There are lots of outside influences affecting the automobile industry right now, especially as they relate to the broad economy.
Rising interest rates, high inflation, and less household disposable income are just a few of the things that are making car buyers more cautious than a cat in a room full of rocking chairs. But here’s the thing, there’s nothing a dealership can do to affect interest rates or inflation. It’s like trying to stop a runaway train with a toothpick – it just ain’t gonna happen.
CARFAX’s Bob Grill and DJ Sherwood talked about these influences and how they’re affecting the automobile industry — and dealerships specifically — on a recent edition of the Just the Fax podcast.
Fed with a Firehose
The interest rates on new and used cars have been steadily rising ever since the Federal Reserve started raising the benchmark Federal Funds interest rate in the spring of 2022 in an effort to cool down inflation. The average interest rate on a 60-month new car loan rose from 3.85% in December of 2021 to 6.05% in November of 2022. It’s like they’re trying to cool down inflation with a firehose, and it’s hitting car buyers right in the wallet.
Grill said it has long been understood that the automobile industry is a leading economic indicator. “When the public keeps getting fed with a firehose that the world is coming apart and they see inflation and interest rates rising, they get more cautious and slow down their spending, including spending on automobiles,” he said.
Cars are a necessity to a point, but in some ways they’re also a luxury. “There’s no question that rising interest rates and inflation are slowing down the car buying public,” said Grill. “If it comes down to eating meals and buying groceries or making a car payment, guess which one wins?”
Inflation is a reality for families. “Everything costs more now and it’s really starting to add up,” said Sherwood. “And wage growth might not be enough to keep up.”
People are in a Bind
People have accepted the fact that car prices increased substantially over the past couple of years and they kept on buying. But when you add higher interest rates, car prices increase even more when you consider that about seven out of 10 car buyers finance at least part of their purchase, according to Grill.
All of this is starting to put some people in a bind: Car prices and interest rates on car loans are higher, which boosts monthly payments. People have less disposable income because of inflation so they can’t put as much money down. And the length of car notes is increasing to 84 or even 96 months. “I think we might start seeing some of the impacts of this in 12 to 24 months,” said Grill.
Sherwood pointed out some other outside influences that are also affecting the automobile industry. For example, the pandemic is still affecting auto sales, although much less than a couple of years ago. New car production is still down considerably, which is keeping inventory levels low. And while the rental car market is rebounding as more people start travelling again for work, there aren’t as many fleet vehicles on the road.
Resilience is Key
What’s the key take away for dealers? Don’t spend time worrying about outside influences you can’t control. As Grill put it: “If all these uncontrollable events are your main concern, you should just lock your doors and go home. The industry has been very resilient over the past three years and we’ll find a way to stay resilient. In some ways, chaos has become the new normal. It’s not always fun, but it is interesting.”
Sherwood urged dealership owners not to let outside influences force them into a place where they don’t want to be. “Stay on offense, but be cautious,” he said. “Now is not the time to be reckless. Practice due diligence in your decision making because bad decisions now will come back to roost later.”
Want all the details? Listen to the full podcast.
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