Everyone is suddenly worried out about the soaring number of Americans who are falling behind on their auto loans - but the freak-out makes no sense
- The number of Americans who are at least 90 days behind on their auto loan payments hit a record 7 million, according to a report from the Federal Reserve Bank of New York.
- The large number of people falling behind on auto loans caused a lot of concern following the report's release.
- But the auto loan market is not an existential threat to the US economy, and is unlikely to push the nation into a recession.
You may have heard, but a lot of people are worried about the number of Americans who are falling behind on their car loans.
Headlines, including here at Business Insider, raised alarms about the New York Federal Reserve's recent report which showed 7 million Americans are at least 90 days delinquent on their auto loans.
In fact, some people are worried that the record number of delinquencies could be a sign that a recession is on the way.
But there are some key details these worriers are missing, as well as clear evidence that auto loan debt won't push the US into a recession.
The percentage of people falling behind on auto loans isn't at a record high
While the 7 million Americans who are very far behind on their car loans is a striking total on the face of it, the aggregate number lacks some important context.
For one thing, the total number of people seriously delinquent on their auto loans may have hit a new high, but we're still below the peak levels in terms of the percentage of borrowers in serious delinquency.
If you widen the view and look at less deliquent loans, the result is similiarly unconcerning. While the percentage of seriously deliquent loans is ticking up, the percentage of auto debt that is newly becoming 30 days or more deliquent is well below its record level and is relatively stable.
Additionally, the credit quality across the auto loan market is still very strong.
In its report, the New York Fed pointed out that most of the growth in auto loans last year came from people with solid credit scores, while the overall credit mix among people with auto loans outstanding was also strong. 30% of the total outstanding auto debt was held by people with a 720 or better credit score, versus just 22% with a score that would be considered subprime.
"In fact, these percentages would suggest that the overall auto loan stock is the highest quality that we have observed since our data began in 2000," the report said.
So a record number of people in raw terms are delinquent on loans, but the percentage of people that are behind is still lower than previous highs. And the overall credit quality of those people holding the loans is the best on record.
Cars are not homes
Given the increased number of delinquencies, some economists have signaled that the record is a "red flag" for the entire US economy, which has some commentators worried.
But drawing comparisons to the mortgage crisis or worrying that the deliquencies are a sign that consumers are turning off the spending taps is misguided.
For one thing, let's dismiss the notion that auto loans are anywhere near the threat that home loans were before the previous recession.
Firstly, the size of the outstanding auto debt is much smaller than its mortgage counterpart. There is only $1.15 trillion in total auto loan debt outstanding, compared to more than $15 trillion in mortgage debt.
Secondly, as we wrote almost exactly three years ago - when concerns about auto loans also picked up steam - auto debt poses less of a threat to the broader economy because cars can easily be repossessed.
The housing crisis crippled the banking system because foreclosing on a home is a long process. It's also hard for a lender to make back their money if a borrower falls behind on payments.
By contrast, car repossession is much simpler, so it's unlikely that a surge in auto loan defaults would cause any major liquidity crisis or spread to the financial system in any big way.
Another argument is that the increase in delinquencies is a sign that consumers are strapped and less likely to make big-ticket purchases going forward. While there is some data to show that consumer spending may be softening, wages are still rising at the fastest clip since the recession, more people are getting pulled back into the labor force, and US consumer confidence - despite some recent faltering - remains close to record highs.
It's not good, but it's also not the end of the world
To be sure, the rising number of auto loan delinquencies is not a positive signal for the economy. These are real people struggling to make ends meet and falling behind on payments, and that sort of indebtedness can cause serious problems for a household.
But looking at other factors of how stretched out households are by debt shows a more benign picture. Household debt service ratios - that is the amount of a households disposable income going toward debt payments - remains far below it's long-term average.
And looking at the biggest ticket item - homes - the credit picture still looks strong. Per the New York Fed report, average credit ratings for homebuyers are well above pre-crisis levels, and the percentage of mortgage debt that is more than 90 days delinquent is low and has still ben declining recently. Delinquencies of home equity debt, while higher than the pre-crisis levels, are still on the decline as well.
Again, this isn't to say there aren't debt issues out there or that the record number of Americans falling behind on their auto loans doesn't matter at all. But put in perspective, the auto loan issue isn't as big of a deal as it may seem at first.