Car buyers' auto debt is snowballing, Edmunds says

New data from Edmunds.com indicates a four-year high in auto loan negative equity, with over 25% of new vehicle trade-ins underwater, averaging $6,754. Driven by elevated car prices and high interest rates, nearly one-third of owners with significant negative equity are rolling this debt into new loans, pushing their average monthly payments to $915 compared to the industry average of $756. This trend underscores a deepening affordability crisis for U.S. car buyers, risking a persistent cycle of debt.

Analysis

Data from Edmunds.com for the second quarter reveals a significant deterioration in consumer financial health within the U.S. automotive market, signaling a potential headwind for the sector. A four-year high of over 25% of new vehicle trade-ins are now underwater, with the average negative equity reaching $6,754. This trend is driven by a combination of high vehicle prices and steep loan rates, creating a severe affordability challenge. The problem is compounded by consumer behavior, as nearly one-third of those with significant negative equity are rolling this debt into their next auto loan. This practice is pushing average monthly payments for these indebted buyers to $915, a 21% premium over the industry average of $756. This dynamic suggests a growing risk of a consumer debt cycle, which could ultimately suppress future auto demand and increase credit defaults across the auto lending space.

Key Decisions for Investors

• Investors with exposure to the automotive retail and financing sectors should increase scrutiny on credit quality and watch for rising loan delinquency rates, as the negative equity cycle could suppress future sales and elevate default risk.
• The data serves as a negative indicator for the health of the U.S. consumer; therefore, it may be prudent to re-evaluate positions in subprime auto asset-backed securities (ABS) and other consumer credit-sensitive assets for potential stress.
• Given that escalating auto debt service costs may curtail broader household spending, consider reducing exposure to consumer discretionary sectors that are heavily reliant on financed purchases.