The supply of new cars could recover like nobody can afford them

A series of interest rate changes by the Federal Reserve early in 2022 had little impact on Americans’ taste for new cars. Then, in late September, the Fed issued its fourth rate hike of the year and announced plans for more — which has begun to transform car buying hard and fast.

Maybe too fast.

The supply could recover too late to matter

“As the industry is poised to see volumes rising from supply-constrained, recession-like lows, the rapid movement in interest rates is reducing demand,” he says Cox Automotive Chief Economist Jonathan Smoke. “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.

The Fed has a clumsy tool

The Fed — the governing board of the US Federal Reserve System — controls the interest rate banks pay to lend each other money. This change is seeping through the economy as banks have to charge higher interest rates on home loans, car 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 it to see its impact far downstream.

The effects are starting to show, Smoke says, and they could get drastic.

Low-income shoppers are disappearing

“Credit is still available, but it’s flowing to a smaller segment of the population, which means demand is shrinking,” he explains. With interest rates soaring to a 15-year high, many consumers are finding that “they can’t adjust the remaining variables enough to keep payments within reach.”

That is crowding out low-income buyers and those with credit problems left over from the economic contraction of the COVID-19 pandemic. Subprime buyers, Smoke says, accounted for 14% of new-car buyers in 2019, when the pandemic began. Now, he says, it’s only 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 luxury items

If these trends continue, Smoke says, they will make new cars something only the wealthy can afford. Higher interest rates could “transform the industry into a more concentrated luxury market, with average new car prices soaring above $50,000 as automakers chase high-credit, high-income buyers who are less likely to lose jobs in recessions and enjoy the ability to pay cash for.” new vehicles or secure lower rates if they decide to finance,” he says.

Prices are already at record highs and continue to rise. With interest rates high, “the new car market will behave like a de facto luxury market for the foreseeable future,” Smoke warns.

Time for a Fed break?

Cox Automotive recently lowered its forecast for new car sales for the year. The company now projects that Americans will buy just 13.7 million cars in 2022 — the lowest level in a decade.

And the Fed has signaled more rate hikes to come.

Smoke would like the Fed to slow down. “The most worrying problem with the Fed’s plans is that they are not taking the time to see the impact of much higher interest rates,” he says. Vehicle demand is slowing, he warns, but “further hard braking could send the industry into a ditch.”

For buyers, the near-term news is relentless. Buyers of new cars can expect rising prices and interest rates. Used car buyers are seeing prices drop as the used car supply recovers. But it’s getting harder and harder to borrow money to buy one.

Virginia C. Taylor