18.4% in 2014 and 16.7% in 2013.
• E.B. expects auto loan delinquencies to keep rising…
According to E.B., more folks will struggle to pay their car loans as the economy weakens. Lenders will take big losses. This will lead them to tighten lending standards. Easy money will dry up in the process.
Casey Research founder Doug Casey says this will create serious problems for the auto industry:
I expect a collapse of the new car market in the near future. People are going to have to keep their cars longer, and fix them up instead of trading them in.
This is clearly bad news for carmakers. But it’s an opportunity for companies that help cars stay on the road longer.
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