The used car market has been booming for the past year, with prices skyrocketing as inventory becomes scarce due to a shortage of new cars. However, cracks are now starting to form in the used car market, and we are also seeing this happening in the finance market.

One example of these cracks is the recent closure of American Car Center, a dealership group that typically services people with subprime credit and unfortunate circumstances. They closed their doors last week, leaving 300 employees without a job and hundreds of vehicles in inventory that now need to be liquidated. This decision was made after they were unable to sell $220 million worth of bonds that were backed by their loan portfolio. The delinquency rates on those loans must have been 20-25%, making it impossible for them to sell the bonds.

This story is potentially the first of many dominoes to fall in the used car market. When we looked at Carvana’s earnings and others, we saw that there is a lot of not money-making happening right now. Carvana reported losses, and delinquency rates are going back up.

If you look at the overall delinquency rates, you can see that there was a significant spike during the Great Recession in 2009-2012. Then, delinquency rates went down, but they are now going back up. Consumers who purchased these very expensive used cars are starting to go delinquent. This ties back to American Car Center, which couldn’t sell their bonds because of the high delinquency rates on their loans. This is an indication that the used car market’s house of cards is less stable than we’d like it to be.

There are three leading indicators of what’s happening: delinquency rates, loan loss provisions, and repossession rates. Delinquency rates show what percentage of consumers are delinquent on their auto loan. Loan loss provisions are the amount of money set aside by financial institutions for expected loan losses. Credit Acceptance Corporation, which is similar to American Car Center, saw a 5,600% increase in their loan loss provision amount year over year. The repossession rate shows at what rate banks are actually repossessing the vehicles. We are seeing loan loss provisions go up and delinquency rates go up, but repo rates go down. This is because the consumer might be underwater on the vehicle, and the bank doesn’t want to be underwater on the loan.

The banks are delaying repossessing these vehicles as long as they can, giving people who are delinquent as much time as possible to get caught up. However, the loan losses on those types of vehicles would be astronomical, and consumers who can’t pay the main balance will never be able to pay the delinquency balance. The banks understand the situation they find themselves in, which is why they are adjusting their loan loss provisions.

Despite sales being up, we are not in a strong position right now. The used car market is starting to show signs of instability, and consumers sitting on the sidelines with cash might not see things getting better for them anytime soon.

In conclusion, the used car market has been booming for the past year, but cracks are now starting to form. The closure of American Car Center is just the beginning, and we are likely to see more dominoes fall. Consumers who have purchased these very expensive used cars are starting to go delinquent, and the banks are delaying repossessing these vehicles as long as possible. While sales are up, we are not in a strong position right now, and consumers with cash might not see things getting better for them anytime soon.