No Relief From High New Car And Truck Prices; Subprime Loans Hit Hardest

There’s still no letup in sight for high new-vehicle prices, despite some factors that could dampen consumer demand — like higher interest rates, and an uptick in late payments in subprime auto loans, according to the latest report from Cox Automotive.

“The seller’s market continues,” said Charlie Chesbrough, senior economist, Cox Automotive.

“Through 2022 and into 2023, we’re not going to be seeing a lot of discounting,” on new cars and trucks, he said in a Sept. 8 webinar. “There’s not going to be a lot of inventory, to where the dealer is forced to negotiate with you.”

The auto industry blames the ongoing new-vehicle shortage on a shortage of computer chips, combined with high consumer demand. That combination continues to drive record- or near-record high prices for new vehicles.

In August, the average new-vehicle transaction price was $48,301, up 11% vs. a year ago, Cox Automotive said. That’s also an increase of more than $10,000, vs. August 2019, before the pandemic.

The outlook for the auto industry is still good, because profits are so high, it makes up for the fact that unit sales are down, Chesbrough said.

And even if the general U.S. economy were to slide into a recession, some things that made the Great Recession so bad for the auto industry are absent today, Chesbrough said

For example, in the run-up to the Great Recession, auto loans to borrowers with subprime credit represented a much greater share of the total. From 2006 to late 2008, auto loans to borrowers with credit scores below 620 made up from 25% to more than 30% of the total, vs. less than 20% today, Cox Automotive said.

Today, customers with subprime credit are already just about priced out of the new-vehicle market, and they are even to an extent getting squeezed out of the used-vehicle market, by high prices and by customers with better credit histories buying up used vehicles as a more affordable alternative to new.

That means in a recession, the auto industry has less at stake, if loans to borrowers with subprime credit start to go bad.

The U.S. auto industry also typically enters a recession with a lot of unsold new cars and trucks in inventory; with profit margins low, and incentives high, as automakers offer bigger discounts to try and move the metal.

That situation is reversed today. New-vehicle inventory is low, and so are discounts. Consumer demand is high, relative to supply, Chesbrough said.

Borrowers with subprime credit are vulnerable, he said. Delinquency rates on average for the whole industry “still look fairly normal,” he said. “But you are seeing subprime rates are starting to rise, in fact hit record levels,” he said. “They are starting to feel some of the heat.”