Breakout

Why the auto business has recovered faster than housing

May was a blowout sales month for automakers. General Motors (GM), Ford (F), Chrysler and Toyota (TM) all reported year-over-year sales increases, with GM even doubling Street forecasts of a little above 6%. Total auto sales in fact grew at the fastest pace since February of 2007.

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businessinsider.com

businessinsider.com

A number of reasons are cited for revving sales higher. As Rick Newman and Aaron Task discuss in the attached video, it’s not just an economy that’s grinding higher that has cars driving off the lots.

Waiting on buying a new car just isn’t sustainable for most people, Newman notes. “There’s this thing called pent-up demand,” he says, that is powering new car sales because older vehicles are starting to reach the end of their usefulness, and car owners have had enough.

But if you dig deeper, what’s really driving auto sales is something that some consider a dirty world – credit. And that’s something the housing industry might need to really examine. “What we’re seeing is normal lending patterns in the car business, much closer to normal than we see in the housing business,” Newman says.

Twelve percent of auto loans are of the subprime variety, but that isn’t necessarily a bad thing. “The fact is, when you see subprime lending, that’s a good sign,” Newman notes. “That means banks are taking account of the risks, they’re figuring ‘what do we need to know about this customer?’”

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If banks underwrite the loans correctly and charge more to individuals who have an elevated risk profile, they’ll give people money to buy the car and profit accordingly. “That’s what we need to happen,” Newman notes.

In fact, a recent study by Experian finds that, while the auto industry and their financial partners have expanded credit to subprime lenders (with lending to ‘deep subprime' borrowers jumping 8.4% year over year), delinquencies in payments have actually fallen.

Newman believes it is the availability of credit, beyond to those with great credit scores, that keeps the economy moving. “The trick with subprime is you have to assess the risk correctly. That’s what the lenders got wrong during the housing bust, and they didn’t underwrite the loans right, they didn’t take into account the risks – they didn’t even bother to find out what the risks are, they just gave them the money.”

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Task and Newman do correctly point out that cars and houses are different assets in the sense that a car can be repossessed in the event of nonpayment, whereas it is difficult for lenders to evict homeowners and reacquire homes in foreclosure. Newman says once the banks are more comfortable lending money to subprime homebuyers and are willing to do the necessary due diligence and underwriting, only then can the U.S. housing market start to perk up again.

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