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I just returned from driving the side streets in a solidly lower working class neighborhood in Philadelphia. Not middle class, not even the lower end of middle, but lower class. I know these neighborhoods well, know the typical jobs held by the residents, and I know their culture. I can differentiate between the above mentioned strata in Philadelphia.
There were at least two new 60k plus luxury cars parked per block (Audi Q7s, a few Mercedes SUVs, a couple of Volvo XC90s, etc), and I was frequently behind them as well. I faced a Mercedes AMG at a stop sign with small woman driving it that, let's just say, didn't have the air of a six figure income earner.
Upon returning home I felt a little bit like "Mark Baum's" team in the film The Big Short as they listened slack jawed at the prospect of strippers owning five homes. These streets were never filled with such cars before.
I'm not saying that I have the economic acuity of the guys portrayed in that movie, just that the parallel was there between what they saw and what I just did. I'm also not claiming to be the only one to notice the possibility of such a bubble, as the possibility has been in the press. I'm merely here to report.
Yes, the auto industry has been in a bubble. This is what it does, but perhaps this one is even bigger because of the federal reserve policies. Loan and lease terms have expanded significantly. Lending standards have fallen. Defaults are soaring in subprime car loans.
However, home loans were something like ten times larger than auto loans so I don’t think it presents the same risk.
It’s not 2008, but the auto industry always runs in cycles with the overall economy and starts to correct before it does. It’s why Michigan has been given the term “canary in the coal mine” often.
Seven year subprime auto loans, what could possibly go wrong?
Outside this auto finance bubble (no one could see it coming of course), there is the other elephant standing in the room, the student loan bubble. The only question is how Congress will give it to taxpayers when the cries for bailouts begin.
Seven year subprime auto loans, what could possibly go wrong?
Outside this auto finance bubble (no one could see it coming of course), there is the other elephant standing in the room, the student loan bubble. The only question is how Congress will give it to taxpayers when the cries for bailouts begin.
Do you have a prediction for how a student loan bubble crisis could come about?
Do you have a prediction for how a student loan bubble crisis could come about?
An economic downturn (they do happen from time to time) leads to job losses and the former students stop paying on their loans. With enough wailing the politicians will enact some form of debt relief (a modification of bankruptcy laws?), voila -- the value of the loan portfolios drops dramatically in write downs, and the bubble implodes.
Student loans are the drug of choice for .edu administrators, and anything that reduces this steady cash flow will cause huge disruptions in that sector as well.
Don't see forgiving student loans in our future. US Govt reduces SS payments by 15% if you owe student loan money you didn't pay back, it 's happening to a 66 year old friend
Large downturn, which is inevitable, will cause issues with the student loans. The difference is the goverment can afford to sit on the bad debt and wait a lot longer than a bank can on a house. So the impact would likely be far further down the line than say what we saw with the last financial crisis.
As mentioned by Skeddy, folks that go into debt with student loans and then give the bird on repayments are likely to see any future goverment checks reduced. They could always offer some kind of forgiveness program. It would be politically popular and boost the party that offers it.
All that said, there is certainly a massive bubble due to student loans and their impact on University pricing.
Cars are a little different and have been cyclical for a long time. The trend has been for more expensive cars and longer loan terms. Much like just prior to the last down turn when every idiot and their brother were driving massive Tahoe's and Hummers when the crisis starts to really set in those vehicles basically rot. High end goods tend to dry up, so all those big pickup trucks that have been in massive demand will no longer be in favor.
It wouldn't surprise me to see one of the big US automakers to make it through the next downturn. I'm not sure there will be another bailout.
Uncollectibles on sub-prime auto loans are running 8-9%, lower than the 10-11% peak of 2010-2011 but very near where they were in 2000-2001. Despite the higher loss rates, any impacts in the financial markets would be much less than the housing bubble because the volume of auto loans is substantially that the volume of home loans. It would likely not be very good for the auto makers and dealers, though.
Read Zerohedge, they have been claiming that the autobubble will implode any day now . . . for the last several years. The logic makes sense, market ignores it. Maybe the market ignores logic, maybe the market is rigged, maybe . . .
Any assets or goods who’s consumption is directly tied to lending will feel the impact soon. Houses vehicles and public education go pop pop pop.
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