Subprime bonds are driving Americans to buy… cars, this time

Fords without end.
Fords without end.
Image: AP Photo/David Longstreath
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The latest sign of America’s surprisingly resilient consumer demand, contrasting with that in Europe, is earnings reports from  two global auto giants, Ford and Fiat. Strong North American sales at Fiat’s Chrysler unit helped the bottom line, as well as demand out of Latin America and Asia. Likewise, Ford’s financials showed strong results in the US with the company posting its best-ever North American quarterly operating profit. For both companies, European demand was soft.

So it’s important to keep in mind that this isn’t because US consumers are rolling around in cash. The latest read on US consumer income for September showed real income levels remaining roughly flat, after August’s were down 0.3%. Spending held up however, and as a result the US savings rate fell to 3.3%, the lowest level since last November, according to RBS economists.

So if Americans aren’t raking in the cash right now, where are they getting the money to spend? Simple, they’re doing it in the traditional American way: They’re borrowing it. As we’ve pointed out before, investors have been snapping up packages of US auto loans lately, including packages of loans to borrowers with shaky credit histories. That’s pumping tons of cash to consumers that want to buy cars.

While the resurgence of any subprime lending will likely raise eyebrows, these aren’t the toxic subprime mortgage securities that sank the financial system back in 2008. For one thing, the subprime mortgage market was far bigger. At the height of the market in 2005, about $1.2 trillion worth of subprime mortgage bonds were issued, according to David Min, a University of California, Irvine law professor who studies financial markets. Only $11.9 billion in subprime auto bonds were sold last year, according to Standard & Poor’s.

But while the quantities may not be the same, the rebirth of subprime lending for cars suggests that the US addiction to debt-fueled consumption is alive and well.