Car repossessions are surging — a troubling sign for the used car market

Used car market bubble on the verge of exploding

There's a troubling situation spreading among car owners that could portend an implosion of the used car industry, according to a new report.

Repossessions of vehicles are surging, and have even doubled among so-called "prime" borrowers, or people with good to excellent credit scores who are considered the least likely to default on their lows, Lisa Beilfuss Popeo, a senior writer for Barron's, told CBS News.

Repossessions occur when a borrower falls behind on their car payments, giving the lender the right to seize the vehicle. The rise in repossessions comes after car prices surged during the pandemic, as auto manufacturers struggled to meet demand amid chip shortages and other issues. Used car prices rose particularly sharply, with the average used car price jumping almost 17% in May to more than $32,000.

"You have used car prices skyrocketing and people having to borrow more and more to get their hands on a car," Beilfuss Popeo said.

Americans had "temporary pockets of income" during the pandemic, thanks to stimulus checks, extra unemployment aid and Child Tax Credit payments, allowing them to pay up for pricier cars, she added.

That's caused concerns among experts that the used car market is in a "bubble," Beilfuss Popeo noted.

But those government supports have ended, and many families are now facing budget shortfalls given the highest inflation in 40 years. As a result, more consumers are defaulting on their auto loans, with subprime repossessions up 11% since 2020, according to the auto-news site Jalopnik.

And repossessions among prime borrowers has doubled from 2% to 4% during the past two years, Beilfuss Popeo said.

"One red flag is the rate of repossession for prime borrowers is starting to rise. It's not just subprime borrowers that are having problems," she noted.

But there is a bright spot, said Popeo, who believes the rapid rise in interest rates as a result of aggressive Fed hikes should cool the market as intended. "Demand is cooling — it should lower prices for certain things, like cars."