The supply of new cars could recover as no one can afford them
Maybe too fast.
Supply could recover too late to count
“Just as the industry is about to start seeing volumes rise from recession-like lows, rapidly changing interest rates are reducing demand,” says Jonathan Smoke, Chief Economist of Cox Automotive. “New cars may finally become more available just when most Americans can no longer afford them,” he adds.
Cox Automotive is the parent company of Kelley Blue Book.
Fed has a clunky tool
The Fed – the Board of Governors of the US Federal Reserve System – controls the interest rate banks pay to borrow money from each other. This shift ripples through the economy, as banks have to charge higher rates on home loans, auto loans and credit cards to stay profitable.
This increases the cost of borrowing for everyone.
It is not a surgeon’s tool. It’s about making a change upstream and observing its effects far downstream.
The effects are starting to kick in, Smoke says, and they could get drastic.
Low-income shoppers are disappearing
“Credit is still available, but it’s channeled to a smaller portion of the population, which means demand goes down,” he explains. Many consumers are finding that as interest rates hit a 15-year high, “they can’t adjust the remaining variables enough to keep payments within reach.”
This is crowding out low-income buyers and those with credit issues due to the economic contraction of the COVID-19 pandemic. Subprime buyers, Smoke says, made up 14% of new-vehicle buyers in 2019 when the pandemic began. Today, he says, they make up just 5% of new-car buyers, “and deep subprime buyers have all but disappeared.”
In August, the average new car buyer signed up for a monthly payment of $743.
New cars could become a luxury item
If these trends continue, Smoke says, they will turn new cars into something only the wealthy can afford. Higher rates could “reshape the industry into a more concentrated luxury market, where average new vehicle prices exceed $50,000, as automakers seek out high-credit, high-income buyers who are less likely to lose their jobs in a recession and take advantage of the ability to pay cash for new vehicles or get lower rates when they choose to finance,” he says.
Prices are already at record highs and heading higher. With high interest rates, “the new vehicle market will de facto behave like a luxury market for the foreseeable future,” Smoke warns.
Time for the Fed to take a break?
Cox Automotive recently cut its new vehicle sales forecast for the year. The company now estimates that Americans will buy just 13.7 million cars in 2022, the lowest level in a decade.
And the Fed has signaled that further interest rate hikes are coming.
Smoke would like to see the Fed slow down. “The most worrisome problem with the Fed’s plans is that they don’t take the time to see the impact of significantly higher rates,” he says. Demand for vehicles is slowing, he warns, but “harder braking could put the industry in the ditch”.
For buyers, the short-term news is relentless. New car buyers can expect prices and interest rates to rise. Used car buyers are seeing prices fall as the supply of used cars recovers. But it’s getting harder and harder to borrow money to buy one.