U.S. consumers are backing out of automobile showrooms as the Federal Reserve continues to raise interest rates. Industry experts are warning tha auto sales may reach a tipping point as rising rates will turn buyers away from new cars.
Wes Lutz, chairman of the NADA, told reporters following a speech to the Automotive Press Association in Detroit:
“Consumers are stretched at this point, budgets are tight. Payments have gone up. Cars are going up $1,000, $1,500, $2,000. It’s a huge concern for us,” he said. “This should be concerning for everyone because the new vehicles are more fuel efficient and they’re safer, and the goal is to get those vehicles on the road to eliminate the old vehicles.”
In a rising-rate environment, auto loans are topping 6 percent after years of just 2.5 percent. Ultimately, consumers, who are already tapped out from borrowing too much, cannot afford new cars, leading them to the used car market.
Unless automakers put a stop to the surging new car prices, auto sales will tumble, he warned.
“If we price these vehicles out of the reach of most consumers, we’re not doing ourselves any good with pollution or gas mileage or safety. It’s important that the manufacturers get it right,” Lutz added.
The auto market has come under the spotlight in recent months because of how much of a bubble it has turned into.
Here are some relevant facts:
– U.S. subprime auto loan delinquency rate hit a 22-year high.
– Total auto loan debt is more than $1 trillion.
– Average new car prices are more than $31,000 and used car prices are just under $20,000.
– Borrowers are paying a record monthly average of $515 for new cars and $371 for used cars.
Then there is the problem of the trade-in treadmill (SEE: ‘Trade-in treadmill’ causing credit risk for lenders in auto loan market). We wrote:
Since the financial crisis, auto sales have ballooned, and sales of cars and trucks hit a record annual high in 2016 with 17.55 million units – auto debt also soared 48 percent in the same time period. Moody’s, however, projects that U.S. new vehicle sales will decline to 17.4 million units this year.
But that isn’t the worst of it.
Last year, researchers note, approximately one-third of U.S. vehicle trade-ins had outstanding loans that were worth more than the cars themselves. This, says one of the report authors, poses a significant risk to lenders.
“The combination of plateauing auto sales, growing negative equity from consumers and lenders’ willingness to offer flexible loan terms is a significant credit risk for lenders,” said Jason Grohotolski, a senior credit officer at Moody’s and one of the report’s authors.
If anything triggers a recession, it could be the auto market.
Leave a Comment