The vehicles are displayed for sale at an AutoNation car dealership on April 21, 2022 in Valencia, California.
mario tama | Getty Images
DETROIT — New cars are slowly becoming more widely available as supply chain bottlenecks finally begin to ease. But now a growing number of Americans might not want them or be unable to afford them.
With the Federal Reserve aggressively raising interest rates to fight inflation, consumers are finding that the cost of financing a new car is suddenly much higher than it was even earlier this year. This is expected to reduce demand and add further pressure on the auto industry, which had struggled with depleted inventory during the pandemic..
“The irony for the auto market is that just as the industry is about to start seeing volumes rise from recession-like lows, rapidly changing interest rates are reducing demand.” , wrote Cox Automotive chief economist Jonathan Smoke. blog post on Wednesday.
At the end of the third quarter, Cox Automotive found the new vehicle loan rate was 7%, up 2 percentage points for the year. The lending rate in the used market rose by the same amount, to 11%, according to Cox Automotive.
The higher cost of car financing comes as household budgets have already been squeezed by high inflation for decades. That means many Americans may no longer be able to afford the new cars that are starting to hit dealer lots.
And the cost of financing is expected to continue to rise. Already this year, the Fed has aggressively raised loan interest rates from 3% to 3.25%, and it has indicated that it plans to continue raising rates until the funds rate feds will reach 4.6% in 2023.
Automakers could offset the costs with financing deals and rebates, but the latter is something the companies have pledged not to return to amid record profits.
Fleet and commercial sales increased significantly in the third quarter, indicating that consumer demand may be waning. That’s a concern as consumer retail sales are more profitable and automakers were counting on pent-up demand from the pandemic to persist in the near term.
But Kristin Dziczek, auto policy adviser for the Detroit branch of the Federal Reserve Bank of Chicago, said fleet sales aren’t necessarily as bad as they have been in the past.
“There’s a lot of pent-up demand for fleets because fleets have been starved for the benefit of consumers,” she said, adding that many governments and large commercial fleets are paying the list price for electric and hybrid vehicles. battery operated to meet local emission standards.
The increase in fleet orders comes as inventory levels finally rise from record highs.
Total auto inventory rose to about 1.43 million units at the end of September, the highest level since May 2021 and an increase of 160,000 units since late August, according to BofA Securities.
“We continue to believe the weak sales over the past year+ are a function of limited inventory,” analyst John Murphy said in a note to investors Wednesday.
But he also noted that demand could weaken due to inflation, low consumer confidence and fears of a recession.
Largely due to Fed actions, Cox recently lowered its forecast for new vehicle sales for the year to 13.7 million from an already lowered 14.4 million and a level not seen in a decade. At this rate of selling, Smoke said a drop in production and profits could further strain the supply chain, which could lead to bankruptcies and further inventory disruptions..
Meanwhile, however, price increases for new vehicles have slowed. Average new car purchase prices rose 6.3% in September to a record high of more than $45,000, JD Power estimates. Earlier in the year, prices had reached record highs of 17.5% and 14.5%.
The prices keep going up
To compensate for the decline in sales, automakers have focused on producing their most expensive vehicles, which are also the most profitable. This, combined with rising interest rates, is causing more and more car buyers to turn to used vehicles.
Edmunds reports that the average amount financed for new vehicles reached a record $41,347 during the third quarter. That’s up from $40,602 in the second quarter and $38,315 a year earlier. The average monthly payment on a new vehicle remained above $700 during the third quarter. Of those buyers, more than 14% have committed to a monthly payment of $1,000 or more for new vehicles — the highest level Edmunds has ever recorded.
“Inventory may be a little thin, but it feels like it may be getting better and not necessarily getting worse, which comes at an interesting time because now it feels like “There may be a bit of difficulty on demand because of higher prices, higher interest rates and whether we’re in a recession or not,” said Jessica Caldwell, executive director of analytics at Edmunds.
Cox Automotive economist Charlie Chesbrough said he doesn’t expect new vehicle prices to fall anytime soon, if ever, as automakers pledge to hold lower inventories to boost their profits.
“I don’t know if there’s a return to normal. I think we’re just at a new normal,” he said.
Prices in the used vehicle industry have fallen, but interest rate increases could offset that, depending on conditions.
After peaking in January, Cox Automotive’s Manheim Used Vehicle Value Index, which tracks the prices of used vehicles sold at its wholesale auctions in the United States, fell 13% to in mid-September. But prices remain high compared to historical levels.
The average price of a financed vehicle is over $31,000, a level closer to the prices of new vehicles than used cars and trucks, according to Edmunds.
“There just aren’t a lot of good options,” Caldwell said. “Opportunity doesn’t really present itself as a good option unless you find something with a lower interest rate.”