More than 31% of auto borrowers have negative equity in their vehicles – meaning they owe more on their loans than their cars are worth. That’s up from 23% five years ago, and a record high.
A whopping 29% of car loans now stretch out as long as six to seven years. That’s triple the level in 2010, and also a record high.
But even giving borrowers 84-month loans isn’t enough, apparently. So car makers are increasingly using leases to get people into cars they can’t really afford. Leasing now accounts for a record 33.6% of purchases, up from around 24% a half-decade ago.
To top it all off, dealers are now offering around 9.3% of sticker price in incentives to move metal. You guessed it – that’s another record.
If those numbers aren’t enough to concern you, then consider that overall auto loan debt just topped $1 trillion in the first quarter, according to Experian. That was up 10% year-over-year. Lease volume surged 27% to a record $76.9 billion.
So to sum up, we have more auto loan debt outstanding than ever before. Those loans sport the longest maturities ever. Auto borrowers are the most upside down they’ve ever been. And since even that isn’t enough to keep sales humming, dealers and manufacturers are offering the most incentives ever and the most aggressive leasing deals ever.
|Dealers are now offering around 9.3% of sticker price in incentives to move metal.|
What could possibly go wrong? How about a huge wave of delinquencies, defaults, personal bankruptcies, and lender losses?
Delinquency rates are already starting to rise, albeit from low levels. The 30-day late-payment rate climbed to 2.1% in the first quarter from 2.02% a year earlier, according to Experian.
That’s not high (yet). But a separate report from the credit ratings agency Transunion found that the serious delinquency rate on car loans, meaning those at least 60 days late, just hit 1.12%. That’s the highest in five years.
If I’m right about the worsening prospects for the economy and the job market, this is only the beginning. A potentially major day of reckoning is headed our way. So my advice is to continue to avoid shares of auto manufacturers, auto dealers, auto parts companies, and anyone else with exposure to an industry whose best days for this credit and economic cycle are behind it.
What do you think? Is my analysis too pessimistic? Too optimistic? Right on target? Any companies you would sell or buy in the auto sector here? What about delinquencies and losses down the road? Should we be worried, or do you think car companies will come out of this okay? Use the comment section to discuss.
It’s been a volatile several days for the stock market, and a lively few days at the website. Several of you weighed in on topics my colleagues and I covered, as well as where markets are headed and which kinds of investments make the most sense in this topsy-turvy environment.
Reader Wayne shared this opinion on stock buybacks: “The problem is not buybacks per se, but companies which either:
1) Over-leverage the company by using borrowed funds to buy stock, which can create a disaster if interest rates rise later; or
2) Use buybacks to appear to decrease share ownership … then grant options to the executive suite in share amounts equal to, or more than, the shares purchased, thus effecting a wealth transfer from outside to inside shareholders (a tactic which the SEC should outlaw as fraud).”
With regard to interest rates, Reader Howard said: “It is so easy to lower interest rates, but much harder to raise them. During more normal times, folks have an appreciation of the true value of money. Now with years of questionable investments at current rates, there are so many more debt bombs to be concerned about.
“Black swans can come from many directions, but I suspect money will sputter to regain some value before many people realize what has been going on and how little it is really worth. Trying to recover 3% interest rates over time will expose the most wasteful extravagance, beginning with governments.”
So where will markets head? Reader Stu offered this prognostication: “My three-month forecast calls for stocks to test last August’s lows, the dollar index to test its highs, and surprisingly, even with a strong greenback forecast, gold to reach $1,460 an ounce on a dire economic/political environment. We’ll see what happens.”
Reader John F. singled out one investment vehicle he’s using right now to profit: “I watched the market with greater and greater confusion. So I am now in municipal tax-free bonds earning 4.75%, and watching the interest come in each month on a laddered portfolio. Right now the stock market is not an investment place. It’s a gambling place.”
Finally, on the subject of retailers and the struggles they face, Reader Dan said: “As a retiree, I can tell you that I was one of the original mall rats. When I was 10, Eastland Mall opened in 1968. It was the first enclosed mall in our area and I thought it was the most wonderful place in the world.
“Today, it is largely vacant and while a JC Penney still anchors one end, the few retailers are not name brand but quirky independent locals who are only there for the bargain rent. I have seen this story repeated all across the country. Retail as we knew it when we were young is truly dead.”
And Reader Thomas suggested one group of companies is particularly vulnerable to the fallout: “What a disaster is waiting for the real estate owners and property developers. Soon the rental market for shopping space will collapse. Total oversupply, while the Internet ‘shops’ are displayed on every mobile phone. And this is just the beginning. How will it look 20 years from now?”
Thanks for weighing in on all of these topics. I believe a lot of money has been wasted on share buybacks at inflated prices, and that the ebbing of the buyback flood will weigh on the markets. I’m also on board with the idea that retailers and retail property owners are in trouble – not just because of the “Amazon-ing” of retail, but the unfolding slowdown in the economy as a whole.
Those are just a few of the topics I plan to cover in great detail during the 2016 Money, Metals, & Mining Cruise. You still have time to check out the details of the July 10-17 event here, or by calling 800-797-9519. My fellow financial experts and I are going to have a blast on board the Crystal Serenity, and we’d love to have you join us.
And as always … whether you’re a cruiser or not … you can comment on the topics I’m covering right here on our website.
Will they or won’t they? We’re back to playing that game after the release of meeting minutes and speeches from Federal Reserve officials implying that we may get a rate hike at the June 14-15 policy meeting.
Investigators from several countries are searching for wreckage from EgyptAir Flight 804 in the Mediterranean, with some personal effects and airplane parts reportedly found already. The flight had 66 passengers and crew on board, and dropped out of the sky around 2:30 a.m. local time not far from Cairo. Terrorism is suspected, but not yet confirmed.
An insider trading scandal resulted in Securities and Exchange Commission charges against former investment banker Thomas C. Davis and sports bettor William T. Walters. It also led to professional golfer Phil Mickelson coughing up around $1 million in profits. Davis allegedly fed insider tips to Walters as chairman of Dean Foods, a move designed to help him get out from under crushing gambling debts.
So do you think the Fed will pull the trigger again next month? Will the EgyptAir crash turn out to be terrorism? And what do you think of the SEC’s insider trading charges? Is the agency finally cracking down on all the shenanigans out there, in a way that might build confidence in markets among individual investors? Let me know what you think in the comment section below.
Until next time,