New Vehicle Affordability 'Challenging' Amid Soaring Auto Loan Rates

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by Tyler Durden
Monday, May 08, 2023 - 11:20 PM

Cox Automotive reports that auto prices are currently at near-record levels, with the average monthly payment for new cars reaching $754 in March due to a high-rate environment. The latest data on auto loan interest rates show a continued surge, worsening the affordability crisis and forcing more car buyers to gravitate to used car markets. 

The Federal Reserve just updated its finance rate for new auto 60-month loans that printed 7.48% in February. These levels have not been seen since November 2007 and are shy of the record high of 7.82% from August 2006.

Since 1Q22, the new auto 60-month loan rate jumped nearly 3% from 4.5% to 7.48%. And 2% from the start of the third quarter. We call these parabolic moves interest rate shocks for consumers.  

On top of high borrowing costs, Kelley Blue Book data shows the average price of a new car hit $48,000 in March, a 30% jump from the same month last year. 

We outlined to readers in February that affording a new car is a luxury for only the wealthy (read: "A Shiny New Car Is Out Of Reach For Many Americans"). 

"The idea of a new car in every American's driveway is not the world we live in," Charlie Chesbrough, a senior economist at Cox, recently told Bloomberg.

After 24 months of negative real wage growth, obliterating mainly households of the lower/medium tier of the consumer base, the new reality is that new vehicle affordability is only for the wealthy.  

It's a hard reality for many to grasp, but some could care less about a new vehicle in their driveway or parking spot at a multi-family unit. Instead, they struggle to pay rent and put food on the table in a higher-rate environment

Meanwhile, automakers are selling fewer vehicles in the US versus pre-pandemic sales trends -- about 13.9 million in 2022 compared with 17 million in 2019. However, Cox Automotive said 2022 revenues for automakers are $15 billion higher than in 2019, primarily because new vehicles are more expensive. 

Squeezing new affordable cars out of the market will drive even more buyers to used car markets.

"Even with three consecutive months of improvement, affordability challenges are limiting access to the new-vehicle market by lower income and lower credit quality buyers," Cox economist Jonathan Smoke. He added:

"Subprime lending in the new market has decreased substantially since 2019, and deep subprime has disappeared. This trend induces automakers to focus on profitable products for consumers who can afford to buy, which keeps less affluent consumers out of the new-vehicle market altogether and limits what is available and possible in the used market for years to come." 

This might indicate used car prices will stay elevated despite Manheim Used Vehicle Value Index topping out in early 2022.