Cox Lowers Auto Sales Forecast as Rates Rise, 'Outlook Worsening'

Interest rates for cars are likely to hit 21-year records by the end of the year, further raising monthly payments and driving down sales as many buyers hold on to aging vehicles a little longer, Cox Automotive analysts said Wednesday.

During Cox Automotive’s forecast call, the analysts announced lower forecasts on both new and used vehicles for 2022, compared with its previous quarterly forecast in June.

New car sales that in June had been expected to fall 3.4% to 14.4 million this year are now expected to fall 8.1% to 13.7 million.

Used car sales that in June had been expected to fall 8.6% to 37.1 million are now expected to fall 10.6% to 36.3 million.

The forecast for new car sales was reduced for the third time this year not only because supply shortages haven’t improved as much as expected, but also because higher rates are driving up monthly payments.

Cox Automotive Chief Economist Jonathan Smoke said interest rates had risen 2 percentage points in the past year before the Fed’s Sept. 21 rate hike. Typical rates are 7% for new cars and 11% for used cars. By year’s end, he said he expects rates will be 9% for new cars and 13% for used, “which will put rates at the highest level since 2001.”

Charlie Chesbrough, senior economist at Cox Automotive, said expectations earlier this year presumed dealers building inventory quickly as supply shortages eased, and the economic effects of COVID-19 and the Ukraine war subsided.

“With the economic outlook worsening quickly over recent months, it now seems likely that much of the pent up demand from limited supply is quickly disappearing as high interest rates eat away at vehicle buyers’ ability and willingness to purchase,” Chesbrough said.

Reaching the new 13.7 million forecast depends on sales staying at the current slow pace through the fourth quarter. “Even this volume may be difficult if recent rate hikes hit harder than expected,” Chesbrough said.

For used cars, forecasts were lowered because sales, which started the year at a slow pace, have failed to gain the momentum that had been expected earlier this year. Now they will be constrained because higher interest rates are driving up monthly payments.

“It’s more likely that those with affordability challenges will be more likely to hold onto a current vehicle than to buy a newer one,” Chris Frey, senior manager for economic and industry insights, said.

Smoke said economic conditions that had been seeming to brighten have turned darker since the Fed announced its plans Sept. 21 for sustained high interest rates to tame inflation. Consumer sentiment has soured, the stock market plunged and even gasoline prices inched up after 98 days of declines.

“The consumer has been remarkably resilient this year in the face of numerous challenges, but supported by a strong labor market,” Smoke said.

“Now part of the pain that the Fed wants to ensure we see involves necessary job losses,” he said. “I fear what October could do as we start the month with Hurricane Ian bearing down on Florida and we enter the final month for the mid-term elections with an unsure outcome that ensures we will get its maximum negativity over the airwaves and on social media.”

“The worry is of course that consumers will reach their breaking point and pull back and thus give the Fed what they want,” he said.

Smoke said the damage is already being seen in the interest-rate-sensitive housing and auto sectors, which he said together impact almost a quarter of the U.S. economy. “The lethal combination of high prices from limited supply combined now with the highest interest rates in 15 years means that affordability is eliminating lower income and lower credit quality buyers.”

Cox Automotive estimated that the average rate is 14.31% and the monthly payment is $551 for a near-prime buyer paying 10% down and taking out a loan with a 70-month term on a used car with the average list price of $28,980.

By December, Cox said it expects those buyers’ average rate to be 16.31% and average payment to be $567 even though the price will fall slightly to $28,400.

In September 2019, those near-prime buyers would have had a rate of 12.57% and monthly payment of $387 on a $21,272 used car.