New Cars Are Back In Stock — But Americans Can’t Afford Them

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New cars are finally back in stock, but there’s one problem: Americans can’t afford them. For decades, new cars were unaffordable to the average American consumer, who didn’t have enough money to save up for a down payment or cover monthly car payments. The average household income hasn’t risen as quickly as car prices in the past few years, either, so this issue has only been exacerbated. Luckily, there are other options available to those who don’t want to take on car payments and would rather buy used cars instead — but should you consider buying a used car instead of new?

DEARBORN — As supply chain bottlenecks finally start to alleviate, new automobiles are progressively becoming more broadly accessible. However, a growing proportion of Americans may not desire or be able to buy them at this time.

Consumers are finding that the cost of financing a new automobile is suddenly much more expensive than it was even earlier this year as a result of the Federal Reserve rapidly raising interest rates to combat inflation. This is anticipated to reduce demand and put more strain on the car sector, which was already under stress due to the pandemic’s reduced inventory.

According to Cox Automotive Chief Economist Jonathan Smoke, “the irony for the auto market is that just as the sector is prepared to start seeing volumes climb from supply-constrained recession-like low levels, the quick shift in interest rates is lowering demand.”

The new car loan rate was 7% at the end of the third quarter, an increase of 2 percentage points for the year, according to Cox Automotive. According to Cox Automotive, the loan rate in the used market increased by the same amount, to 11%.

As household finances are already being strained by decades-high inflation, the cost of financing a car has increased. Because of this, many Americans could no longer be able to purchase the new automobiles that are beginning to appear on dealer lots.

And it is anticipated that borrowing costs will continue to rise. The Fed has already aggressively raised interest lending rates this year from 3% to 3.25%, and it has said it would do so until the fed funds rate reaches 4.6% in 2023.

Finance options and discounts might be used by automakers to offset expenses, although the latter is something businesses have promised not to resume despite record earnings.

Recovering inventory
Automakers had anticipated that the supply chain deficit during the epidemic would result in pent-up customer demand that would last for a while. However, sales of business and fleet vehicles, which aren’t as profitable, significantly surged in the third quarter, suggesting that consumer demand could be ebbing.

Inventory levels are finally rising from historic lows at the same time.

According to BofA Securities, the total automobile inventory grew to roughly 1.43 million units at the end of September, which is the highest level since May 2021 and is up 160,000 units from the end of August.

In a letter to investors on Wednesday, analyst John Murphy stated, “We continue to believe that the sales slowdown over the previous year+ is a product of insufficient inventory.”

But he also pointed out that factors like inflation, low consumer confidence, and worries about a recession might cause demand to decline.

Cox recently reduced its prediction for new car sales for the year from 14.4 million to 13.7 million, a level not seen in a decade, in large part as a result of the central bank’s policies. Smoke warned that at that sales rate, weaker manufacturing and profit margins might put more strain on the supply chain, perhaps resulting in bankruptcies and significant inventory shortages.

However, price hikes for new vehicles have slowed down in the interim. According to J.D. Power estimates, new automobile average purchase costs increased 6.3% in September to a record-breaking amount of over $45,000. Prices had earlier in the year increased by record amounts of 17.5% and 14.5%.

Prices keep climbing
Automakers have been concentrating on creating their most expensive automobiles, which are also their most profitable, to make up for declining sales. This is encouraging more people to shop for used cars together with higher interest rates.

According to Edmunds, during the third quarter, the average loan amount for new cars reached a record high of $41,347. This is an increase from $38,315 in the previous year and the second quarter’s $40,602 total. During the third quarter, the typical monthly payment for a new car remained above $700. More over 14% of those customers agreed to make new car payments of $1,000 or more each month, which is the largest percentage Edmunds has ever noted.

“Inventory can be a little shaky, but it feels like it might get better and not necessarily worse,” said Jessica Caldwell, executive director of insights at Edmunds. “Now it feels like there may actually be a bit of trouble on the demand because of higher prices, higher interest rates, and the questions of whether we’re in a recession or not.”

As manufacturers pledge to maintain tighter inventories to increase profitability, Cox Automotive economist Charlie Chesbrough said he doesn’t anticipate new car prices to soften very soon, if at all.

“I’m not sure if things have returned to normal. We’ve just reached a new normal, I believe, he remarked.

Although used car prices have been falling, depending on the circumstances, rising interest rates may cancel that out.

Cox Automotive’s Manheim Used Vehicle Value Index, which monitors the values of used cars sold at its U.S. wholesale auctions, peaked in January and has since dropped by 13% as of mid-September. However, costs are still higher than they have ever been.

According to Edmunds, the average cost of a financed vehicle is over $31,000, which is more than the cost of used cars and trucks but lower than the cost of a new vehicle.

There aren’t many viable solutions, according to Caldwell. Really, unless you can locate anything with a cheaper loan rate, used doesn’t seem like a smart alternative.

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