Average car prices are getting higher and higher thanks to the shortage of auto parts. Interest rates are rising thanks to the federal government’s efforts to control inflation. And car companies and dealers have less incentive to take cost-cutting measures because demand still far outstrips supply.
Bottom line: Don’t expect the car market to return to normal anytime soon.
The average interest rate on new car loans reached 5.7% in the third quarter of 2022, the highest since 2019, according to Edmunds.com. At the same time, the average amount financed to buy a new car reached a record $41,347. The average monthly payment in the third quarter was more than $700. It was $630 in the same quarter last year, and the average payment was down nearly $1,000, according to Edmunds.com.
Americans are sticking to their cars more and more. According to S&P Global Mobility, the average car on the road in America today is more than 12 years old. And it’s likely to be even older.
People typically go car shopping every five years or so, so when many people with good credit were in the market last time, they would have been able to get much lower interest rates from auto company financing lines.
“I think he bought a car then and now he’s going back to the market and he’s like, ‘Five percent! That’s a lot higher than I expected!'” said Jessica Caldwell, an industry analyst for Edmunds.com.
In recent years, when the Fed raised interest rates, automakers issued auto loans with artificially low interest rates (sometimes even 0%) as an incentive to buy. But with so few cars to sell, there’s little incentive to do so now, Caldwell said.
“What’s the point of creating a very low subsidized interest rate for inventory they don’t really have?” he said
Those high costs will be tough on consumers, but still won’t reduce demand enough to ease pressure on car prices, at least in the short term, analysts interviewed by CNN Business said. That’s because demand for new cars far outstrips supply, so the reduction in demand caused by higher prices, even higher payments, still won’t bring things into line. Car dealers can still sell all the new cars that come onto their lots, often even before the car hauler trucks are delivered. Customers will have to pay more.
“I’ll wait until we turn the corner,” buyers think, said Mike Wall, an industry analyst at S&P. “Well, we turn the corner and there will be another corner.”
This means that the average car in America will continue to age as owners live longer.
“It’s almost certain that we’ll soon be approaching a median age of 13,” said Jonathan Smoke, chief economist at Cox Automotive.
Car buyers without good credit are being forced out of the new car market, Smoke said. People with poor credit ratings, known as subprime borrowers, typically account for 15% of new car purchases. Now they are down to 5%, he said. And deep subprime loans, which typically account for about 8% of new car buyers, are now almost non-existent in the market. Subprime and deep subprime loans typically carry much higher interest rates.
When auto production returns to normal (perhaps in the second half of 2023 or perhaps not even then), interest rates may start to become an issue. Automakers should eventually do something to make buying a car at least a little more attractive to consumers, Wall said. But only a little.
The inventory shortage is starting to ease a bit, Smoke said. In recent months, there have been a couple of hundred thousand more vehicles on dealership lots, he said.
“It’s not on every model, but it’s mostly a national production in North America,” he said.
One type of vehicle where things are improving faster are large trucks, he said, thanks to protective trade tariffs dating back to the 1960s, almost all of which are built in North America.
“If I foresee an area where there might be more early discounts or more attractive rental deals coming back, I’d look for full-size pickups,” he said.
Smoke said there is one thing that can help normalize the new car market: a recession, which will really hurt demand.
So yes, by then it might be easier to buy a car at a good price, though many people may end up paying the other way.