New cars are finally back in stock, but Americans might not be able to afford them

DETROIT – New cars are slowly becoming more affordable as supply chain bottlenecks finally begin to loosen. Now, however, a growing number of Americans may not want or be able to afford them.

As the Federal Reserve aggressively raises 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. That is expected to reduce demand and add new pressure to the auto industry, which has struggled with depleted supplies during the pandemic.

“The irony for the auto market is that just as the industry is poised to start seeing volume growth from low levels that are akin to a supply-constrained recession, the rapid movement in interest rates is dampening demand,” Cox Automotive Chief Economist Jonathan Smoke wrote. blog post on Wednesday.

At the end of the third quarter, Cox Automotive found that the new vehicle loan rate was 7%, up 2 percentage points year-over-year. The loan rate in the used car market rose by the same amount, to 11%, according to Cox Automotive.

Higher car finance costs come as household budgets are already squeezed by decades of high inflation. This means that many Americans may no longer be able to afford the new cars that are starting to hit the dealerships.

And financing costs are expected to keep rising. Already this year, the Fed has aggressively raised lending rates to between 3% and 3.25% and has indicated it plans to continue raising rates until the fed funds rate reaches 4.6% in 2023.

Automakers could offset the costs with finance deals and rebates, but that’s something the companies won’t go back to when they’re making record profits.

Recovering inventory

Fleet and commercial sales increased significantly in the third quarter, suggesting that consumer demand may be weakening. That’s worrisome because retail sales to consumers are more profitable and automakers have been counting on pent-up demand from the pandemic to persist in the near term.

But Kristin Dziczek, auto policy adviser for the Detroit-Chicago branch of the Federal Reserve Bank, said fleet sales aren’t necessarily as bad a sign as they’ve been in the past.

“There is a lot of pent-up demand for fleet because fleets are being starved for the benefit of consumers,” she said, adding that many government and large commercial fleets pay stickers for battery electric and hybrid vehicles to meet local emissions standards.

The increase in fleet orders comes as inventory levels finally rise 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 up 160,000 units since the end of August, according to BofA Securities.

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“We continue to believe that the weakness in sales over the past year+ is due to limited inventory,” analyst John Murphy said in a note to investors on Wednesday.

But he also noted that demand could moderate on the back of inflation, weak consumer confidence and recession fears.

Largely because of the Fed’s actions, Cox recently cut its forecast for new car sales for the year to 13.7 million, down from an already cut 14.4 million and a level not seen in a decade. At this sales pace, Smoke said lower production and profits could further strain the supply chain, potentially leading to bankruptcies and further inventory disruptions.

Meanwhile, new vehicle price growth is slowing. Average new car purchase prices rose 6.3% in September to a record of more than $45,000, J.D. estimates. Power. At the start of the year, prices rose to record levels of 17.5% and 14.5%.

Prices keep climbing

To offset lower sales, automakers are focusing on making their most expensive vehicles, which are also their most profitable. This, combined with rising interest rates, is forcing more car shoppers to look at used vehicles.

Edmunds reports that the average amount financed on new vehicles reached a record $41,347 during the third quarter. That’s up from $40,602 during the second quarter and $38,315 a year earlier. The average monthly payment for a new vehicle remained above $700 during the third quarter. Of those buyers, more than 14% committed to paying $1,000 or more per month for new vehicles—the highest level Edmunds has ever recorded.

“Inventory may be a little thin, but it looks like it’s going to maybe get better and not necessarily worse, which comes at an interesting time because now it looks like demand may actually be struggling a little bit because of the higher prices. , higher interest rates and questions about whether or not we’re in a recession,” said Jessica Caldwell, executive director of insights at Edmunds.

Cox Automotive economist Charlie Chesbrough said he doesn’t expect new vehicle prices to drop anytime soon, if at all, as automakers vow to keep inventories leaner to boost profits.

“I don’t know of any return to normal. I think we’re just in a new normal,” he said

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