Demand for new vehicles slows amid rising interest rates

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Demand for new vehicles slows amid rising interest rates

(NewsNation) — For much of the year, automakers have had a supply problem, but as production ramps up and interest rates continue to rise, now they’re worried about the opposite — lower demand.

Those fears are primarily driven by affordability concerns. With an average transaction price of $48,681, Americans who bought new vehicles last month paid more than ever before, according to Cox Automotive.

That elevated price is primarily due to strong luxury vehicle sales, said Michelle Krebs, an executive analyst at Cox Automotive, who pointed out that those who are buying new cars in today’s market tend to be more affluent.

Overall, new vehicle prices are up 7.2% compared to last year, according to this week’s inflation report.

But the high sales price is just part of the overall cost. On Wednesday, the federal reserve announced another half-point interest rate hike as part of an ongoing effort to curb inflation. Those increases are affecting interest rates for auto loans which have surged in recent months.

At the end of 2021, the average interest rate on a five-year new car loan was 3.85%, according to Bankrate.com. Today, the average interest rate for the same loan is around 6%.

Those with lower credit scores tend to pay higher rates, but industry insiders say even people with impeccable scores are seeing expensive loan terms.

“We just had an 820 credit score get quoted 8% from Capital One and 10% from Ally for a CAR LOAN,” CarDealershipGuy, the anonymous CEO of a car dealer group behind a popular industry newsletter, tweeted this week.

Meanwhile, auto dealer sentiment has dropped to its lowest level since the start of the COVID-19 pandemic, according to a recent Cox Automotive report. That’s an indication more dealers view the current market as weak than strong.

New vehicle sales volumes were down in November compared to the month prior.

“Production is improving, inventory is improving, but consumers are starting to tap the brakes on sales because of high-interest rates and a possible recession,” said Krebs.

Last month, the U.S. supply of unsold new vehicles stood at 1.64 million units — the highest level since May 2021, according to Cox Automotive. That’s still well below the November 2019 supply of 3.55 million vehicles, but marks an 81% increase from this time last year.

Despite improved inventory levels, the average listing price for a new vehicle in the U.S. is up 4% from this time last year, at $46,823.

It’s not all bad news for consumers, especially for those looking to buy a used car.

Wholesale used vehicle prices are down more than 14% compared to a year ago, according to Cox. Used vehicle inventory has recovered to 2.44 million units, which is near pre-pandemic 2019 levels.

The average listing price for a used car is about half that of a new one, which means those who can afford to pay in cash will avoid interest rates altogether.

“We’ve never seen this level of people paying cash for vehicles,” said Krebs.

It remains to be seen whether car manufacturers will attempt to lure consumers back by re-introducing incentives like cash rebates or low-interest financing.

Today, the average incentive package is just 2.2% of the average transaction price. By comparison, in November 2019, the average incentive package was 10.6% of the average transaction price, per Cox.

For now, automakers will be glad they have vehicles to sell but as we head into 2023, all eyes will be on consumer demand.

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