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Auto industry could see billions in losses if interest rates spike

Leasing may become a popular option for car buyers, as dealers offer them fewer incentives.
Image: A pedestrian walks past a pre-owned car sales lot in Miami on Jan. 12, 2022.
A car lot in Miami. One analyst said the average price of a used vehicle rose nearly $8,000 over the last two years.Chandan Khanna / AFP - Getty Images

The prospect of rising interest rates has the automotive industry on edge.

If the Federal Reserve decides to increase interest rates, as it suggested it would soon this week, automotive experts say the industry could lose $22 billion in sales.

Consumers could also purchase 150,000 fewer new vehicles and 500,000 fewer used ones, experts said.

Those expected rate hikes are likely to happen at the end of the central bank's next policymaking meeting — and almost exactly two years after it slashed rates to zero in response to the emergence of a fast-spreading coronavirus that threatened to destabilize the entire financial system.

Hiking rates would likely affect several U.S. sectors along with the automotive industry, with some analysts contending the increase will trigger more uncertainty in the auto world.

Tyson Jominy, vice president of data and analytics at the consumer intelligence company J.D. Power, said usually there is an automotive roadmap for when interest rates spike and decrease, but little precedent exists for a global pandemic and an auto supply-chain shortage.

“We don’t have a lot of experience with increasing rates with nothing to sell,” Jominy said.

The global chip shortage seems to be coming under control, but there are still widespread worries about other supply chain disruptions affecting rubber, plastics and steel, which has made it difficult to manufacture vehicles, NBC News reported. Wall Street has underscored concerns about rising interest rates and inflation.

J.D. Power estimates spiking interest rates would lead to a $15 billion loss in used vehicle sales and another $7 billion in losses on new vehicles.

“Interest rates have been the one area of relief for consumers that want to buy a vehicle because prices right now are at all-time records,” said Jessica Caldwell, executive director of insights of Edmunds, a car shopping researching website.

She added that consumers have banked on getting high value for their trades and low interest rates for car purchases.

In December, a new vehicle averaged $45,000, compared to $35,034 during the same month two years before, Jominy said.

The average cost of a used vehicle was $30,790 in December, compared to $22,855 in that same month two years prior, he said.

“Prices aren’t going to slow down even if interest rates keep increasing,” said Peter Nagle, senior research analyst at the data research firm IHS Markit. 

Leasing may become a popular option for car buyers because that was the trend heading into pandemic, he said.

Whereas in the past, car dealerships would have offered more incentives for consumers to buy vehicles, that probably won’t be the case in today’s climate.

Automakers have halved the incentives they traditionally offer — to around $1,900 for the typical new vehicle in December, according to industry data reported by NBC News.

“These aren’t small purchases that people are making,” Caldwell said. “Because inventory has been so tight due to the microchip shortage it hasn’t been necessary for automakers to offer incentives and they’re selling every car that they have above sticker price, which is something we thought would never happen.”

Interest rates this year will be less favorable for vehicle buyers, particularly those with lower credit scores, Cox Automotive chief economist Jonathan Smoke wrote in a blog post Wednesday in response to the Federal Reserve's announcement.

The Fed has found itself in its first major battle with inflation in decades, after two years of easy monetary policy implemented to counter the economic and financial impact of the pandemic, CNBC reported. The consumer price index in December rose 7 percent, the highest since 1982.

Traditionally, if automakers had more production and inventory, they could increase incentives and competitive rates, but there aren’t enough vehicles being built right now to meet demand, Jominy said.