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Most Factors Point Positive for Auto Lending – But Supply Constraints Continue

The overall US economy is recovering well from the Covid-induced recession, and most factors point to good news for auto lenders
Origence article

The overall US economy is recovering well from the Covid-induced recession, and most factors point to good news for auto lenders.

That was the message from Dr. Elliot Eisenberg, president of GraphsandLaughs, LLC, and frequent speaker at Origence events. During Eisenberg’s recent webinar highlighting economic and lending trends, he said America is not seeing an “A” economy, but it certainly is a “B+” economy.

“The Delta variant has not been that bad for the economy,” Eisenberg said. “Auto sales in August struggled because of low inventory due to a lack of parts – particularly semiconductor chips.”

Most recessions see a gradual return of demand, but the post-Covid recovery has been rapid, Eisenberg explained. So rapidly, the supply side is not catching up. “Car sales are a microcosm of the entire economy,” he said.

Light vehicle auto sales had been bumping along in a fairly-narrow range prior to the March 2020 Covid outbreak that shut down the economy. From 2016 to 2020, most months’ sales were at an annualized pace of approximately 17 million to 17.5 million units. Sales cratered last summer, but subsequently recovered as 2020 turned into 2021. In recent months, the figures have shot up to an annualized pace of more than 18 million units, which Eisenberg cautioned may not be sustainable.

The good news for the auto industry and lenders: people have money and are spending it. Even with millions of jobs lost, government unemployment bonuses and stimulus checks have led to household savings rates not seen in more than 50 years.

Other than supply constraints, the only other headwind Eisenberg sees is prices of both new and used cars have been skyrocketing. “Prices can’t get much higher, or people won’t buy cars,” he assessed.

Per the Manheim U.S. Used Vehicle Value Index, it appears used car prices either have peaked or are peaking, he added. “Be careful when you lend against used cars. Don’t lend against the price of last month, lend more against the price from last year. Don’t get caught holding the bag two or three years from now, when used car prices collapse.”

Used car loans remain a vital part of credit union portfolios. Credit unions held $252.4 billion in used car loans through end of June, according to CUNA Mutual Group. Experian’s Q2 State of the Automotive Finance Market Report noted that credit unions hold 24% of the used car finance market, on par over the same period last year at 24.6%. The report also revealed that credit unions grew their share of the new car finance market to 11%, up from 9.5% over the same period last year.

Origence’s CUDL network of indirect lending credit unions, a force of some 1,100 lenders nationwide, continues to be the largest auto lender in the country, according to July AutoCount data, with 733,471 loans through July 2021, a 13.4% increase over YTD July 2020.