US auto loan bubble deflates - L'AGEFI

US auto loan bubble deflates – L’AGEFI

Asset price inflation during the pandemic has not spared US auto debt. In two years, the volume of loans to finance auto purchases increased by 9.1%, to $1.469 billion in the first quarter of 2022 — behind student loans of 1.570 billion, but far from 11,180 billion in home loans. . Two factors explain this increase: aid distributed during the pandemic and higher prices for new and used cars. As a result, the average amount borrowed in 2022 is $38,000, up 20% from 2019, more than half the median annual income of $70,000. With interest rates still rising and a possible recession on the horizon, the sector looks sensitive, especially as fragile households have also borrowed: According to data from S&P, risky loan issuance jumped to $44 billion over the course of one year, issuing $98 billion in new loans.

Admittedly, the risk is far from systemic. On the other hand, religion is diverse, as it is distributed to almost all American families. On the other hand, “Loans are not always kept on banks’ balance sheets, but they are often securitized, and their good relative performance since the beginning of the year (-5% vs. -15% for US credit) keeps investors interested.”, which spreads risk, recalls Alexandre Heyzes, strategist at Richelieu Group. The concerns also relate to non-financial players, such as car sellers, who have less capital and may have taken on excessive risk, more than banks.

financial effort

However, if default rates – today at a historic low of 4% – are destined to rise, they should remain sustainable. “There is still accumulated savings during Covid, about $2000 billion, and family debt is less than it was in 2009, Sami Char, chief economist at Lombard Odier confirms. Above all, wages are rising, even if they do not offset inflation, and the labor market and real estate remain strong. These three factors, combined, allow families to face higher financing costs.Especially since it is a basic expense for families: owning a car is practically mandatory in order to be able to work. Without a sharp reversal that would cause a large percentage of borrowers to go out of business, defaults should remain low.

On the other hand, the situation will affect consumers. Funding rates for 48- and 72-month loans thus decreased from 4.6% last November to 5.2% in May, the most recent number available, driven by higher interest rates. And 25% of maturities, according to Consumer Reports analysis of 800,000 loans, are more than 10% of the borrowing family’s monthly income. “Households’ ability to borrow is diminishing: the loss of purchasing power associated with inflation, especially energy, and the increase in the cost of credit, will eventually lead to demand problems.says Stefan Dew, director of market strategy at Ostrum AM. Year-on-year loan growth has also slowed, down from about 10% at the start of the year to 6% today. “But, with the exception of the “hard landing”, the sector should not face an insurmountable rise in defaults.Between slowing consumption and rising credit prices, the US economy is rediscovering the reality of raising interest rates.

Leave a Comment

Your email address will not be published. Required fields are marked *