Autos Subprimed for a Fall

By Elliott Wave International

Editor’s note: This article was adapted, with permission, from the February issue of The Elliott Wave Financial Forecast, a publication of Elliott Wave International, the world’s largest market forecasting firm. All data is as of Jan. 30, 2015. Click here to read the complete version of the article, including specific near-term forecasts, for free.

With gas prices tumbling and car sales surging in December, analysts expect total vehicle sales to rise to 17 million units in 2015, close to the 17.3 million record in 2000. But a closer look reveals that this presumed “pocket of strength” is actually another deflationary sinkhole.

A big clue to this potential is the source of much of the industry’s recent sales surge: debt.

Just as home sales received a boost from slackening underwriting standards in 2005, subprime car deals jumped in 2014 as loan terms lengthened to as many eight years and credit standards slipped markedly.

According to a New York Times examination of five large auto lenders, subprime credit companies “are loosening credit standards and focusing on the riskiest borrowers.”

Equifax reports that as of October, 31% of car loans (6.5 million) went to borrowers with credit scores below 640.

Honda’s top U.S. executive warns that “competitors are doing ‘stupid things’ to boost auto sales including making seven-year-long loans that harm buyers.”

Yet Honda feels it has no choice but to join in. “We’ve seen this movie before, we know how it ends, and it’s not pretty…. but we’ve already paid the price of admission. So we might as well stay to the end.”

We’ve seen this we-have-no-choice thinking before. Somehow, knowing the ending doesn’t do anything to change behavior or to alleviate the pain when it comes.

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This article was syndicated by Elliott Wave International and was originally published under the headline Autos Subprimed for a Fall. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.