Against all odds: Auto market holds steady

The auto finance sector is showing signs of improving affordability and resilient loan production amid gradual dips in vehicle prices and loan rates while concerning credit performance and inflationary pressures remain. [caption id="attachment_58341882" align="aligncenter" width="1600"] (Photo/Canva) [/caption] Delinquencies are up but not historically high, while interest rates are at a two-decade high but a cut could come by the end of the year, according to economists who closely follow the Federal Open Market Committee . The prevailing theme defining the auto finance industry in 2024 is steadiness amid normalization in pricing, inventory and credit performance on the heels of a pandemic that riled market conditions for more than three years. “The last four years have had unprecedented amounts of variability but there are a couple encouraging trends for auto lenders," Douglas Busk , chief treasury officer at subprime lender Credit Acceptance Corp. , told Auto Finance News . “Inventory levels are still not back to pre-pandemic levels, but they are better than they were 12 to 18 months ago,” Busk said. “And vehicle prices are moderating, but they are still elevated relative to where they were pre-pandemic.” Auto loan production has also held up despite elevated costs and affordability pressures. . Motor vehicle loan outstandings fell 0.2% sequentially but increased 2.4% year over year to more than $1.5 trillion in the first quarter of 2024, marking the fifth consecutive quarter just above the $1.5 trillion mark, according to the latest Big Wheels Rankings data . “The last four years have had unprecedented amounts of variability but there are a couple encouraging trends for auto lenders." — Douglas Busk, Credit Acceptance Corp. Assessing market health Taken together, the indicators illustrate that the auto finance industry has defied initial expectations of recessionary conditions in the face of challenges, including higher interest rates driving up the cost of borrowing, which has made auto loan financing more difficult. . The industry has adjusted, though some lenders have fared better than others. AFN ’s proprietary Auto Finance Composite Index rose to 159.6 in March from 156.8 in February, a 1.8% increase. . The index climbed 37.5% compared with March 2023, and has continued its positive trajectory since the start of 2024, growing 20.5% since Jan. 1. The Auto Finance Composite Index gauges the auto finance industry’s health by analyzing eight weighted datasets, serving as a thorough benchmark for industry performance. [caption id="attachment_58341878" align="aligncenter" width="996"] Source: Auto Finance News [/caption] ABS issuance soars YoY Auto asset-backed securitization (ABS) volume in the first half of 2024 continued to outpace volume reported in 2023 in a sign of healthy origination production. . Auto ABS issuance was $86.2 billion year to date as of June 7, up 34.5% from $64.1 billion YTD in 2023, according to data from JPMorgan Securities. [caption id="attachment_58341880" align="aligncenter" width="980"] Source: JPMorgan Securities [/caption] Prime ABS issuance jumped 38.9% YoY to $39.3 billion as of June 7, while nonprime issuance climbed 25.2% YoY to $19.9 billion. . Similarly, lease auto ABS issuance increased 56.6% YoY to $17.7 billion. Outstandings up 3.7% Though total originations dipped 1.4% YoY to $598.5 billion in 2023, outstandings grew 3.7% YoY, compared with a 0.6% YoY dip in 2022, according to an AFN analysis of the latest Big Wheels Rankings data. . Big Wheels Rankings provide a list of the top 100 lenders by outstandings. Still, 37 of the top 100 financiers in 2023 posted portfolio losses, and half of the companies in the top 100 shrunk their origination volume last year. Banks also lost market share for the 10th year in a row but regained their status as the leader in the used market. “Historically, what you've seen is, going back pre-COVID, we've been somewhere between 40% and 55% new originations,” Rich Porrello , director of consumer finance at Huntington Bank , told AFN . “That clearly changed during COVID given the fact that there weren't a lot of new vehicles available.” As a result, Huntington Banks’ used-vehicle financing percentage rose to 70%, Porrello said. Captives, however, fared better in 2023 after they lost share in 2022 due to lower incentives. . Captives’ portfolios grew 5.8% YoY in 2023, a recovery from a 6.5% decline in 2022, according to the latest Big Wheels Rankings data. The decline in new vehicles available in 2022 “ is why you saw the captive market share go down [in 2022],” Porrello said. “The manufacturers weren't supplying cars. . Dealers didn't have them, so the manufacturers didn't have to incentivize. . The captives didn't have to incentivize, so you saw their share go down, not only in loan, but in lease as well.” Incentives came back in 2023 as interest rates rose, and captives’ market share rebounded to 41.2% after dipping to 39.6% in 2022, according to Big Wheels . . Only two of the 13 captives included in Big Wheels Rankings posted year-over-year portfolio declines, compared with eight in 2022. . Captives also held five of the top 10 spots by outstanding volume in 2023 Toyota Financial Services was the top financier across lending types in originations and outstandings, originating $65.6 billion in loans and leases in 2023 and ending the year with $114.5 billion in receivables, according to Big Wheels Rankings. Stellantis Financial Services saw its portfolio shoot up 243.1% YoY to $7 billion at yearend 2023. . The captive was formed in November 2021 when Stellantis NV acquired First Investors Financial Services . Stellantis’ sales fell 20% YoY in the first quarter of 2024 to 389,000 units as the OEM scaled back production and discontinued older models, looking to roll out newer models later this year, according to the company’s April 30 earnings presentation. SFS came in at No. 32 in total outstandings volume in 2023 across all lending types. “As of January, we stepped over the mark of being [the No. 1] retail [loan] provider for the Chrysler Dodge RAM dealers, as well as the No. 1 lease provider for Chrysler Dodge RAM dealers,” Tommy Moore , president and chief executive of SFS US, told AFN . “The growth is coming through being very smart in this market. . Most of it is in the prime, super prime world, and near prime. . Dealers are choosing to move their business to their true captive finance company, which they've not had in 14 years.” Incentives are a main driver of captive market share as rates remain high, Melinda Zabritski , senior director of automotive financial solutions at Experian , told AFN . “With the rates being what they are, if there's incentives going on the new side, that's where consumers are going to go,” she said. Eye on rates, prices Auto loan interest rates on new and used vehicles dipped sequentially in May but remained higher than rates reported a year ago. For new vehicles, the national average interest rate on a 60-month car loan fell 1 basis point (bps) sequentially to 8% as of May 28, according to data provider Curinos . The average new-vehicle rate is 56 bps higher compared with the 7.44% average rate reported by Curinos on April 21, 2023. . Rates on used-vehicle loans also fell 1 bps sequentially but jumped 59 bps compared with the April 2023 rate to 8.07%, according to Curinos. While rates remain elevated, prices are showing a positive sign for affordability. . Prices on wholesale used vehicles fell across all major market segments on a YoY basis in May. The Manheim Used Vehicle Value Index fell 0.6% month over month and 12.1% YoY to 197.3, according to Cox Automotive . The decline in values marks the third straight year of decreases as prices continue to level out from pandemic highs, Jonathan Smoke , chief economist at Cox Automotive, said on June 6 at the National Automotive Finance Association ’s Non-Prime Auto Financing conference in Fort Worth, Texas. Wholesale prices have steadily declined YoY from pricing peaks in 2021, Smoke said. . For comparison, prices declined by 15% in 2022 and 7% in 2023, he said. Seasonally adjusted prices were down 17.4% YoY for compact cars, 16.3% YoY for midsize cars and 3.2% YoY for SUVs, according to Cox Automotive. . Prices were down 11.2% YoY for pickups. . Luxury vehicles performed similarly with a YoY price decline of 11.4%. “The price correction between used and new [vehicles] is largely over,” Smoke said. DQs on the rise While prices are moderating and loan production is fairly steady, credit performance and affordability continue to challenge the auto finance industry. Short-term delinquencies rose in the first quarter of 2024 as monthly payments remain elevated. The rate of auto balances 30-plus days past due was 2.7% in Q1, up 48 bps compared with a year ago , according to Experian’s Q1 State of the Automotive Finance Market Report published May 30. . Just over 1% of auto loan balances were 60-plus days past due in Q1, a 14 bps YoY increase. Elevated delinquency rates go “hand in hand with the very large increase that we saw in the loan amounts, and the increase that we saw in the monthly payments." — Melinda Zabritski, Experian. Average monthly payments increased to $735 in Q1 from $732 a year prior, according to the Experian report. Average new-vehicle loan amounts remain far higher than in 2021, before the Federal Reserve ’s interest rate hikes. . The average new-vehicle loan amounts in Q1 were 14.7% higher than in 2021, while <a href="https://www.bing.com/ck/a?!&&p=f0a47497c87174fcJmltdHM9MTcxNzM3MjgwMCZpZ3VpZD0xOWEwNWRkZS05YTJhLTZiYWEtMjdjNy00OTg1OWI0ODZhZWYmaW5zaWQ9NTE5MQ&ptn=3&ver=2&hsh=3&fclid=19a05dde-9a2a-6baa-27c7-49859b486aef&psq=monthly+car+payments+AND+%22auto+finance+news+net%22&u=a1aHR0cHM6Ly93d3cuYXV0b2ZpbmFuY2VuZXdzLm5ldC9hbGxwb3N0cy9yaXNrLW1hbmFnZW1lbnQvbW9udGhseS1wYXltZW50LXByZXNzdXJlLXNob3dzLW5vLXNpZ24tb2YtZWFzaW5nLWFzLWFwcnMtdGljay11cC8&ntb=1" target="_blank" rel="noopener"> monthly payments were up 27.4% from 2021. Higher monthly payments make vehicle affordability a challenge , especially in the subprime space, where consumers tend to have lower incomes and are more affected by inflation compared with higher-income consumers. “Inflation has pushed prices up for pretty much everything,” Ilja Troitschanski , president and founder of subprime lender Axis Auto Finance , told AFN . “The biggest increases are in the cost-of-living items: insurance, food items, shelter. . For consumers that fall into the subprime category that were already not in the best financial position; when they took out a loan, it's a hard hit, no doubt about it.” Auto insurance costs, for example, have risen substantially. . Though motor vehicle insurance costs fell in May, costs are up 20.3% YoY, according to the latest CPI report released June 12 by the Bureau of Labor Statistics . Auto lenders expected a rise in delinquencies as the effects of interest rate hikes started to set in. “The industry is seeing increased delinquency and increased losses as a function of the move from the historic lows that came through COVID,” Huntington Bank’s Porrello said. “At the same time, our losses are within lines of where we thought they would be, and we expected them to go up.” Huntington, which typically lends in the “high 700s” credit range, hasn’t changed its lending standards because the bank penciled in delinquencies rising, Porrello said. “We're not planning on doing anything differently, because the losses and the delinquencies aren't above where they've been historically,” he said. “We knew that they would get back there. . There's no reason for us to adjust to that manner.” Buyers return to market Despite inflationary pressures and its constraints on the market, lenders are likely to see growth down the line as pent-up demand continues to swell and consumer confidence continues to rise, Charlie Wise , senior vice president and head of global research and consulting at TransUnion , told AFN . Approximately 55% of consumers feel optimistic about their finances and financial outlook despite affordability concerns, according to TransUnion’s Q2 2024 Consumer Pulse study published June 12, which surveyed 3,000 U. .S. consumers. Still, consumers are likely to feel more optimistic about affordability if inflation and interest rates continue to normalize, Wise said . In May, nearly 84% of survey respondents ranked inflation as a top three concern, up from 79% in Q2 2023, he said. Consumer confidence also rose in May following three months of declines, according to the latest U. .S. . Conference Board Consumer Confidence Index released May 28. . The index rose to 102 in May, up from 97.5 in April, joining increases reported in the board’s Present Situation Index and Expectations Index. “Eventually, the consumer is going to come back in the market, either out of necessity or out of saying, ‘Hey, I feel good about this,’” Wise said. "The conditions are right for that to happen.” Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

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