LAS VEGAS—Changes are coming to auto lending and auto sales this year, including some headwinds, says one analyst who expects credit unions to continue to outperform all other lenders.
Michael Buckingham, senior director PIN Automotive Finance at JD Power, told attendees at CU Direct’s Drive ’17 Conference that while new auto sales are still expected to be strong this year, growth has likely plateaued.
“I don’t want to paint a picture that the new vehicle market is problematic, but there are some headwinds,” Buckingham said. “I am not talking about anything like a recession, but I think we have topped out in new car sales. Going forward, sales growth will be flat. We won’t see the growth trajectory we have seen in the past few years.”
While analysts at the meeting noted that sales of 16 million to 17 million units annually is a good place for the market to be, an issue to pay close attention to is that vehicle prices are rising, now at an average of $31,400. Buckingham said the biggest obstacle to sales is affordability.
“Since recession the price of vehicles has continued to climb,” said Buckingham.
Analysts have stated that what is quickly driving prices higher is new technology being loaded into cars, technology that in many consumers’ minds makes a car obsolete in three years.
Buckingham noted that lenders and consumers are addressing higher prices with the growth of leasing and longer terms, which have become a concern among industry experts that see consumer debt becoming a bigger issue as well as the rapid growth in negative equity in vehicles.
Buckingham emphasized that leasing’s growth has helped to keep car payments affordable, but cautioned that leasing may have peaked.
He said JD Power is projecting that the appeal of leasing will wane as the price of leasing grows largely due to the number of high quality used vehicles coming of lease today. The glut of good used cars on dealer lots is driving down residual values, therefore increasing the price of a monthly lease.
“If leasing falls off, expect loan terms to rise,” said Buckingham. “Loan terms of 72 months are at the highest level we have seen and they are growing. If leasing falls back, these terms will go out longer.”
Buckingham noted that new inventory levels at dealers are also starting to “swell. So there is a little bit of concern here. Prior to the recession a lot of the manufacturers kept building and building cars.”
That situation is leading to higher incentives today that Buckingham said are at record levels. He said incentives are in place on about 15% to 20% of cars.
“But not on trucks,” he added.
As many automotive industry experts have pointed out, the appeal of trucks has picked up following the recession, while the appeal of cars has waned. Buckingham said interest in SUVs and crossovers also continue to rise.
Interest, too, in subprime and non-prime lending is declining at banks, as delinquencies in the borrowing segment rise, said Buckingham.
“Subprime lending interest may have peaked as lenders become more cautious,” said Buckingham. As CUToday.info recently reported, Wells Fargo announced it is pulling back on subprime lending.
“We don’t see a subprime bubble, but we do see lenders dialing back their appetite for risk,” said Buckingham.
In the current auto lending environment, credit unions are faring extremely well, said Buckingham. CU Direct credit unions, as a group, are closing in on the No. 1 spot as the nation’s largest lender in terms of total loans. They are now No. 2.
“Credit unions should continue to see their share of the market, both new and used, continue to grow as banks take a more cautious view of auto financing,” said Buckingham. “Bank share is dropping and we saw that accelerate in 2016. On the flip side we see credit union share growing rapidly. It’s quite a story.”
In closing Buckingham pointed to the growth in negative equity trade-ins, an issue CUToday.info has extensively reported on.
“Not only are higher numbers of negative equity trades coming in, but the severity of the negative equity is moving higher.”