Car Repos Are Exploding. That’s a Bad Omen.
A surge in repossessed autos reflects broader economic problems. The question: How might a bursting of an auto bubble affect the broader U.S. economy?
Ford CFO John Lawler said in June that the company had started to see delinquencies increase. Here, a cars at a
Ford factory are prepared for distribution.
The jobs report and minutes from the Federal Reserve’s June meeting were the economic highlights of the week, but they are, respectively, a lagging indicator and old news. This column instead digs into the auto market, where there is an underappreciated ticking time bomb.
Lucky Lopez is a car dealer who has been in the business for about 20 years. In recent meetings with bankers, where he bids on repossessed vehicles before they go to auction, he has noticed some common characteristics of the defaulted loans. Most of the loans on recently repossessed cars originated during 2020 and 2021, whereas origination dates are normally scattered because people fall on hard times at different times; loan-to-value ratios, or the amount financed relative to the value of the vehicle, are around 140%, versus a more normal 80%; and many of the loans were extended to buyers who had temporary pops in income during the pandemic. Those monthly incomes fell—sometimes by half—as pandemic stimulus programs stopped, and now they look even worse on an inflation-adjusted basis and as the prices of basics in particular are climbing.
Sticker Shock
Used-car prices are more than $10,000 above typically expected levels, or what one observer says is a bubble that 'is beginning to show signs of bursting soon.'
Part of the problem is that some consumers’ incomes were temporarily high as the pandemic brought about debt forbearance, pandemic stimulus checks, enhanced unemployment benefits, and, in some cases, forgiven loans from the Paycheck Protection Program. Lopez says he recently bought a Bentley, McLaren and two Aston Martins—all purchased by buyers using PPP money as down payments, and all repossessed after few or no monthly payments.Another recent acquisition: a Silverado repossessed from a borrower with a solid 700 credit score who made two payments.
Banks’ auto lending standards, meanwhile, went out the window, and then lenders jumped on the bandwagon of overpaying for cars, Lopez says. “Everybody thought the free gravy train would never end,” Lopez says.
Now, he says he has never seen so many people making $2,500 a month owing $1,000 a month in car payments. That’s about double the maximum portion of income many financial advisors recommend allocating toward a car payment. “The idea that the economy is strong? Anyone who is actually doing business sees things are not strong,” says Lopez. “We had a housing bubble in 2008, and now we have an auto bubble.”
Consider data from car-shopping app CoPilot, which monitors daily online inventory across dealers nationwide to track what they say is the difference between a car’s listed price and what it would be worth if not for extraordinary pandemic dynamics. In June, used-car prices were up 43%, or $10,046 above projected “normal” levels, the company says.
As Danielle DiMartino Booth, CEO of Quill Intelligence puts it, companies in the business of repossessing autos are among the first to know when economic trouble is brewing. And now those companies are buying car lots to handle the flood of repossessed, used cars coming to the market because what they are seeing is a longer and harder recession, she says. Lopez says banks are in turn leasing more land to handle an expected car-repossession surge.
Some auto executives have hinted of turbulence. Earlier this year, Vickie Judy, CFO of America’s Car-Mart CRMT –2.79% (ticker: CRMT), discussed rising car repossession rates on an earnings call. In June, Ford F –0.26% (F) CFO John Lawler said the company had started to see delinquencies increase.
Lopez says it is hard to track vehicle repossession rates because banks are loath to talk about them. But based on what he says he has seen from banks, subprime repos have nearly doubled since 2020, to around 11% on average. The bigger red flag is in prime repos, where borrowers have higher credit scores. Lopez says usually about 2% of prime loans wind up repossessed. Now, that rate is at about 4%. Some of that can be explained by pandemic support temporarily making some consumers look like better borrowers. But it probably doesn’t fully explain the jump in prime defaults, thus suggesting a wider swath of consumers are struggling despite narratives around large cash cushions and a strong job market buffering households as inflation bites, interest rates rise, and financial markets melt.
Pamela Foohey, law professor at Cardozo School of Law at Yeshiva University, warned in 2021 of an auto-loan crisis. She wrote then that heading into the pandemic, auto loans outstanding were at record levels and auto-loan delinquencies were hitting new highs almost every quarter. The bubble was about to burst, it seemed, but government pandemic responses meant the bottom didn’t fall out of the auto-loan market. The measures were temporary, she warned then, and the bubble has since only grown.
Barron’s checked in with Foohey this past week. “The bubble is beginning to show signs of bursting soon,” she says, pointing to the overall spike in car prices that has led to larger loans and to rising repossession rates.
What is bubbling in the auto market reflects broader economic problems. The question: How might a bursting of an auto bubble affect the broader U.S. economy? Data published in May by the New York Fed shows Americans’ auto debt rose $87 billion for the year ended in March, to $1.47 trillion. That represents about a 10th of total consumer debt, which rose 8.2% over the same period.
One place the trouble is starting to show up, Lopez says, is on banks’ balance sheets. He says banks that were giving auto loans with LTVs of around 140 are now getting around 70 at auction—meaning they are losing substantial money. Foohey says the increase in auto loans and the increase in delinquencies and defaults track an increase in defaults on personal loans and credit cards.
There is a silver lining in that the weaker economy the auto trouble both reflects and portends should cool inflation. But it might not be that simple, at least not right away. “A lot of the banks—they’re smart. They control the market, like diamonds,” Lopez says. “As repos pour in, they only release them so often,” he says, meaning auto prices will probably remain stubborn even as economic growth wanes and more repos mean more used-car inventory.
That will also remain the case for inflation broadly, with stagflation the only alternative to a deeper-than-expected recession.
Time to start buying auction cars. People will finally remember that the game has been rigged from the start.
Will said it best in "Margin Call", listen carefully:
Fractional reserve banking and cronyism is empowered by the average day person who lives beyond their means in apathy.
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