According to Manning and Napier’s September 28 Market Commentary the answer is “a lot”.
First the facts:
U.S. auto debt swelled to a record high $1.2 trillion at the end of the second quarter. This is the 25th consecutive quarter of auto loan growth, with the total outstanding balance now up 70% from a post-crisis low of $700 million in 2010. The surge in auto loans is a growing burden that we are monitoring both in terms of the challenges it may pose to the consumer, as well as to our outlook for the U.S. economy more broadly.
Since the beginning of the decade, the growth in auto loans has been strong enough to outpace the growth in overall household debt.
After bottoming at 5.8% in the first quarter 2010, auto debt now accounts for 9.3% of total household debt; its highest share since the New York Fed began tracking the data in 2003.
In addition to rising auto debts, consumers are facing ever higher auto payments, further challenging individuals who likely also have other debt obligations. At the end of last year, the average auto loan for a new car rose to $30,621, while the average monthly payment was $506, according to Experian. This was the first time the amount borrowed for a new car and the average auto payment topped $30,000 and $500, respectively.
Additionally, auto loan terms are lengthening. As of June 2017, the average auto loan term reached 68 months, the longest ever according to Experian. For context, the average car loan term 10 years ago was 63 months. While these longer commitments reduce monthly payments, the increased length of the debt burden extends the headwind to the consumer.
Though delinquencies are certainly rising, the risks surrounding burgeoning auto loan debt have not yet translated into widespread defaults. As of the end of the second quarter, 3.9% of auto loans were 90 days delinquent or more, up from a pre-crisis low of 2% in 2005, but still far below the post-crisis peak of 5.3% in 2010. Low interest rates and a healthy labor market are likely helping consumers manage current payment obligations.
In the meantime, pressure from the growing debt burden is beginning to show cracks in subprime auto loans. Subprime auto loans are ordinary car loans that have been extended to those with lower than preferred credit. Issuance in this category jumped from a low of nearly $53 billion in 2009 to $119 billion in 2016, a striking 126% increase. Often, these borrowers have lower incomes, less steady sources of income, or existing debt burdens that reflect a greater probability of default.
And the conclusion:
For the subprime auto market, one worrying sign emerged earlier this summer. Per Fitch, a credit-rating service, subprime auto bonds issued in 2015 are on track to become the worst performing vintage since 2007. Although the auto loan market is a small fraction of the size of the housing mortgage market, the deterioration of credit quality still raises concerns.
The auto debt situation is further complicated due to the rising age of the American automobile. As of the end of 2016, the average age of passenger vehicles on U.S. roads increased to 11.6 years, and has risen each year since 2002 when it was at 9.6 years. Older cars have a greater propensity for breaking down, which combined with worsening debt burdens, suggests that more borrowers may find themselves in an increasingly difficult situation should something go wrong.
While we still like certain credits in the auto-loan asset-backed securities space, for yield-starved fixed income investors, we would advise caution. At this time, we prefer owning only the most senior AAA-rated classes of prime auto-loan backed securitized credit selected through our bottom-up, fundamental process. Regarding macroeconomic implications, rising auto debt, and more broadly, increasing household loan balances, continue to act as headwinds to both the consumer and overall U.S. economic growth.
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®