The Formation of an Auto Bubble and Its Threats to Irvine’s Car Industry
By: Dhanika Pineda
Photography: Genaro Molina (Los Angeles Times)
The automotive industry seems to have pulled itself into an economic bubble that is similar to the U.S. mortgage bubble that burst in 2008, thereby triggering a global financial crisis. With the growing worries of a rising “car bubble,” U.S. automotive markets grow weary of how the bubble might affect them, including the auto markets in Irvine. Before speculating the outcomes of this bubble, it is important to understand why and how this car bubble is rising in the first place.
Most Americans today lead autocentric lives. Demands of most modern lifestyles leave Americans dependent on their cars. Owning your first vehicle has even come to be regarded as a right of passage. A similar argument can be made about owning a home in relation to the mortgage crisis of 2008.
“[Bubbles] begin with an unawareness and inability to address it,” Benjamin Raynor, a UCI Ph.D. student of International Political Economy said. “People need cars, they require them to get to work, to go get groceries [or] to take their kids to school— very basic things. The lower-income people also require these cars just as much as anybody else, but they have to pay more relative to their own incomes … car loans have started to become more expensive in terms of interest rates and lower-income individuals are starting to not be able to pay off those loans.”
Today’s auto market is host to a high amount of subprime delinquencies who are borrowers that do not have the best loan history and often have outstanding payments. The initial notions of a bubble emerging out of the car industry mostly came from this, which is the same way the mortgage bubble came into existence in 2008.
An economic bubble occurs in situations where prices are based on wrong speculations on the future. When demand for a product increases, businesses raise prices. When the demand is high enough, people may resort to risks such as taking out loans. Normally, these loans can be paid back in a certain amount of time. However, in the case of an economic bubble with a high percentage of subprime loans, funds do not get paid back in time, which affects the flow of capital and taints the pool of safe debt with bad loans.
Irvine also happens to be a key center for the auto industry. Corporate headquarters for Kia, Hyundai’s design and technical center, Mazda’s North American Headquarters and Ford’s regional headquarters and design centers are all located in the city of Irvine.
“If this bubble is correct, it could really damage the car industry especially here in Irvine,” Raynor said.
Reflecting on the last financial crisis, Raynor points out that many players in the automotive industry were actually put out of business, despite the fact that the last crisis was one concerning mortgages.
Most car purchases are rarely bought outright with cash upfront but instead are financed through credit. These car companies are reliant on individuals paying back those loans. Currently, Americans are about three months behind on their car loans on average, according to a StreetsBlog article by Angie Scmitt. That’s going to start to spiral. Companies will be more likely to charge higher interest rates in order to prevent people who may default on those loans from taking out loans in the first place. Both the car loan defaults and decreased car sales will have an adverse effect on the automobile industry.
Car debt currently makes up 5.5% of the USA’s GDP. That’s a staggering $1.26 trillion, a growth of over 75% since 2009.
In 2012, the Federal Reserve began easing lending policies, which dropped the prices of used cars and lowered the interest rates on auto loans. In late 2015, these reins on the auto industry were again tightened, and auto loan debt began to fail. Auto loans that were made in the fourth quarter of 2015 performed worse than any loans since the 2008 mortgage crisis. In 2018, Americans took out over 113 million auto loans, 39% more since 2010.
The problem is further worsened by the availability of cheap auto loans, making nearly half the loans that should be payable within a couple of years last six years or longer.
A question of ethics can also be raised regarding the availability of cheaper loans. Many recent reports have come out regarding loan discrimination toward minorities and people of color by car companies.
“The people who are most likely to be affected by bad interest rates are the ones being targeted with high interest rates,” Raynor said.
This affects the way individuals are affected by the bubble as well. The same could be seen in the mortgage bubble of 2008.