U.S. automobile debt continues to accelerate. Are we heading for a crash?
According to the latest State of the Automotive Finance Market by Experian, auto loans in the U.S. reached a record total of $1,149,000,000,000 in the second quarter of 2018. Higher interest rates are beginning to feed through to the auto loan market meaning that monthly payments are increasing and borrowers still like to finance over the longest term possible (the average loan term is 68 months).
The average monthly payment for a new vehicle is now $525, an all-time high. That equates to around one-fifth of the average American's after-tax pay. When you consider all the other monthly expenses that households have, there is clearly an affordability issue when it comes to America's transport of choice. Trucks and SUV sales are booming as people's optimism about the future means that taking on new debt is hardly a consideration. A comment on the auto debt story from glenlloyd, a reader of the ZeroHedge website neatly sums it up: "For most people it's not about limitations, it's about presenting an image of success. So the neighbor comes home in a new SUV -- now they have to Jones it and get a new one." As a description of herding behavior, it doesn't come much better than that.
The Experian survey also showed that the source of finance is shifting away from banks towards credit unions. This may be a sign that the quality of the market is degrading and that lender sentiment could be becoming more conservative.
The chart below shows total U.S. Motor Vehicle Loans (Owned & Securitized) as measured by the Federal Reserve back to 1943. Notice the relatively steady increase until the 1980s. That's when auto debt really started to accelerate higher, a trend fueled by a secular decline in interest rates and a positive social mood. There are two clear periods of corrections in the uptrend, from 1989 to 1992, and from 2005 to 2010. This means that the entire advance in automobile debt over the past 75 years sports a five-wave structure. After five waves up, we should expect a correction towards the previous fourth wave (at least). That would mean the level of U.S. automobile debt deflating by around 40% -- a big decline, but not out of the realms of imagination even for the most ardent inflationists. Nevertheless, such a deflation will be a symptom of devastation for many and, no doubt, occur within the context of a broader economic collapse.