Despite Interest Rate Hike, Vehicle Affordability Could Improve

The Federal Reserve’s quarter-point interest rate hike Wednesday could be the last in a series of increases meant to dampen inflation, and the effects of the higher rates, though curbing vehicle affordability for many in the interim, should in the longer run lower prices, Cox Automotive said.

“Because of the impact of higher rates, tighter credit, and improving supply, the auto market is indeed returning to a balance between supply and demand,” the vehicle marketing provider said in an analysis.

It was the 11^th rate increase since the series started in March 2022, and put the benchmark borrowing rate at its highest level in more than 22 years. The Fed has left the door open for one more rate hike this year, though Cox said that’s unlikely.

High borrowing rates can affect affordability of consumer loans for purchases like vehicles and homes. With already high vehicle prices, many consumers are priced out of buying vehicles altogether. Cox says up to 10% have been priced out.

“We have seen the most impact on the used auto, where sales have declined for more than a year.”

But it sees conditions brightening. “However, this spring likely represented the bottom for the weak used-vehicle sales trends, as affordability should improve from here, enabling incremental demand to grow.”

Cox said used-vehicle retail prices and loan rates have recently fallen. It said the federal funds rate affects auto loan rates less than do bond yields and yield spreads. Since March, it said average used-vehicle rates have fallen from more than 14% to less than 13.6%. The Fed’s latest increase “may not ripple through the rates consumers see.”

LEARN MORE: Younger Borrowers Falling Behind in Car Payments

Originally posted on Auto Dealer Today