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Why Auto Sales Are Up

Increased sales of both cars and light trucks have been supported by improvements in both the labor market and financing conditions.

Cars and light trucks in the U.S. sold at an annual rate of 17.7 million in November, according to information released by Autodata last week. That marks a solid increase from the spring, when vehicles sold at an annual rate of 16.5-17.1 million.

The U.S. economy has added an average of 188,000 jobs each month over the past year. Even with brisk hiring, data on job openings released this morning remains elevated, suggesting continued job gains. Layoffs are subdued, with initial claims for unemployment insurance as a share of employment are at an all-time low. The unemployment rate fell to 4.6 percent in November, its lowest point since the recession. Solid employment prospects have helped some consumers qualify for auto loans.

According to the Federal Reserve’s Senior Loan Officer Survey, auto financing conditions have improved. Over the past three months, loan officers reported that credit score requirements and down payment requirements for auto loans are little changed. Loan officers also reported that maturities for auto loans were lengthened. Loan officers at small banks reported offering lower interest rates. Auto loan delinquency rates have been stable at 3.4 percent, markedly improved from the 5 percent rate in recent years.

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2 Comments Post a comment
  1. Walker Todd #

    Some of us worry about the “lengthening of terms” part of the story. You can now obtain 6-year loans on new cars and 5-year loans on used cars. Both are about two years too long. Sets us up for subprime auto loan-backed securities in the near future. — Walker Todd, Chagrin Falls, OH 44022

    Like

    December 7, 2016
    • Hi Walker,

      No doubt, longer maturities lower monthly payments on otherwise out of reach price tags. Eventually a person may find themselves owing far more than the car is worth. When a person owes more than a car is worth they might just stop repaying the loan. This scenario is more likely for subprime borrowers.

      Overall, 20.9 percent of auto loan origination in the third quarter went to subprime borrowers. There is a divergence between the share of subprime auto loans issued by banks and credit unions and auto finance companies. The share of subprime auto loans issued by banks and credit unions was 12.7 percent in the third quarter. In comparison the share of subprime auto loans issued by auto finance companies was 29 percent.

      Let’s keep our eyes on auto finance companies for early signs of trouble with subprime auto loans.

      Ted

      Liked by 1 person

      December 7, 2016

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