James Greene, sales operations manager for Planet Subaru in Hanover, Mass., said new-vehicle buyers seem to understand how inflation and supply chain snags have affected the market.
“People are used to seeing stuff that costs more,” Greene said.
Levine, the Florida customer, described seeking four-wheel drive and certain safety technology when shopping for a truck for his son. But when looking at Ford F-150s, the desired features existed only on higher-tier configurations carrying at least $60,000 sticker prices, which he called too expensive. He ran into the same issue looking at Ram 1500s.
Rising interest rates combined with higher-priced vehicles now could put monthly payments beyond a regular consumer’s budget, Hitch said.
“That is gonna be a challenge,” she said.
Jominy agreed higher rates would drive customers from the market. In general, each additional 1 percentage point of rate increases a monthly payment by $20 and cuts buying power by $1,250, he said.
Vehicle loan rates will surely rise after last week’s rate hike by the Federal Reserve. Even before that move, new-vehicle interest rates had increased by about 0.7 percentage point this year, Smoke wrote on May 4. Average used-vehicle interest rates had grown by about 0.75 percentage point, he said.
But avenues still exist for customers to stick with the new-vehicle market despite price and rate pressure, Jominy said. Switching to longer loan terms would make for lower monthly payments. Based on trends observed by J.D. Power, the average new-vehicle loan should theoretically have reached 75 months by now, he said, but instead has held steady at 69 months the past couple of years.
“That’s the one lever that consumers retain,” Jominy said.
Leasing could eventually provide another form of price relief for would-be new-car buyers.
Right now, monthly lease payments aren’t that attractive to customers, and leasing has collapsed to 18 percent of the market instead of its traditional 30 percent, Jominy said.
When more favorable deals return, likely sometime in 2023, customers could again turn to leasing as way to get into a new vehicle, he said.
“It’s not all doom and gloom.”
Manley said AutoNation could use equity in vehicles being traded in to help customers afford new ones.
“If you look at the increase in used-vehicle wholesale prices and the increase in new-vehicle prices, the gap between them actually narrowed over the period of last year,” Manley said. “So if you were trading in a vehicle, then your position really has been not materially impacted by rising prices because you’ve got it on both sides. That obviously doesn’t apply to people that are buying a vehicle for the first time in the marketplace.”
Moran said his group can still sell a new vehicle to first-time buyers without a trade-in, either by sending them to a Jones Junction store with lower-cost new vehicles or by leveraging friendly lenders.
“Banks [have] great programs for first-time buyers,” he said.
Walser also said he doubts a first-time buyer would be priced out in the case of a 10 percent hike changing the price of a $40,000 new vehicle to $44,000.
“That difference on a five- or six-year note I don’t think is putting people out of the marketplace,” Walser said. But a $20,000 used model going to $25,000 could be a larger barrier for some customers, he said.
It stands to reason that eventually, customer demand pent up by the pandemic and supply shortage will be sated.
Are dealers concerned that sticker prices will be too high for consumers to tolerate then? Walser said no. Were sales to slow because of pricing, “you will see a combination of dealer discounts and OEM incentives that will correct that situation and bring it back in line,” he said.