The vehicles go on sale at AutoNation Auto Agency on April 21, 2022 in Valencia, California.
Mario Tama | Getty Images
DETROIT—New cars are slowly becoming more widely available, as supply chain bottlenecks are finally starting to loosen. But now, an increasing number of Americans may not want to or may not be able 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 earlier this year. This is expected to lower demand and add new pressure on the auto industry, which has been struggling with depleted stocks during the pandemic..
“The paradox for the auto market is that as the industry prepares to start seeing volumes rise from stagnation-like lows supply, the rapid movement in interest rates is dampening demand,” Jonathan Smock, chief economist at Cox Automotive Wrote in a blog post Wednesday.
At the end of the third quarter, Cox Automotive found the new car loan rate was 7%, up two percentage points from the year. The loan rate in the second-hand market has risen by the same amount, to 11%, according to Cox Automotive.
The high cost of car financing comes at a time when household budgets are already under pressure due to decades of high inflation. This means that many Americans may not be able to buy the new cars that are starting to hit many dealers.
The cost of financing is expected to continue to rise. Already this year, the Federal Reserve has significantly raised interest rates on interest loans to 3% to 3.25%, and indicated that it plans to continue raising interest rates until the federal funds hit rate 4.6% in 2023.
Automakers can offset the costs with financing deals and discounts, but the latter is something companies have vowed not to return to amid record profits.
Stock recovery
Automakers have been relying on pent-up consumer demand from supply chain shortages during the pandemic to survive in the near term. But fleet and commercial sales, which are unprofitable, increased significantly in the third quarter, suggesting consumer demand may be waning.
That’s even as stock levels are finally rising from record lows.
Total auto inventories rose to about 1.43 million units at the end of September, the highest level since May 2021 and 160,000 more units than the end of August, according to BofA Securities.
“We continue to believe that weak sales over the past year+ are the result of limited inventory,” analyst John Murphy said in a note Wednesday to investors.
But he also indicated that demand may fall due to inflation, weak consumer confidence and fears about a recession.
Largely due to the central bank’s actions, Cox recently lowered its forecast for new car sales for this year to 13.7 million, down from an already low 14.4 million and a level not seen in a decade. At that sales pace, Smok said lower production and profits could put more pressure on the supply chain, potentially leading to bankruptcies and more inventory disruptions..
Meanwhile, increases in new car prices have slowed. Average new-vehicle purchase prices rose 6.3% in September to a record high of more than $45,000, J.D. Power estimates. Earlier in the year, prices jumped at record levels of 17.5% and 14.5%.
Prices keep going up
To compensate for the decline in sales, automakers have focused on producing their most expensive cars, which are also the most profitable. This, combined with higher interest rates, is driving more car shoppers to look at used cars.
Edmunds reports that the average amount funded for new cars reached a record high of $41,347 during the third quarter. This is up from $40602 in the second quarter and $38,315 in the prior year. The average monthly payment for a new car remained above $700 during the third quarter. Of those buyers, more than 14% committed to making a monthly payment of $1,000 or more for new cars — the highest ever recorded by Edmunds.
“The inventory could be a little weak, but it looks like maybe it will get better and not necessarily worse, which comes at an interesting time, because now it looks like there might actually be some trouble with demand due to higher prices,” said Jessica Caldwell, executive director of insights at Edmunds. Interest rates are higher and questions are whether we are in a recession or not.
Charlie Chesbro, an economist at Cox Automotive, said he doesn’t expect prices for new cars to fall any time soon, if any, as automakers pledge to keep smaller stocks to boost profits.
“I don’t know there is any going back to normal,” he said. “I think we’re in a new normal.”
Prices in the used car industry have been dropping, but interest rate increases could offset that, depending on the terms.
after, after It peaks in JanuaryCox Automotive’s Mannheim Used Car Value Index, which tracks the prices of used cars sold at wholesale auctions in the United States, is down 13% through mid-September. But prices are still higher than historical levels.
The average price for a financed vehicle is more than $31,000, a level closer to new car prices than used cars and trucks, according to Edmunds.
“There aren’t a lot of good options,” Caldwell said. “User doesn’t present itself as a good option, really, unless you find something with a lower interest rate.”
More Stories
JPMorgan expects the Fed to cut its benchmark interest rate by 100 basis points this year
Shares of AI chip giant Nvidia fall despite record $30 billion in sales
Nasdaq falls as investors await Nvidia earnings