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        home > news > Sales > New Vehicle Buyers Face Squeeze as Interest Rates Climb

        New Vehicle Buyers Face Squeeze as Interest Rates Climb

        Rate rise combined with used vehicle price drop causing problems.

        Joseph Szczesny
        Joseph Szczesny , Executive Editor
        Feb. 08, 2023

        Affordability is a challenge for carmakers and their customers who must contend with rising interest rates and falling trade-in values. Those two factors are combining to reduce their purchasing power as the price of new vehicles have reached an all-time high.

        Dealer profits
        Buyers are facing increasing car payments as interest rates are rising and used car prices are falling.

        Speaking during the annual Society of Automotive Analysts Automotive Outlook Conference, Colin Langan, a senior analyst with Wells Fargo Bank, noted the price cuts announced by Tesla and Ford indicate “the pricing part is over” for manufacturers and dealers.

        Tesla price cuts putting pressure on more than EVs

        The price cuts by Tesla also put pressure on what could be considered mainstream vehicles with gasoline engines, such as the Ford Explorer or Toyota Highlander, which now run about $46,000, Langan added.

        While the industry is facing the prospect of price, the benefits for consumers are scarce. Interest rates on car loans have increased by 300 basis points, or three percentage points, while the value of their used vehicles are falling and likely will continue to do so, Langan says.

        The Manheim Used Vehicle Value Index, which tends to fluctuate, is down 12.8% from a year ago.

        Previous increases in the value of used vehicles during the past couple of years helped blunt the inflation reflected in the rising prices. But the current scenario of higher interest rates and lower used car values leaves consumers facing a modern day equivalent of sticker shock as their monthly payments jump and in many cases doubles, he says.

        Tow truck car carrier semi trailer on highway carrying batch of damaged cars sold on insurance car auctions for repair and recovery. Vehicles shipment and rescue service
        New vehicle inventory levels are on the rise for some automakers.

        Langan suspects retail sales have begun to soften because customers are looking for price cuts — and aren’t finding them. Automakers shored up their sales figures by filling more orders from fleet customers, according to recent sales reports. 

        Although the inventories of some dealers and manufactures are increasing, the supply chain problems of the past three years have disrupted the supply of some vehicles, he said. Meanwhile, the rising inventories of some manufacturers increase the prospects for the price wars to escalate.

        There is still a lot of pent-up demand, he notes.

        EV buyers face high cost for raw materials

        However, that unsatiated demand doesn’t necessarily apply to electric vehicles. EV makers are running into some major economic headwinds such as the rising price of battery materials.

        The chances of $100 per kilowatt-hour battery have dwindled as the rising cost of materials has pushed the price of batteries closer to $160/kwh. The chances of battery-electric vehicles reaching cost parity with a vehicle with an internal combustion engine have receded, and it may not happen until well beyond 2030.

        Closeup of front side of red car with other cars parking in parking area.
        The Manheim Used Vehicle Value Index, which tends to fluctuate, is down 12.8% from a year ago.

        The tax credits tied to the Inflation Reduction Act will help mitigate some of the cost pressures, but not all of them, he noted.

        Jay Hwang, who analyzes trend in the battery industry for S&P Mobility, says materials used in cathodes, such as cobalt and nickel, will remain in short supply as will the lithium used in lithium-ion batteries. Since it takes 10 years to develop a new mine for the materials used in batteries, they will remain in short supply throughout the coming decade because of the rising demand. The massive tax credits for processing battery material and making batteries in the U.S., which are worth an estimated $4.5 billion, will help stimulate the growth of the battery business.

        Meanwhile, China will have a dominant position in processing battery materials, despite with the implementation of the IRA tax credits.

        Steve Brown, senior director, Corporate Ratings, Fitch Ratings, told the conference on the positive side is outlook for the industry appears relatively stable. Given the general economic outlook, the industry with a few exceptions is much better shape financially, he says.

        “It’s not like it was in 2007 and 2008” before the Great Recession,” Brown noted. The auto industry is much better prepared for a recession, which should relatively be mild in any case.

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