The Board of Governors of the U.S. Federal Reserve System announced the largest increase to its benchmark interest rate in 22 years yesterday. It also announced plans to start selling the $9 trillion stockpile of Treasury Bonds and mortgage-backed securities it has accumulated. Both moves should further tighten credit.
What will they mean for car shoppers?
About Housing More than Cars
Both moves are designed to combat inflation. Inflation has impacted everything Americans pay for in 2022. But, though car prices have made headlines, the housing market has been far more volatile than the auto market.
“Prior to today’s changes, the average 30-year mortgage rate had increased by 230 basis points since the end of December,” says Cox Automotive Chief Economist Jonathan Smoke. “Auto loan rates have also moved higher but not by as much.” Average auto loan rates have moved up about 70 basis points on new car purchases this year. For used cars, rates have increased by 75 basis points.
The Fed’s move will make financing big-ticket items more difficult – that’s the point. But it will affect house hunters far more than car shoppers.
Effects on New Car Shoppers
New car prices have risen dramatically since the beginning of 2021. But much of the cause is beyond the Fed’s control.
“The Fed’s moves likely won’t impact new vehicle sales, which are already being limited by the lack of supply,” Smoke explains.
A worldwide microchip shortage and other supply chain challenges, including the war in Ukraine and an increase in the cost of transporting parts, have all conspired to leave automakers unable to build cars fast enough to meet demand.
Those are the factors that need to change to bring new car prices down, Smoke says. “The new vehicle market is likely to remain inflationary as supply remains very tight and is not likely to improve substantially before 2023,” he adds.
New car prices have declined slightly in recent months but remain well over sticker.
While the Fed’s move may have little impact on the final purchase price of most new cars, it will increase the cost of monthly payments. Each 1-point increase in auto loan rates adds about 3% to the average monthly payment. For buyers looking to get the lowest possible monthly payment, “the clock is ticking,” Smoke says.
Effects on Used Car Shoppers
Used car prices had already begun to decline before the Fed’s announcement. March marked the third straight month of declining used car prices.
The spring months typically bring an increase in used car sales as Americans begin receiving tax returns. The IRS is behind its normal pace in issuing returns this year, delaying the bounce. But Cox Automotive analysts still expect to see it.
The fundamentals affecting used car prices remain intact despite the Fed’s move. Higher new car prices are still sending some shoppers to used car lots instead.
Car dealers are also still short on higher-mileage, older used cars. Automakers simply built fewer cars for several years after the 2008 financial crisis, leaving fewer for today’s used market.
So used car prices have been resistant to change but have fallen in recent months. “Used vehicles have already returned to being depreciating assets in 2022,” Smoke says.