The auto loan bubble is deflating in the United States

Asset price inflation during the pandemic did not spare US auto debt. In two years, the volume of loans to finance car purchases increased by 9.1% to $ 1.469 billion in the first quarter of 2022 – just behind student loans at $ 1.570 billion, but far from $ 11.18 trillion. of real estate loans. Two factors explain this increase: aid distributed during the pandemic and the rise in the price of new and used cars. As a result, the median amount borrowed in 2022 is $ 38,000, up 20% from 2019, more than half of the median annual income of $ 70,000. With the continued rise in interest rates and a probable recession on the horizon, the sector therefore appears sensitive, especially since fragile households have also gotten into debt: according to S&P data, the issuance of risky loans has jumped to 44 billion dollars in one year, of $ 98 billion in new loans issued.

Of course, the risk is far from systemic. On the one hand, the debt is diversified, as it is spread across almost all American households. Otherwise, “Loans are not always kept on banks’ balance sheets, but are often securitized and their good year-to-date relative performance (-5% versus -15% for US credit) is affecting investors“, Spreading the risk, recalls Alexandre Hezez, strategist of the Richelieu Group. Concerns also affect more non-financial players, such as auto sellers, who are less well capitalized and may have taken excessive risks, than banks.

Financial effort

However, if default rates – now at an all-time low of 4% – are set to rise, they should remain sustainable. “There are still savings accumulated during Covid, around 2 trillion dollars, and household debt is lower than in 2009, points out Samy Chaar, Lombard Odier’s chief economist. Above all, wages are rising, even if they do not compensate for inflation, and the labor market and real estate remain solid. These three factors, taken together, allow families to cope with higher financing costs.Especially since it is an essential expense for families: having a car is practically mandatory in order to work. Without a strong turnaround that would put a large share of borrowers out of work, defaults should remain low.

On the other hand, the situation will weigh on consumers. The financing rates for 48 and 72-month loans thus fell from 4.6% last November to 5.2% in May, the latest data available, driven by the increase in rates. And 25% of the maturities, according to a Consumer Reports analysis of 800,000 loans, represent more than 10% of the lending family’s monthly income. “The ability of households to borrow is eroding: the loss of purchasing power linked to inflation, especially energy, and the increase in the cost of credit, will end up creating demand problemssays Stéphane Déo, director of market strategy at Ostrum AM. Year-on-year growth in loans also slowed, from nearly 10% at the start of the year to 6% today. “But barring a “hard landing”, the sector should not face an insurmountable rise in defaults“Amid the slowdown in consumption and rising credit prices, the US economy is rediscovering the reality of rate hikes.

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