PRINCETON, N.J. — New car sales in the U.S. will finally return to pre-recession levels this year. But with that comeback — and corresponding hike in consumer and lender confidence — problems lurk on the horizon.
Industry analysts are wary about lenders continuing to extend terms and reaching to lower credit scores to compete, car prices markedly increasing and leasing luring buyers to higher-end vehicles. That could lead consumers deeper in debt, more upside down on their loans and increase default rates.
New cars sales on a seasonally adjusted annual rate will top 16 million units this year, according to projections. The last year U.S. automakers passed 16 million sales units was 2007.
Kevin Tynan, senior automotive analyst for Bloomberg Industries, has his eyes on automakers' leasing practices, as well as consumers' growing confidence in their own balance sheets.
"Money is cheap and easy now, consumers are feeling a lot better," said Tynan. "It is interesting. We saw such a big pullback in spending during the Great Recession and talk of the 'new normal' in consumer buying habits. Now we are kind of back to where we were."
Tynan said he is seeing some of the same consumer, carmaker and lender tendencies evident before the recession, such as large numbers of truck, SUV and high-end car sales. "Dealers are finding it much easier these days to take a buyer who was looking to purchase a loaded Camry up to a Lexus lease, for example."
Leasing has taken off in the last year. Tynan said that every month in 2014 leasing's share of all new car sales has been above 27%, with two months above 28%.
But what's most concerning to Tynan is the continuing growth of lease penetration in the entry-level luxury car segment. "It's in mid-50% range — so more than half the entry-level luxury vehicles leaving dealerships' lots are being leased."
Looking ahead, Tynan is worried that the higher-end leases could become harder for consumers to afford, who may be tempted to stretch budgets when they trade in their car in three years.
Tynan reminded that the rock-bottom rates and strong residual values driving down monthly payments likely won't be around in a few years.
Tynan pointed to all the cars coming off-lease in three years — potentially five million in 2017 — that will lower residual values, and leasing dropping off dramatically during the recession, which has limited lease returns and raised used values.
"I think the automakers are falling back into doing some of the same things they did before the recession," observed Tynan about carmakers' efforts to keep production levels and sales up. "Prior to the recession the automakers used incentives, mainly cash back. Now they are using leasing."
At Black Book, Gainesville, Ga., Jared Kalfus, VP of data licensing, sees used values softening at a faster pace in the next few years with automakers appearing to keep inventory levels high.
"Couple that with increasing numbers of lease returns and that will cause collateral values to decrease more rapidly," Kalfus explained.
Last year used depreciation was 12.8%, and this year Kalfus projects the percentage will rise to 13.5%. He said in such an environment lenders need to rely on software tools, such as Black Book's Collateral Insight Engine, to spot opportunities and potential residual value problems with cars and trucks.
David Jacobson, president of GrooveCar, Hauppauge, N.Y., does not like how new car prices jumped in the last year and are impacting loan amounts and monthly payments.
"The average loan amount for a new car is $27,512, a $964 increase year over year, according to Experian," said Jacobson. "That is an enormous jump. So everyone is looking for cheaper ways to own a car, and it is getting a little out of hand."
That increase is reflected in lenders' auto loan balances: bank balances are up by $33 billion year over year, CUs are up $23 billion, finance companies $19 billion and captives $9 billion, according to Jacobson.
New safety features and technology are driving up sticker prices, he explained.
Loan terms have been steadily lengthening, with experts last September spotting the trend that includes some lenders going longer than 100 months.
"Sixty-six percent of all new loans are over 60 months," said Jacobson citing the latest Experian data.
CUs Go Long
Tony Boutelle, president and CEO of CU Direct, Ontario, Calif., believes CUs are going longer on new car financing to compete with leasing. "We are seeing more terms between 72 and 84 months."
Experts, too, feel competition is spurring lenders to reach to lower credit scores, particularly near prime borrowers, many former prime who have had their credit damaged due to the economy.
According to first quarter Experian data, banks, credit unions and finance companies together have increased their deep subprime lending 8.39% year over year. Melinda Zabritski, senior director of automotive credit for Experian Automotive, Schaumberg, Ill., said CUs increased portfolio business to 4% from 3% with these borrowers.
"Speculation as to why... it could be the fact captives are picking up market share in both new and used, banks are being very aggressive with some moving into subprime, so credit unions have to buy deeper than in the past," offered Zabritski.
For now, Zabritski said she is not concerned because of the small portion of lenders' portfolios deep subprime represents, and because credit unions are strong managers of risk.
"Overall, we are looking at a healthy auto lending market with some slight increases in delinquencies that we will keep our eyes on," said Zabritski, saying key areas to pay attention to are rising loan amounts and new vehicle payments. "As these two things grow, the question is, 'Will we see delinquencies increase?' The average new car payment used to be $460 and now it's over $470."
CUs' strategies, pointed out Boutelle, are working. "Credit unions have captured 23% of all auto loan originations — up from 21% through this time last year."
Looking at CU Direct credit unions, Boutelle said last year growth in total funded loans was up 20% and this year it's up 30% over 2013.
Boutelle said the indirect channel continues to be the primary driver, but the type of borrower is shifting. He pointed out that 64% of CU Direct credit union indirect loans go to new members, while 36% go to existing members. "That split used to be closer to 70% new members and 30% existing."
That is a sign that all of the auto-buying programs credit unions have been adding, both mobile and Web-based, are keeping members from straying at the dealership.
Jacobson reported strong auto loan growth, as well, from GrooveCar CUs, especially for its CU Xpress Lease, which is on pace for a record year, he said.
Credit unions in March saw total vehicle loan growth rise by 12.9%, according to CUNA Mutual Group, the highest growth total in 13 years. Experts reiterated that the last two years have been good for lenders and the automotive industry, but Jacobson hopes that does not lead to short-term memories.
"We have to be careful not to forget the past and get back to some of the same old habits," he said.
