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

Is The Stock Market Cycle Pointing To A New Bull Market Already?

Is The Stock Market Cycle Pointing To A New Bull Market Already?

memberswis
On February 6, 2023

February 7th, 2023Is The Stock Market Cycle Pointing To A New Bull Market Already?Are we in another bear market rally or the start of something new? That’s what everyone wants to know, especially as we

Job Creation Shocks The Market

Job Creation Shocks The Market

jeffwood
On February 5, 2023

February 6th, 2023Job Creation Shocks The MarketIf we’re heading into a recession, how were we met with better-than-expected job growth numbers last week? Unemployment dropped, despite the headlines of tech companies planning to lay off

Job Cuts And Stock Buybacks Keys To Success In 2023

Job Cuts And Stock Buybacks Keys To Success In 2023

memberswis
On February 2, 2023

February 3rd, 2023Job Cuts And Stock Buybacks Keys To Success In 2023 The thing I’ve learned from this earnings season is that a company can have consecutive quarterly drops in revenue and provide a lower

Fed Raises Rates But Bulls Are Still In Control

Fed Raises Rates But Bulls Are Still In Control

memberswis
On February 1, 2023

February 2nd, 2023Fed Raises Rates But Bulls Are Still In ControlOk, bulls. You win.  I will start lifting my bearish stance on the market.  Despite the final 10-minute market sell-off and a Dow that finished

What Past Fed Announcements Tell Us The Market Will Do Today

What Past Fed Announcements Tell Us The Market Will Do Today

jeffwood
On January 31, 2023

February 1st, 2023What Past Fed Announcements Tell Us The Market Will Do TodayWatch out - this article is going to have some math.Here we are once again on Fed Announcement day. Most of the folks

The Hidden Profits Of 2023

The Hidden Profits Of 2023

jeffwood
On January 30, 2023

January 31st, 2022The Hidden Profits Of 2023There is still one more trading day left in January, but if the adage “as the S&P 500 goes in January, so goes the year” holds true, the markets

The Fed Goes Up Against Earnings This Week

The Fed Goes Up Against Earnings This Week

jeffwood
On January 29, 2023

January 30th, 2022 The Fed Goes Up Against Earnings This Week We are in peak earnings season with some heavy hitters like Pfizer (PFE), Snap (SNAP), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), and Apple

Smoother Sailing in 2023

Smoother Sailing in 2023

user
On January 18, 2023

January 17th, 2022Smoother Sailing in 2023 Nothing has changed since the end of 2022, yet traders have already decided that this year won’t be as bad as the last. Bulls have been piling into stocks

The Rise Of Bing Over Google – That’s No Joke

The Rise Of Bing Over Google – That’s No Joke

jeffwood
On January 12, 2023

January 12, 2023 The Rise Of Bing Over Google - That’s No Joke Before we talk about two tech giants getting ready to battle it out once again, let’s look at the overall market. The

Why I Ignore Most Of The News

Why I Ignore Most Of The News

jeffwood
On January 8, 2023

January 9th, 2022 Why I Ignore Most Of The News It’s easy to get caught up in the financial headlines. I’ve certainly done it. Last week shows why I ignore most day-to-day stories. I know

PREV NEXT
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.