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Credit-Fueled U.S. Car Sales May Need Help From Incomes

A rebound in U.S. auto sales has been buoyed by the return of easy lending, even to borrowers with flawed credit histories. Some economists question whether the gains can be sustained without a boost in hiring.

Auto loans were up 5.5 percent in the second quarter from the same time last year, with riskier buyers accounting for 43.9 percent of the total, up from 42 percent in 2008, according to Experian Plc. (EXPN) By contrast, hourly wages for non-managers climbed 1.1 percent on average over the past 12 months, the least since records began in 1965, Labor Department figures show.

The financing spigot opened as Federal Reserve efforts to keep interest rates low prompted investors to pour money into securities backed by subprime car loans in search of higher returns, giving the auto industry and the economic expansion a lift. That may no longer be enough to fuel purchases as wages are held back by a pool of 12.3 million unemployed Americans.

“If you want to take it to another level of sales, you want to see more of the fundamental drivers of consumption improve more materially, things like income and employment,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets LLC in New York, the bank with the third-best forecasts for consumer spending, according to Bloomberg calculations. “With credit flowing again to subprime, you’ve had the wherewithal to bridge that gap to execute on pent-up demand. That takes you only so far.”

Stocks fell, paced by a slump in financial and technology shares, as investors watched for progress on Washington’s budget debate. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,374.53 at the close in New York.

German Confidence

Internationally, German investor confidence unexpectedly declined in November as the sovereign debt crisis curbs growth in Europe’s largest economy.

While pent-up demand, aging automobiles, and low borrowing rates are boosting U.S. auto sales, support for the market also is coming from an abundance of easy money as global investors, similar to mortgage-bond speculators before them, search for yield.

Issuance of auto-loan securities is up almost 60 percent so far this year from a year ago, to $61 billion, making car loans the biggest class in the $200 billion asset-backed securities market, said Harris Trifon, a debt analyst at Deutsche Bank AG in New York. Offerings of subprime auto debt are up 50.9 percent from the same period in 2011, to $12.2 billion, he said.

On Wall Street, demand for auto debt is “extraordinary,” said Trifon. “It’s opening up different financing channels to a bigger universe of borrowers.”

Lower Scores

The average credit score of a new-car buyer has dropped to 753 this year from 762 in the second quarter of 2011, according to Experian, a Dublin-based credit services company. For used cars, average scores have fallen to 662 from 671.

By comparison, the median credit score nationally is 711, according to Fair Isaac Corp. (FICO), a Minneapolis company that developed the rating system. Borrowers are ranked on a scale of 300 to 850, with those in the high range having a lower risk of default. While definitions vary, borrowers with a history of late or missed payments, little income or high levels of debt have a lower rating and are those more likely to be considered sub- or non-prime.

Global Lending Services LLC is staking at least $100 million on higher-risk car loans, working with dealers in Georgia, South Carolina, North Carolina and Virginia. The Atlanta-based company lends to subprime and deep-subprime borrowers and, in some cases, buyers who have no credit history at all.

‘Smart Money’

“The smart money is definitely investing heavily in automotive subprime,” Global Lending founder Douglas Duncan said. “You’ve seen significant growth year-over-year in subprime. Obviously that’s helping to drive sales.”

Dealer sales are on pace to increase at least 10 percent in 2012 for the third consecutive year, the first such streak since 1973.

The string of double-digit gains may break next year. About 15 million new cars will be sold in 2013, a projected 4 percent increase over expected 2012 sales, according to a September forecast by Edmunds.com, a research group in Santa Monica, California.

“There’s no question that credit is readily available at great rates,” said Bill Fox, a partner in Fox Dealerships in Auburn, New York, which has four lots close to Syracuse and a fifth in Painted Post near Corning. “It’s certainly different than it was a few years ago. It’s uniformly a good time to be in the car business.”

Auto Contribution

The auto industry has accounted for 0.3 percentage point of the average 2.2 percent gain in quarterly gross domestic product since the recovery from the recession began in June 2009, Commerce Department data show.

While credit availability is bolstering car sales now, it might not be enough to maintain the momentum, said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio.

“We’re not getting the income generation to propel those auto sales to the next, higher, level,” Mayland said. “With how weak the economy is and how weak income generation is, we’re really at a stumbling block.”

Employers added 171,000 workers to payrolls in October and the unemployment rate rose to 7.9 percent from 7.8 percent the prior month as hundreds of thousands of Americans joined the labor force in search of a job, according to Labor Department data.

The thawing of credit while wages stagnate is not necessarily a good thing, said John Silvia, chief economist at Wells Fargo Securities Inc. in Charlotte, North Carolina, who drew comparisons to the mortgage-lending surge that was driven by too-easy borrowing.

“Once this cycle gets going, we could be in deep trouble in two or three years, because everybody starts pushing the envelope and pushing the envelope,” said Silvia, a former chief economist of the Senate Banking Committee. “Are we drifting into the same problem we did with adjustable-rate mortgages in 2004?”

To contact the reporter on this story: Lorraine Woellert in Washington at edexheimer@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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