The auto loan market is a leading indicator to the broader economy. Used car values are near record levels but have traded lower for three consecutive months. More used car loans will be underwater as used car values decline. Thus, the risk of loan default rises.
LTV’s exceed 100% while underlying asset values decline. This concerns me as loan-to-value (“LTV”) ratios are near record highs (116% as of Q2 2022), at a time when the value of the underlying asset (the vehicle) is rolling over. This means that an increasing number of borrowers will be underwater on their loans should used car values continue to decline as we expect. How many borrowers will walk away from underwater loans?
We fully expect auto loan delinquencies and defaults to increase. However, it will be difficult to get a clear picture in anything close to real time as many auto loans get securitized, thereby obfuscating timely data collection and reporting. The more I look at today’s economy, the more I am reminded of 2008. While history may not repeat itself, it certainly rhymes.
Used car values have declined recently. Used car values have declined for three consecutive months (see chart and table below from Cox Automotive). We expect this trend to continue for the remainder of 2022, through 2023 and into 2024.
Greater default risk? Yes, it would seem so. The question is “how many borrowers will walk away from auto loans they are underwater on – especially subprime borrowers?” We know anecdotally that this is happening in the used car space as loan-to-value ratios are well above 100% (116% in Q2’22 per Experian), while used car values are declining – meaning more loans will be underwater should used auto values continue to decline.
- See the Manheim/Cox Automotive Used Vehicle Index HERE (used car values have declined for three consecutive months).
- See Experian’s Q2 2022 State of the Automotive Finance Market HERE.