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Autos: Slumping Sales & Growing Delinquencies Spell Trouble

The auto industry is riding what has, thus far, been a rollercoaster ride of a year. February was a weak month for vehicle sales, but March followed it up with more optimistic figures. However, newly released sales figures for April, compounding serious pressure from other market factors, may be a sign of the floor falling out from underneath the automakers.

Nissan led the downturn, experiencing a shocking 28% plunge in sales of new vehicles. Honda was whacked by a 9.2% decline. Ford and Hyundai also felt the squeeze as their sales fell 4.7% each. Inventories of new vehicles continue to take very long to clear. It took an average of 68 days before a dealer was able to sell a new vehicle in April – just off the highest level since 2009 of 75 days. One must also consider the millions of nearly new vehicles that will return to the market this year after coming off lease, providing a lower-cost alternative for consumers.

For many prospective buyers, purchasing a vehicle is simply becoming too expensive. Auto loan interest rates are now at levels not seen since before the financial crisis in 2009 – an average of 5.6% in April, compared with 4.2% in February 2013. With the Federal Reserve planning at least 2 more rate hikes later this year, it is unlikely that these rates will decrease soon.

Consumer wallets are being squeezed in other areas as well. The average monthly payment on new vehicles averaged $535 in April compared to $509 in 2017 and $463 in 2013. The average amount financed increased to $31,318 in April compared to $30,315 last year and $26,679 in April of 2013. Down payments also increased, reaching $3,911 in April, compared to $3,770 in 2017 and $3,494 in 2013. As a result, the net Percentage of domestic banks reporting stronger demand for auto loans declined by 8.5% in the first quarter of 2018.

Further complicating the landscape are the ongoing negotiations over NAFTA. The US’ NAFTA negotiating team has presented several redrawings of trade provisions on finished automobiles that would inevitably make production more expensive. The most recent proposal would require 40% of the parts used in light vehicles and 45% of parts used in pickup trucks to originate in high-wage countries. It also mandates that 75% of all components, including 70% of all aluminum and steel, in a vehicle be North American-made to qualify for tariff-free importation under a new deal, up from the current level of 62.5%. Mexico, whose auto industry registered record output in 2017, has already refused this specific proposal, and it is unclear where negotiations will go from here. There is even the possibility that Trump instructs his team to leave the bargaining table altogether and temporarily suspends NAFTA. No matter what happens, car prices are likely to be on the upswing when all is said and done.

Attracting new buyers will become especially difficult in the coming months as larger and larger portions of owners cannot afford their current vehicles. Thousands of vehicles are being traded into dealers while still underwater. A third of all vehicles traded in the last year had negative equity. The average negative equity trade-in was $5,130 underwater.

Auto Loans Outstanding in the final quarter of 2017 totaled $1.221 Trillion, up 5.5% YoY. Of that total, more than $280 billion worth of outstanding auto loans were subprime loans. What’s worse, 4.05% of all outstanding loans are seriously delinquent, the highest level since 2012, and up from 3.75% a year ago. In Q2 2017, 9.7% of loans that auto-finance companies made to the riskiest borrowers were overdue by 90 days or more, the highest percentage since 2010.

This does not seem to be giving pause to some firms. Blackstone, the world’s biggest private equity firm, plans on expanding its presence in subprime car loans going forward. But, it’s not a good sign that some of the other large subprime lenders such as Pelican Auto Finance, Summit Financial Corp., and Spring Tree Lending, are not expanding their portfolio because they are busy filing for bankruptcy.

All the factors outlined above point to trouble ahead for the U.S. auto industry, which also has to contend with falling used car values. That trend may accelerate as more pre-owned inventory hits the market. Traditional car makers also risk losing market share to tech companies that are entering the auto-making business in the scramble to develop electric and autonomous vehicles.

MRP added Short Autos as a theme on October 12, 2017. Since then, the automobile ETF (CARZ) has seen a small decline of 1.8%, underperforming the S&P’s 3% gain over the same period.


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