Is America’s Economy Headed for a Great Car Crash?

Back in 2007, so many Americans defaulted on their mortgages that it plunged the world into the Great Recession. Ten years later, we could be looking at a repeat of that crisis – only this time it’s with car loans. Six million Americans are in immediate danger of having their car repossessed. And that may just be the tip of the iceberg.

The financial crisis that broke a decade ago was triggered when the housing bubble burst. America’s financial institutions had been too eager to sell home loans to as many customers as they could – credit ratings be damned. When the many Americans who couldn’t afford them defaulted on these so-called subprime home mortgages, the first domino fell in a debt tsunami that we now know as the Great Recession.

Although it never repeats itself exactly, there are lessons to be learnt from history. Back then, home loans precipitated a financial crisis. This time around, it could be car loans. In 2007, many more Americans had home mortgages than car loans. But that balance has reversed – and dramatically so.

Only five years ago, 80 million Americans had outstanding auto debt. According to data recently released by the Federal Reserve Bank of New York, that figure has now risen to 107 million. To put that in context: that is 43% of the adult population of the entire U.S. It’s almost as if Americans, burned by the subprime home mortgage crisis of a decade ago, have collectively moved one item down on the list of big-ticket items on their wish list.

And sure enough, U.S. car and truck sales have hit record after record over the past seven years.

A surge in December deals pushed the number of cars sold in 2016 to a record high for the seventh year in a row. The record was aided by the number of older cars on the road, improved economic conditions, easy credit, compelling product and Millennials aging and buying cars.

Last year, 17.6 million new cars and trucks were registered in the U.S., just over 100,000 more than in 2015. Sales have increased for every year since the crisis year 2009, when only 10.4 million light vehicles were sold – and Chrysler and GM declared bankruptcy. Last December, the average new vehicle hit a record high price of $35,309, a result of low gas prices. Those have whetted Americans’ appetite for trucks and SUVs, which not only guzzle more gas, but also have a higher sticker price.

Higher prices means more borrowing, and it’s not just the number of Americans with auto debt that is breaking records, also the total sum of that debt – now topping $1.1 trillion. And, with depressing predictability, the number of people who are unable to meet the payments of their auto loans is also increasing.

Around 6 million Americans are currently 90 days or more behind on their car payments – the period of time after which they are in danger of having their vehicle repossessed. For many working-class Americans on the brink, losing their car can be the beginning of a precipitous drop into poverty. The car is often indispensable to get to work. Without a car, they also lose their work. The repossession earns them a bad mark on their credit report, which will make it harder for them to get other loans, or even to find affordable housing.

Could the American economy be headed for another recession? For those with a clear recollection of how the crisis started ten years ago, the similarities are eerie. The main difference between both could be underlined by the name for the coming downturn – you heard it here first: the Great Car Crash.              

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