Rates Rise as Auto Affordability Concerns Grow

The Federal Reserve's recent increase of the Fed Funds Rate by a quarter point will tighten auto credit access, according to Cox Automotive’s Auto Market Weekly Summary for March 27.

Interest rates are skyrocketing because of widening yield spreads, while terms are shortening. Both measures will increase payments. The affordability challenges that result will likely dampen spring auto sales, the summary indicates.

Cox Automotive’s Dealertrack Auto Credit Total Loan Index found auto credit access expanded in February as the approval rate improved, the subprime share increased, and the share of loans with negative equity grew.

But auto loan rates also increased, and terms shortened. “[Now] preliminary data shows auto credit access reversed course and tightened during the first half of March, with the widening of yield spreads and shortening of terms,” the report noted.

The Fed Funds Rate now sits at 4.75% to 5.00%, the highest since 2007. But the Fed has softened its outlook regarding additional increases. “The median expected terminal Fed Funds Rate remains 5% to 5.25%, which indicates one more 25 (basis points) move left,” Cox reported.

Auto loan performance deteriorated in February, but the pace slowed, Cox reported. Loans that were delinquent for 60 days or more increased in February for the tenth consecutive month and rose 21.9% year-over-year, according to Cox data.

“In February, 1.90% of auto loans were severely delinquent, an increase from 1.89% in January and the highest severe delinquency rate dating back to 2006,” the report noted. “Compared to a year ago, the severe delinquency rate was 32 basis points higher. In February, 7.34% of subprime loans were severely delinquent, an increase from 7.30% in January and the highest severe delinquency rate dating back to 2006. The subprime severe delinquency rate was 135 basis points higher from a year ago.”

Cox Automotive noted higher delinquencies are still not leading to prepandemic loan default levels. Still, loan defaults increased 2.2% in February from January and were up 16.2% from a year ago, the report noted.

Cox reported the labor market is not as strong as it was a year ago but noted there is little evidence of major deterioration in jobless claims data. “Jobless claims remain at historically low levels relative to the job base,” the weekly report noted.

According to Cox research, seasonally adjusted initial jobless claims declined by 1,000 to 191,000 for the week ended March 18, and nonseasonally adjusted initial claims fell by 4,700.

Continuing claims, representing people who previously filed and remain on traditional unemployment compensation, increased by 14,000 week-over-week, pushing the total to 1.69 million as of March 11. The level of continuing claims is still 69,000 lower than before the pandemic, Cox reported.

Continuing claims declined by 61,500 to 1.94 million in the latest data, which lags the traditional number and isn't seasonally adjusted. That total measure is down 40,600 over the last four weeks and 164,000 lower than the prepandemic level but at the highest level in a year, the report concluded.

Originally posted on Auto Dealer Today