Wednesday , 28 September 2016


New & Used Vehicle Bubbles Developing

On Tuesday, it was announced that over seventeen million new vehicles were soldMercedes-Benz-SLS-AMG-GT-2013-12F4K02481554913 in 2015, the highest it’s ever been in United States history but, while the media claims that this record has been reached because of drastic improvements to the U.S. economy, they are once again failing to account for the central factor: credit expansion.

By Tommy Behnke (mises.org)

…Instead of learning from the mistakes that sent shock waves throughout most of the planet, the Federal Reserve has continued with its expansionist policies. Since 2009, the money supply has increased by four trillion dollars, while the federal funds rate has remained at or near 0%.

Automotive companies have taken advantage of the cheap borrowing costs, increasing vehicle production by over 100% since 2009:

Auto LoansSource: OICA

In order to generate more vehicle purchases, these companies have incentivized consumers with hot, hard-to-resist offers, similar to the infamous “liar loans” and “no-money down” loans of the 2008 recession. Dealerships have increased spending on sales incentives by 14% since last year alone, and the banners in their shops now proudly proclaim their acceptance of any and all loan applications — “No Credit. Bad Credit. All Credit. 100 Percent Approval.” As a result, auto loans have increased by nearly $80 billion since 2009, many of which have been given to individuals with far-from-stellar credit scores. Today, almost 20% of all auto loans are given to individuals with credit scores below 620:

Auto LoansSource: New York Fed

Not only are more auto loans being originated, but they are also increasing in duration. The average loan term is now 67 months (that’s 5.58 years) for new cars and 62 (that’s 5.16 years) months for used cars. Both are record numbers.

Average transaction prices for new and used cars are also at their record highs. Used car prices have increased by nearly 25% since 2009, while new car prices have increased by over 15%. Part of this has to do with the increasing demand for cars generated by the upsurge in auto loans. The main reason, however, is that consumers — taking advantage of the accessibility of cheap credit — are purchasing more expensive body styles…

The auto bubble has yet to burst, but its negative effects are already starting to gradually appear. For one, delinquencies on car loans have increased by nearly 120%, from just over 1% in 2010 to 2.62% in 2014. Since cars rapidly depreciate in value, this number is projected to spike. By the time these six, seven, and eight year no-money down loans are due to be paid in full, many of these vehicles won’t be worth paying off anymore — maintenance and loan costs will start exceeding the value of the cars…

At a time when labor force participation is at its lowest level since 1977 — at a time when real wages are rising less than they have since at least the 1980s — it is imperative that the Federal Reserve stop misleading individuals into making irrational investments. The economy is simply too frail to continue weathering these endless business cycles.

Economists, politicians, and the general populace need to start learning from their economic history so they can begin recognizing that favoring debt over thrift isn’t beneficial to the country’s financial well-being. Failure to do so will simply lead to more bubbles, more malinvestment, and more economic headaches in the years to come.

[The original post written by Tommy Behnke (mises.org) is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample heresign up in the top right corner) in a slightly edited ([ ]) and/or abridged (…) format to provide a fast and easy read. You can also “Follow the munKNEE”  via Twitter and/or Facebook.]

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