Is the New Car Bubble Bursting in the United States?
Automobile sales in the U.S. peaked in early 2017, and a number of signs show that sales may not increase for the foreseeable future.
Ford shares are currently priced at $11, down more than 20 percent from 2017's peak. These share prices, in part, reflect justified worries about the U.S. automobile industry. Fraud in automobile loans is reaching historically high levels, with fraudulent loans accounting for 1 percent of total loans. High levels of delinquency are a good indicator of an underlying good being overbought or in a bubble—the same increase in delinquency rates was observed during the housing bubble.
Another bad sign: April has been the first month since 2009 in which car markets all across the globe have simultaneously contracted.
Dealers are having a hard time moving their inventory. The average time a car spends on a dealer lot has increased from 55 days in April of 2015 to 70 days in April 2017. After months of sluggish sales and generous dealer incentives, the April sales drop could be indicative of an impending collapse.
With modern automobiles being more reliable than ever, car owners are more likely to repair an old car than spend capital on a new car. This trend has been "stealing" sales from the future. Combining stagnating sales with a record high $1.2 trillion taken out in auto loans—with 25 percent signed by subprime borrowers—the recipe for disaster is at hand.
However, the good news is that truck sales have remained strong. Although Ford and GM have reported net losses in April, pickup truck sales were ahead of last year. Often seen as an indicator of economic vitality, truck sales could help cushion the blow of the potentially-inevitable auto bubble burst.