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01 March 2019

8 Mile: The price of the American Dream?

The American Dream, an ethos of a bygone era, driven by the rise of the motor car and epitomised by the bright lights of Detroit. A.K.A. Motor City, the conurbation prides itself on being the birthplace of the Ford Model T, first produced in 1908 and hailed as the car for the people. Fast forward a century, and the motor car is a staple part of American life, not least because its city footprints are so vast, but the alternatives to transport are virtually non-existent for many.

Car ownership in the US has now touched its highest level since 2008 and 2009, in which per-person rates have increased for four years running. However, an increase in arrears among sub-prime finance packages are revealing cracks in the system. Cars contain the key to economic prosperity for many Americans, but have become somewhat of a prerequisite to employment in the US. On top of this, the average amount paid for a car has risen to $36,000, versus $50,392 per capita income. As a requirement to affordability, total financing ballooned to $1.274tn in 2018, representing the third-largest household debt type in the US after mortgages and student loans.

Consumers are now struggling to meet their debt obligations on auto loans, as the number of loans at least 90 days in arrears has now exceeded 7 million, its highest in two decades. This is the highest rate in arrears since March 2012 at 4.47%; a 10.37% increase from one year ago.

It’s no surprise that those with subprime credit ratings are the driving force behind the figures; more than 1 in 12 are now seriously behind on payments. Meanwhile, in Detroit, a city with a median income of $27,838 and an unemployment rate of 19.8%, this figure is closer to 1 in 7. More alarming, though, is the significant rise in individuals with near-prime ratings of 620 and 659. Lenders are now responding to sub-prime late payments by moving their business to more creditworthy borrowers, driving new loan originations to a record $584bn. Such levels have not been witnessed since the financial crisis, where at their peak they almost touched 4%, but now reside at around 3%.

On the face of it, the US consumer landscape appears in sound financial health, as unemployment is at record lows and wage growth is over twice the rate of inflation. However, many are clearly not benefitting from the strong labour market. Going into arrears on a car loan is not only problematic for lenders and the automotive industry, but it puts short-term financial pressure on the consumer, while hindering their ability to take out further credit in the future. With a growing number of burdens facing the US economy, many are looking for indicative recessionary catalysts that create the tipping point, and with the last credit crisis fresh in people’s minds, it seems there is traction behind the belief that credit lenders will be to blame yet again.

James Rowbury, Investment Research Coordinator


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8 Mile: The price of the American Dream?

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