The Fed raises car prices

LOS ANGELES — Consumers are starting to downgrade on car purchases after the Federal Reserve’s third interest rate hike last week. After more than a year of semiconductor chip shortages, COVID lockdowns in China and supply chain issues that have dramatically restricted availability and driven new vehicle transaction prices to a record average of 48 $301 in August, the fierce demand that has defined recent car purchases is finally starting to subside.


What do you want to know

  • Cox Automotive predicts new vehicle purchases will end the year at 13.7 million
  • Before the pandemic, automakers were selling more than 17 million vehicles a year for five straight years due to low interest rates, widely available credit, low unemployment and strong consumer sentiment
  • “The deadly combination of high prices from limited supply combined now with the highest interest rates in 15 years means affordability is weeding out low-income, low-credit-quality buyers,” the economist said. Cox Automotive chief Jonathan Smoke at a quarterly auto industry briefing
  • The average monthly payment for a new vehicle is approaching $750, an increase of nearly $200 from two years ago

“It now seems likely that much of the pent-up demand from constrained supply will quickly disappear as high interest rates erode vehicle buyers’ ability and willingness to buy,” the economist said Wednesday. Cox Automotive principal Charlie Chesbrough during a quarterly auto industry briefing.

Cox Automotive expects new vehicle purchases to end the year at 13.7 million. Before the pandemic, automakers were selling more than 17 million vehicles a year for five straight years due to low interest rates, widely available credit, low unemployment and strong consumer sentiment. But that seems to be changing.

“The impact of the chip shortage is strong,” Chesbrough said.

Until the most recent Federal Reserve rate hike, the number of new vehicle sales was primarily hampered by a lack of product, which is expected to continue and keep prices high. But rising car loan rates are now adding to the overall price and eroding consumer confidence.

The consumer confidence index fell 1.5% after the Fed’s decision last week. Gasoline prices, which had fallen for 98 straight days since their peak in June, started to climb again in mid-September and could end above average in August.

“The deadly combination of high prices from limited supply combined now with the highest interest rates in 15 years means affordability is weeding out low-income, low-credit-quality buyers,” the economist said. Cox Automotive chief Jonathan Smoke during the briefing.

The average monthly payment for a new vehicle is approaching $750, an increase of nearly $200 from two years ago. Credit is tightening, Smoke said. “We’ve seen a crunch roughly for four to five straight months. As the Fed increases the federal funds rate, we see a corresponding increase in auto loan rates. »

Already, average auto loan rates have increased by 2% since the start of the year. The current average is 7% for new vehicle loans and 11% for used vehicles, but Cox sees these increasing to 9% for new vehicles and 13% for used vehicles by the end of the year as the Fed continues to raise rates to keep inflation under control.

As high vehicle prices and rising loan costs combine to make cars increasingly unaffordable, some buyers are abandoning the market altogether. In 2019, subprime borrowers made up 14% of the auto market. They are down to 5%, according to Cox.

“These potential buyers drop out of the process completely and don’t even try to get a loan,” Smoke said. “A monthly payment of $550 for a typical used-car buyer is probably $150 too high, and therefore they’re not even trying to make it.”

There is, however, a bright spot. The second-hand market is normalizing after nearly two years of aberrant behavior. Average list prices are still significantly higher than they were before the pandemic, at around $28,000 for a three-year-old vehicle, but there are 10% more used cars available than there are. a year.

“It’s the best since the start of the pandemic at this time of year. The good news is that used vehicles are starting to depreciate again, not appreciate,” said Chris Frey, senior director of Cox Automotive Economic and Industry Insights.

Used car prices have been stable since May and are expected to decline through the fall. However, they are 8% higher than they were a year ago. Since September 2019, monthly payments for used cars have increased by 42%, from $387 to $551.

“While new inventory remains difficult, pushing more buyers into the used market, high prices for used vehicles remain,” Frey said. “We expect prices to decline a bit on the retailer side through the end of the year, but the decline is modest. Payments are expected to increase.

Due to high prices, more and more buyers who are still buying used cars are looking for much older cars, with 2005 models and older vehicles selling particularly well. “It’s actually the older stuff that sells more than the newer ones,” Frey said.

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