Why Is Warren Buffett Tuning Out Auto Loan Bubble Chatter?

Drew Angerer/Getty Images
Drew Angerer/Getty Images

Warren Buffett is certainly not letting bubble noise slow his enthusiasm in automobiles. The Oracle of Omaha recently announced that Berkshire Hathaway is buying Van Tuyl Group, the largest privately held auto dealer in the United States. Terms of the deal were not disclosed, but analysts estimate an all-cash price of more than $4 billion. Interestingly, the investment comes at a time when some market participants believe the auto market is peaking.
Are too many people fueling car purchases with debt? According to Equifax, 12.5 million new auto loans were originated through the first six months of 2014, up 4.9% from the same period a year earlier. The total balance of new loans increased 6.9% to $254.2 billion, while the total balance of loans outstanding surged 10.8% to $924.2 billion — an all time high. In fact, the number of auto loans outstanding is at a record high of more than 65 million.
This strong growth remains a focal point, but does not necessarily indicate a bubble collapse is waiting around the corner. Experian reports only 15.1% of new vehicle loans in the second quarter of 2014 went to consumers in the subprime and deep subprime segments, down from 22.1% a year earlier. In the second quarter of 2007, shortly before the Great Recession, the figure was almost 20%. Furthermore, the average loan amounts extended to subprime and deep subprime consumers also declined in the second quarter.
“Although we’ve seen relative stability in the automotive industry the past several years, lenders are still showing cautionary signs when lending to the subprime market and keeping their risk at manageable levels,” said Melinda Zabritski, senior director of automotive finance for Experian, in a press release. “As for consumers, as long as those in these higher risk segments continue to pay their bills on time, keep delinquent balances in check, and select a vehicle that fits within their budget, they should still be able to obtain the necessary financing to purchase a vehicle that meets their needs.”
While advancements in technology from companies such as Tesla, Google, and Uber, among others, may impact the auto market’s future, they aren’t preventing investors from making major bets today. In addition to Buffett admitting he may purchase more dealerships, he already owns nearly 33 million shares of General Motors, worth almost $1.2 billion, as of the end of June. David Tepper’s Appaloosa Management also has a large stake in GM. Daniel Loeb, founder and chief executive officer of Third Point, recently took a new position in Ally Financial, one of the largest providers of automotive financing in the United States.
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