Subprime Auto Bubble Bursts As "Buyers Are Suddenly Missing From Showrooms"

It was less than a month ago when we showed a series of "10 charts revealing an auto bubble on the brink", and which laid out several very troubling trends, including i) the average new vehicle loan hit a record high $31,099; ii) the average loan for a used auto climbed to a record high $19,589...

Summarizing the above is simple: cheap credit leads to easy lending conditions, and record prices as everyone floods into the market with lenders hardly discriminating who they give money to.

But, as we said in March, the key data which seems to suggest that the auto bubble may have run its course came  from the following charts which showed that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.

Commenting on these trends, Melinda Zabritski, Experian's senior director of automotive finance solutions warned that "we're certainly at a point where affordability is a question. When you look at how much income you need to support that payment, it certainly is higher than your average individual income." And nowhere was this more obvious than the auto sector's overreliance on stretched subprime borrowers, who remained the marginal source of auto demand as long as rates remained low.

However, with short term rates rising, with Libor soaring, low rates are increasingly a thing of the past.

"For some buyers, this is going to come as a surprise," said Jessica Caldwell, executive director of Industry Analysis for Edmunds.com. "For buyers with average credit scores, the rates are higher than a couple years ago and that will mean a higher monthly payment."

And, as we said last month, it will mean for a sharp drop in demand, especially among the most stressed consumer groups.

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