Interest rates are now at their highest level in 22 years, after the Federal Reserve Board raised rates by a quarter point this week once again raising the price of loans for new vehicles.
So far, however, the rising rates have not seemed to deter automotive sales, which have been stronger than expected during the first half of the year.
July sales number look strong
Cox Automotive estimated this week that July new-vehicle sales will jump 15.3% in sales volume year over year when July sales numbers are released next week. July is shaping up to be another solid month for the new-vehicle market, with improved inventory levels having the expected impact, according to Cox.
Cox also said with rising inventories in place, the upward movement of pricing appears to be easing as well, Cox analysts said.
“The fact that average transaction prices are up a meager 1.6% year over year in June is notable,” said Michelle Krebs, executive analyst at Cox Automotive. “A year ago, the industry was looking at transaction prices that were consistently up 10% to 12% year over year. With no inventory in place, it was inflation gone wild.
“Now, as inventory has been consistently building and supply and demand are finding a balance, the price gains seem to be well under control. In fact, average transaction prices are down from the start of the year. That’s good news for shoppers.”
Incentives begin to reappear
Jessica Caldwell, Edmunds’ executive director of insights, also noted carmakers are beginning to offer more incentives.
The good news for new car buyers is that automakers have gradually offered more subsidized loan programs as inventory has improved and stabilized. That should take some of the sting out of rising interest rates for qualified consumers with good credit, with the caveat being a shorter loan term than desired in many cases. All other shoppers will need to tread cautiously if they plan on financing a car purchase this year, Caldwell said.
Added Caldwell, “Despite average interest rates hovering above a hefty 7% in the second quarter, new vehicle sales have been robust for the broader industry. This can mostly be attributed to pent up consumer demand that has been building for a few years, as well as fleet operators finally getting new vehicles. Healthy sales should carry on for the remainder of the year barring any major disruptions to the supply chain or vehicle production.”
The Fed could raise interest rates another quarter point this fall, putting more pressure this fall as the board’s inflation hawks continue to express concern about rising food and energy costs.
Despite another week of lackluster demand for gasoline, pump prices rose three cents since last Thursday to $3.58, reflecting the higher price of crude oil, which has recently increased to the mid-$70s per barrel, AAA reported.
Nonetheless, the auto industry continuing strength is helping the overall economy.
Gross domestic product — the broadest measure of economic growth — exceeded expectations in the second quarter, growing at a 2.4% rate that marked the fourth straight quarter of positive growth and underlined the resilience of the U.S. economy.
Economists polled by Bloomberg had been expecting GDP growth of around 1.8%, meaning the 2.4% growth was a surprise in light of earlier predictions of a recessions this year as higher interest slowed or choked off growth.