Caution Flags Fly As Interest Rates Rise

Republished By Plato

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The increase in interest rates approved by the Federal Reserve Board has sent a shiver through the automobile industry as 2023 looms large on the horizon, analysts noted.

Buying a car — Rising interest rates helped send the average transaction price of a new vehicle to an all-time high in November.

The average transaction price — or the price paid — for new vehicles hit a record of $48,681 in November, surpassing the previous high set in August, according to Kelley Blue Book, a Cox Automotive company, even as inventories climb.

Interest rates starting to have an impact

“Rising interest rates are increasingly top of mind for consumers in all aspects of life, including auto loans,” said Ivan Drury, Edmunds’ director of insights. “Even rates that are near or slightly below average can rack up thousands more in interest paid compared to years past, as vehicle prices have also shot up.”

Edmunds analysts noted climbing interest rates make financing increasingly more expensive for consumers looking to purchase a new vehicle.

Car sales — New vehicle inventories have recovered enough to help motivate buyers to keep looking.

Edmunds data from November 2022 shows the average interest paid over the life of a new car loan climbed to an all-time record of $8,436, and the same for a used car loan climbed to an all-time record high of $10,204.

Lower interest rates — which were often subsidized by automakers — and longer loan terms helped Americans buy bigger, feature-heavy vehicles during the past decade, Edmund’s analysts noted.

However, the trend is reversing, and consumers are paying more than ever to finance new and used vehicles as the Federal Reserve voted to raise interest rates for the seventh time this year, while signaling that it is moving more cautiously as the U.S. economy slows.

Affluent buyers flood the zone

Mercedes dealership angled — Luxury buyers are still strong in the market, despite the rising prices.

Edmunds said more affluent buyers are still in market, and luxury share was elevated last month, above 18%. All luxury, including Land Rover, which sold 5,116 vehicles in November with nearly no incentives., and the average price paid exceeded $95,000.

The car shopping experts at Edmunds expect pent up consumer demand and rising inventory levels to support new vehicle sales, forecasting that 14.8 million new cars will be sold in 2023. The forecast, drawn from Edmunds data, represents a 7% increase from its estimate of 13.8 million new vehicle sales in 2022.

“2022 was a mixed bag for the entire automotive industry. Sales were severely dampened by limited inventory, but automakers and dealers were able to rely on a dichotomy of affluent car shoppers and individuals making necessity-based purchases to keep things afloat — and the vehicles that they could sell commanded some hefty price tags,” said Jessica Caldwell, Edmunds’ executive director of insights.

“Although inventory levels have been slowly picking up toward the end of the year and should help meet pent-up consumer demand through 2023, a number of headwinds such as rising interest rates, inflation and economic uncertainty are likely to hinder a speedy recovery,” Caldwell said.