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Big trends for 2017: rising interest rates and auto loan delinquencies
Economists aren't typically known for their unbridled optimism. They tend to be a cautious lot, who seem most anxious when the markets are doing well. They trade nervous glances waiting for something to go wrong.
Has something gone wrong? Maybe so: the Federal Reserve Bank of New York has confirmed that auto loan delinquencies are at their highest levels since the chaotic days of the Great Recession.
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That sound you hear is thousands of economists exhaling.
How many auto loans are currently in arrears? Car loans delinquent by 30 days or more now total $23.27 billion. The last time America saw stats that high was in the third quarter of 2008, when the total was slightly higher: $23.46.
Loans classified as seriously delinquent--overdue by 90 days or more--now total $8.24 billion. That's not so alarming, though: a higher figure was posted just last year, in the third quarter of 2016.
Reality check
So, do economists have something to gloat about?
Yes and no.
Any time delinquencies hit new highs, there's cause for concern, and today is no exception.
However, several factors suggest that current numbers aren't quite as bad as they seem.
For starters, loan delinquencies have been hovering near historic lows. An uptick more or less puts them back in "normal" territory.
Also, as the Federal Reserve Bank of New York explains, today's delinquencies look a lot different than they did in 2008:
"In the third quarter of 2008, 8.5 percent of total household debt was delinquent, compared with the current quarter’s 4.8 percent mentioned above; the serious delinquency rate was 5.1 percent, compared with today’s 3.3 percent. The delinquency trends are also quite different: delinquency rates continued to deteriorate significantly after the third quarter of 2008, with serious delinquency reaching 8.7 percent of outstanding balances in 2010. Today, delinquency has been relatively steady at low levels. Other measures of payment distress, like the rate at which mortgage debts transition into delinquency, are even lower relative to the pre-recession period."
Translation: auto loan delinquencies are creeping upward, but the more important figure to watch is overall household delinquencies, especially with regard to mortgages. On that front, delinquency rates are actually quite low and holding steady.
Sorry, economist pals. Don't worry, though: as you know all too well, your day will come.
There are only about two weeks left in 2016, and that means two things: it's time for a host of year-end wrap ups and plenty of predictions about 2017.
We'll leave the year-in-review article for another time (because, of course, a lot could still happen in the last 15 days of December), but predictions are a bit easier. That's because the Federal Reserve Bank just agreed to raise interest rates for only the second time in a decade.
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For some people, the interest-rate uptick won't have much of an effect. Fixed-rate auto loans and mortgages, for example, are insulated from such fluctuations.
However, borrowers with variable-interest loans could definitely feel the pinch. And unfortunately, the people who tend to take out those kinds of loans are often the least-suited for adapting to changing interest rates.
Credit giant Transunion believes this week's interest hike--along with the three or four additional increases many analysts predict for 2017--will drive up delinquency rates on both auto loans and credit cards. The worst effects will be seen in the subprime market, which shrank quickly after the Great Recession but has been expanding dramatically over the past few years.
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That would be in keeping with recent trends. Serious delinquencies among subprime auto loans have risen 23.5 percent over the past five years. That's much higher than the rate of delinquencies among credit card holders or mortgages--in fact, the latter has actually fallen by nearly 61 percent since 2012.
By the end of 2017, Transunion expects the auto loan delinquency rate to hit 1.40 percent, the highest since the end of 2009, when it reached 1.59 percent.
The good news, according to Transunion's Jason Laky, is that although delinquencies may be on the rise, they're not likely to spike: "We do not expect to see a surge in auto delinquency unless there is an economic shock." He also says that if lenders behave themselves, the increase in delinquencies won't have a significant increase on banks' bottom lines. In other words: the chances of another financial meltdown are slim.
Which is great news for banks and investors, but maybe not so much for subprime borrowers.
