Credit Crunch Tsunami Hits Land

Cars, houses, and now jobs are at risk

The big news this week is the credit crunch tsunami launched by last month’s bank panics is now hitting land, with buildings collapsing in car loans, housing, and business loans.

The recession signals are turning into sirens.

Car Lenders Pulling Out

The latest is that banks are cutting off loans and credit to car dealerships. Capital One, one of the biggest car lenders, is even pulling their “floor plans” that dealers use to buy cars to populate their lots.

The reason banks are pulling out is it’s super hard to get buyers approved since banks are pulling in lending. So banks aren’t worried whether the dealer can sell the car, it’s whether the bank wants the car buyer as a risk.

It’s worth noting that consumers’ credit scores are holding up just fine: The average mortgage-holder’s credit score is steady, while credit scores for credit card borrowers (a bigger, and poorer, group) is down slightly from last year’s stimulus-fortified utopia, but outside that they’re the highest since 2013.

So it’s not the car buyers, it’s the banks.

The problem for dealers is that, if this keeps up, dealers start losing a lot of money on the cars sitting in their lot. They eventually run out of money and have to raise fast cash selling the cars at auction. This craters car prices. Which is great for long-suffering car buyers, but it wipes out dealers.

In fact, just a few days ago a big used car dealer group, USA Auto Sales, just announced it’s “indefinitely” closing 39 dealerships. It wouldn’t be surprising to see more on the way: Just look at your nearby car dealers and see whether they’ve got full lots or a thin screen of cars fronting a whole lot of empty lot.

Enter Mortgages

As big as cars are — there are $1.4 trillion in car loans outstanding — mortgages are in even worse shape. And there’s almost $20 trillion in mortgage debt. And remember mortgages is what set off the last big crash in 2008.

What’s happening is mortgage applications have plunged, while households are struggling to stay above water with debt to income ratios — how much debt vs how much you make — higher than the peak before 2008 subprime meltdown

This is driving defaults, with FHA mortgages — those go to first-time home buyers with 3-5% downpayment — now hitting 12% in the most recent numbers.

As for Mortgage applications, they’re close to the worst of 2008.

The problem is homeowners are sitting on low rate mortgages (on average 3 or 3 and a half percent), but new mortgages are closer to 7%.

So the owners don’t want to sell — they’d have to trade a 3% loan for a 7% loan, which means paying about $1,600 more per month on the median house.

Of course, buyers aren’t all that excited either; between near-7% loans and soaring prices during Covid-era Zero Interest Rates, they’re looking at a $2,700 mortgage payment, up from $1,800 two years ago.

The Big One: Business Loans

Finally, the one that really bites: business loans. These keep the jobs alive, which are holding up all those cars and houses in the first place.

Since the bank panics hit last month banks have dropped credit by about $270 billion.

About 1/4 of that — $65 billion — was in commercial and industrial loans, with pullbacks in small business loans, real estate loans, even construction loans.

The only bright spot is credit cards, which pay so high banks will eat those all day long. And which are, therefore, a classic distress signal that families are struggling.

Beyond the job losses, the concern here is that tighter business loans mean the businesses have to start using up their cash.

This pulls cash out of banks which, thanks to fractional reserve, ripples into yet more credit tightening. You can even get a feedback loop, with tighter lending leading to yet tighter lending. While companies drop like flies, taking the jobs with them.

We’re already seeing this with small business bankruptcies at a record high, manufacturing at a 3-year low despite the recession not officially having even started yet. So there’s a good chance there’s a lot more pain to come.

Put the cars, the mortgages, and the jobs together and we could be in for a very bumpy ride.

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