Could This Industry Be The Next Subprime Mortgage Crisis?

subprime mortgage crisis

When we talk about an upcoming recession, it comes down to the consumer’s resilience to higher prices.  Are the consumers still able to make their payments?  Are consumers buying discount brands, but still buying?  

The answer for right now is … both.  First, let’s look at a potential crisis in the making.

Remember 2008 when home loans were easy to get and then they were packaged and sold off and people lost track of the paper until people realized they couldn’t make their mortgage payments, then they defaulted, and then brought the market down?  

Well, a similar situation is forming in the car loan industry.  When the pandemic hit and the economy crashed, everyone was desperate for sales and you had auto loans being created that shouldn’t have.  There was a brief moment when auto prices dropped and then people used stimulus money as a down payment and their monthly income turned from let’s say $2k/month to $4k/month and no one bothered to check if that income was temporary.  

Combined with near 0 interest rates and people were getting into cars and trucks they couldn’t really afford if their situation changed.  Now interest rates are rising, costs of goods are increasing, home property values skyrocketed, credit card interest rates are up, and so on.  In other words, their situation changed.

As car values jumped throughout the pandemic, people found themselves buying an overpriced, depreciating asset.  And now it’s time to accept the punishment and that is coming in the form of a spike in vehicle repossessions.  

Could we see the car loan industry play out like the subprime mortgage crisis in 2008?  

Well, that depends.  Do consumers still have money to spend?   Are their jobs still available?  What is going on with the rest of consumer spending?

Keep reading to see the three indicators you can watch to monitor consumer spending.

There are three quick indicators that are showing consumers seem to be resilient in the face of rising prices.  Despite the growing number of defaults on auto loans, consumers keep spending money in other areas.  They aren’t pulling back their spending – but they are altering where and how they shop.  

What should you watch out for in the future?

The discount pizza indicator – Value pizza chain, Little Caesars, is on track to double its franchise growth rate in 2022, citing high demand for the $5 (now $5.55) “Hot N Ready” pizza.  Despite their food costs rising over 10%, they’ve been able to stay out in front of the competition even after having to raise prices for the first time in 25 years. Franchises have stayed afloat due to an increase in foot traffic and reduced staff from their automation initiatives like the Pizza Portal.

Speaking of foot traffic…

The discount store indicator – Discount dollar stores are seeing foot traffic at pre-pandemic levels.  Visits are up 13.2% from the first quarter of 2022, 8% year-over-year, and 20.5% from the second quarter of 2019.  

Companies like Five Below (FIVE), Dollar General (DG), and Dollar Tree (DLTR) have been growing the number of stores and expanding into new areas.  DLTR has performed the best YTD, with their stock gaining 22% and FIVE has performed the worst with a near -40% return YTD.  Can FIVE pick up momentum and finish strong with the others by the end of the year?

The discount grocery indicator – Physical foot traffic isn’t the only thing increasing during the recession.  Virtual foot traffic to discount grocery stores is also on the rise.  Direct-to-consumer markets, which can save consumers up to 30% on some grocery items, are seeing an increase in the number of products being added to their shopping carts by 22%.  While I couldn’t find any publicly traded companies in this space, there are a few raising lots of cash and are waiting in the wings for the market to become more favorable before going public.  

So by these measures, the recession may not be so bad.  Jobless claims are on the rise, but still low and people keep spending money, which only further complicates the pesky inflation problem we’re seeing.  We do need to keep an eye on the auto loans.  If vehicles are being repossessed, that means defaults on loans are coming.  The good news is that a default on a $70k auto loan is a little easier for the banks and the market to digest than a $500k+ home loan that we saw in 2008.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008

 

Jeff

Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

Can Clean Energy Renew Your Portfolio?

Can Clean Energy Renew Your Portfolio?

johnh
On August 8, 2022

As we look for trade ideas, the U.S. government just handed over a potential big win for one industry. Will we see a boost to the clean energy stocks after the Senate voted to unlock nearly $370 billion this past weekend?

Will Payrolls Push The Fed To Take Action?

Will Payrolls Push The Fed To Take Action?

johnh
On August 7, 2022

What does all of this mean for the future? Are the jobs reports good or bad?

Keep reading to find out the key levels for the S&P 500 and what reports are likely to move the markets this week.

Job Market Remains Tight As Jobless Claims Increase

Job Market Remains Tight As Jobless Claims Increase

johnh
On August 4, 2022

To close out the week I have a trade idea for you with a potential 44% return in the next 43 days.

Get Today’s Trade Idea (and more)

FOMO Hits Market After Strong Earnings

FOMO Hits Market After Strong Earnings

johnh
On August 3, 2022

We could see another strong month ahead for tech and there’s one symbol that you may want to add to your trading list.

Keep reading to learn more about the one symbol that could have a strong August.

Consistent Income Using One Ticker

Consistent Income Using One Ticker

johnh
On August 2, 2022

As the markets remain relatively flat, theta decay is your friend this week so I thought I’d write about a trade that has been showing remarkable accuracy lately.

This one trade has a 90% accuracy rate. Keep reading to find out more.

How Stable Is The Job Market?

How Stable Is The Job Market?

johnh
On August 1, 2022

It wasn’t too long ago that the market was reacting (or overreacting) to every piece of news that was published. Over the last month and a half, the markets have settled down some. That can be seen from the VIX (volatility index) which has been steadily decreasing since the mid-June market lows.

Don’t Call It A Recession

Don’t Call It A Recession

johnh
On July 31, 2022

That begs the question: if the market is forward-looking, why do we put so much attention to GDP numbers that are identified and then reported after the quarter is complete?

Is This Really A Recession?

Is This Really A Recession?

johnh
On July 28, 2022

The Mediots Are At It Again

As we’ve explained over the last few months, it was likely that the U.S. economy would meet the ‘technical’ definition of a recession (two or more consecutive quarters of negative GDP).

Three Dividend Stocks To Buy After Yesterday’s Fed Meeting

Three Dividend Stocks To Buy After Yesterday’s Fed Meeting

johnh
On July 27, 2022

It’s official, the Fed increased interest rates by 75 basis points for a second straight meeting. Inflation remains high, job growth is slowing, and consumer confidence is at historic lows.

Maybe that’s why investors are rushing toward dividend investing to protect their portfolios. With a recession likely on the horizon, if we’re not there already, and dividend payouts projected to increase throughout 2022, there are three quality companies you should consider for your portfolio.

Top CEOs Are Saying This About The Upcoming Quarter

Top CEOs Are Saying This About The Upcoming Quarter

johnh
On July 26, 2022

What can learn from the major companies that reported earnings?

Alphabet (GOOG/L) released earnings and missed overall, but their ad revenue beat expectations so their stock went up after hours. Microsoft (MSFT) missed on cloud revenue and ad revenue and their stock went down. Great.

PREV NEXT

Contact

267 Kentlands Blvd #225
Gaithersburg, MD 20878

P. (866) 257-3008
(Monday-Friday 9:00 AM-5:00 PM EST)

E. [email protected]

Products

About

Publisher of actionable and proven strategies and tactics to help investors build wealth and reach seven-figure portfolios.

Receive the latest news

Subscribe To Our Daily Newsletter

Get notified about new articles, special events, training, and much more

Like What You See?

Leave your info below to get more options and trading ideas to your inbox

Yes, send me news to my inbox.