Americans Borrowed More to Buy Much Less: What Happened to Auto Loans Is Truly Astonishing

Undeterred by soaring prices and shortages.

By Wolf Richter for WOLF STREET.

Consumers borrowed bravely in December amid shortages of all kinds, including new vehicles, skyrocketing prices for new and used vehicles, and markedly higher prices for other goods and services. Undeterred, consumers bought not what they wanted to buy, but what there was to buy. And enough consumers have borrowed to do so to make the banks smile again.

Credit card and other revolving credit balances jumped 6.6% year-over-year to $1.04 trillion, unadjusted for seasonality, according to the Federal Reserve Board of Governors today. It’s come a long way since 2020 and until mid-2021 when consumers, inundated with free money, cut their fraudulent credit card balances at the expense of banks suddenly not earning 29% or whatever or on those reduced credit card balances. But consumers now atone for these sins:

In reality, people who top up their credit cards and pay usurious interest on their cards are a subset of consumers, since many consumers have no credit card debt. They simply use their cards as means of payment and pay them back every month.

But still, even those efforts in December 2021 didn’t beat the borrowing frenzy of December 2019, because enough people still had cash, and they were also making more money, and they didn’t have no need to borrow so much on their rip-off credit cards. Credit card balances in December were 4.9% lower than in December 2019.

I’ve been screaming for a year and a half about seasonal adjustments during the pandemic when well-established seasonality has been upended. So let’s go.

On a seasonally adjusted basis, revolving credit balances reached $1.04 trillion – yes, as unadjusted, because December is the month when seasonal adjustments are indexed to unadjusted data, as you can see in the chart below -below. In the unadjusted data (red), the peaks are in December. Seasonally adjusted data (purple) is added to all the months of December:

What has happened with auto loans and leases is truly amazing.

The number of new vehicles sold in December fell 28% from a year earlier, amid the worst new vehicle shortage in history, as dealers had very little to sell in the field.

But the vehicles were being sold at ridiculous prices that often included additional decals worth thousands of dollars on top of the MSRP. Moreover, automakers, having been hammered by the shortage of chips and not being able to produce them in large numbers, have prioritized their most expensive models and equipment sets. As a result, the average transaction price, as tracked by JD Power, jumped 20% year-over-year in December, to $45,700:

Retail sales of used vehicles fell about 6% year over year in December, according to Cox Automotive. But prices got even crazier than new-vehicle prices and jumped 37% year-over-year, according to the used-vehicle CPI:

What’s amazing is how this collapse in unit sales volume – down 28% for new vehicles and 6% for used vehicles – and the huge price increases have blended into the phenomenon of consumers borrowing more to buy a much less.

Total auto loans and leases outstanding in the third quarter rose 3.4% from a year ago to a new record high of $1.22 trillion, despite falling volume. This is another aspect of inflation: consumers borrow more to buy less:

Student loans still pending.

Automatic student loan forbearance has been extended for the umpteenth time, this time until May 1, 2022. We’ll call it the Spandex Forbearance Program. This means 0% interest on balances and no payments due. Blanket loan forgiveness has been avoided so far, but many specific student loan forgiveness programs have been in effect for years, and more have been added during the pandemic.

Right now, no one is repaying their student loans. They just borrow, betting that they will never have to repay those loans. Even in previous years, loan repayments were often so low they didn’t even cover the interest, and balances have steadily increased, despite years of declining enrollment, and an even steeper drop in enrollment. during the pandemic.

In the fourth quarter, balances were down a miniscule $2 billion from the previous quarter, not because anyone made payments, but because various loan forgiveness programs removed more loans from the counts as new loans have been added.

The fourth quarter balance of $1.75 trillion, the second highest on record, was nonetheless up 2.7% from the fourth quarter of 2020:

All of these forms of consumer credit combined — revolving credit, auto loans and student loans — rose 5.9% year-over-year in December to a record $4.43 trillion, seasonally and unadjusted. seasonally adjusted (December is the month when seasonal adjustments are indexed to non-seasonally adjusted credit). Consumers have therefore done their part without fail. They borrow more to buy less. And little by little, they are ensuring that banks and car lenders are once again able to maximize their profits.

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