Interest Rates Archives | Page 3 of 5 | Auto Remarketing

UPDATED: Impact surprise Fed rate cut could leave on auto financing

The Federal Reserve sensed the U.S. economy is becoming ill stemming from the COVID-19 coronavirus outbreak, so policymakers made the surprise move on Tuesday by cutting the target range for the federal funds rate by 50 basis points to 1.00% to 1.25%.

Experts at Cox Automotive and TrueCar reacted to the first Fed action outside of regular meetings of the Federal Open Market Committee (FOMC) since the end of 2008 and the financial crisis. Cox Automotive shared its assessment on its blog, Commentary & Voices, mentioning how auto-finance rates have held “relatively high in recent months.” Cox Automotive agreed with other analysts, noting the average APR at 5.69% in February, down from 5.75% in January.

“According to our Industry Insights team, today’s surprise move by the Federal Reserve will not lower interest rates for most car buyers. In fact, the stock market has not responded well to the cut — at the time this is being posted — so vehicle demand could actually be hurt by declining wealth and lower consumer sentiment, which typically follows stock market correction,” Cox Automotive wrote on Tuesday afternoon in this post.

“Bottom line: Stock market volatility, COVID-19 concerns and even the political landscape in this election year are all wild cards that weigh on consumer confidence and may well become a drag on auto sales,” the company’s experts went on to say.

The analyst team at TrueCar weighed in on the development in a message sent to SubPrime Auto Finance News on Wednesday morning.

“By cutting the interest rates by half a percentage point, consumers can potentially save from five to eight dollars per month on their payments, which can save a total of $400-$600 during the duration of the auto loan,” said Nick Woolard, director of OEM and affinity partner analytics at TrueCar.

“However, lowering the rates does not get at the heart of the issue,” Woolard continued. “The coronavirus can still affect overall consumer behavior and, even with lower interest rates, consumer confidence can still negatively impact the automotive industry.”

Federal Reserve chairman Jerome Powell explained why the FOMC unanimously approved Tuesday’s action just two weeks ahead of its regularly scheduled meeting to consider rate adjustments.

“My colleagues and I took this action to help the U.S. economy keep strong in the face of new risks to the economic outlook,” Powell began during his prepared remarks. “The fundamentals of the U.S. economy remain strong. The unemployment rate has been near half-century lows for well more than a year, the pace of job gains has been solid, and wages have been rising. These strong labor market conditions have underpinned solid household spending, which has been the key driver of economic growth over the past year. At the time of our FOMC meeting in January, prospects for continued economic growth remained favorable, and we judged that monetary policy was well positioned to support that outlook.

“Since then, the spread of the coronavirus has brought new challenges and risks,” he continued. “The virus has afflicted many communities around the world, and our thoughts and prayers go out to those who have been harmed. The outbreak has also disrupted economic activity in many countries and has prompted significant movements in financial markets. The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time. We are beginning to see the effects on the tourism and travel industries, and we are hearing concerns from industries that rely on global supply chains. The magnitude and persistence of the overall effects on the economy, however, remain highly uncertain, and the situation remains a fluid one.”

Curt Long, chief economist and vice president of research at the National Association of Federally-Insured Credit Unions (NAFCU), offered this reaction, looking ahead as to what the Fed’s next move might be.

“While a rate cut doesn’t do much to solve the economic and financial consequences of COVID-19, it at least reassures markets that the Fed is ready to offer whatever support it can,” Long said. “And it refocuses policymakers on fiscal responses, which are more likely to have a real impact.

“For its part, the Fed will be hoping that markets remain relatively stable while more data comes in. But with the virus spreading and plenty more room for mitigation response, the risks are still heavily weighted to the downside, and more rate cuts are likely to follow,” he added.

Chief economist Robert Dye and the team at Comerica Bank also considered what the Fed might do next, emphasizing that policymakers work in the monetary world, not healthcare.

“The Fed rate cut comes as the U.S. government and the U.S. economy adapts to the threat of the coronavirus,” Dye began. “It is important to note that there is nothing the Fed can do to change the trajectory of the global coronavirus outbreak. It cannot alter the disruption to global supply chains and the demand destruction due to the temporary cessation of business production and personal travel. However, the Fed can ‘foam the runway’ and do what it can to support and encourage economic activity in the U.S. and foster a quick recovery from the dampening impact of the coronavirus outbreak.

“We believe that there is significant downside risk to the U.S economy from the global coronavirus outbreak,” he continued. “We expect the U.S. economy to slow meaningfully through the first half of 2020. Therefore, the Federal Reserve may decide to cut the fed funds rate further in the months ahead.”

February average ARPs remain stable as retail prices climb again

As purchase preferences continue to skew toward SUVs and trucks, pushing average prices higher, Edmunds noticed what those buyers are being charged to finance that acquisition remained stable in February.

Edmunds reported on Tuesday the average interest rate for new-vehicle financing stayed below 6% for the eighth month in a row. The annual percentage rate (APR) on new financed vehicles averaged 5.6% in February, compared to 6.3% in 2019 and 5% five years ago.

Edmunds data revealed that the share of sales with 0% finance deals stayed flat at 3.6% in February, unchanged from January.

“Interest rates on new cars are in a really stable place right now,” Edmunds executive director of insights Jessica Caldwell said in a news release.

“February is a slower month for auto sales, so shoppers heading to the dealership at this time of year are probably not going to find much in the way of big promotional offers, but they’re definitely getting better interest rates than if they tried shopping at this time just a year ago,” Caldwell continued.

For used-vehicle financing, Edmunds indicated the average APR came in at 8.3% in February, edging slightly higher from January (8.2%) but softening from a year ago (9.0%).

The stable financing metrics should be good news for dealerships and finance companies that are continuing to work customers who are taking on more debt to finance higher-priced vehicles.

In the new-car space, TrueCar and its data and analytics subsidiary, ALG, projected February average transaction prices (ATP) to be up 2.0% or $701 from a year ago and 1.0% or $360 lower compared to January.

“Average transaction prices have increased for 51 consecutive months. This is likely due to the healthy economy and consumers opting for utility vehicles with generally higher price tags,” said Eric Lyman, chief industry analyst for ALG, a subsidiary of TrueCar.

“That being said, there are still plenty of new vehicles for consumers to choose from that are not only affordable, but also offer the latest safety and technology features. Brands such as Kia, Nissan, Hyundai and Honda all have average transaction prices below $30,000,” Lyman continued in a news release.

Nick Woolard, director of OEM and affinity partner analytics at TrueCar, explained which OEM influenced the firm’s data most in February.

“Hyundai has shown the biggest increase in average transaction price this month primarily due to sales of the Palisade, their popular three-row SUV, which has almost twice the average transaction price of other vehicles in Hyundai’s portfolio,” Woolard said. “The all-new Sonata, winner of ALG’s best vehicle redesign of 2020, is also piquing the interest of consumers looking for a Hyundai at a lower price point.”

The valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States was $37,876 in February. They determined new-vehicle prices increased $975 or 2.6% from February of last year while falling $126 or 0.3% compared to the previous month.  

“Many of the major manufacturers increased prices by more than 4% by capitalizing on the shift toward SUVs. However, trucks, especially full-size trucks, are exhibiting weakness,”, for Kelley Blue Book analyst Tim Fleming said in a news release.

“After prices climbed 3% in 2018 and 4% in 2019, truck prices are only flat through February 2020,” Fleming continued. “With the GM and Ram trucks in their second year of production and Ford about to sell-down the current F-150 for its upcoming redesign, this year may be a good time to find a deal on a new truck.”

What can constitute a deal for consumers is how much money OEMs slap on hoods. ALG spotted judicious incentive use in February.

Analysts indicated average automaker incentive spend in February is expected to reach $3,576, up 0.2% or $8 year-over-year but down 4.2% or $158 month-over-month.

ALG calculated that incentive spending as a percentage of ATP for the industry in February is expected to be 10.1%, down 1.8% from a year ago and down 3.3% from January.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds

As projected, Fed leaves interest rates unchanged

Earlier this month, the American Bankers Association Economic Advisory Committee projected that the Federal Reserve wouldn’t adjust interest rates.

Thus far, the forecast from that collection of 15 bank economists is holding true as the Federal Open Market Committee voted unanimously to maintain the target range for the federal funds rate at 1.50% to 1.75%. This week marked policymakers’ first opportunity of the year to make an adjustment.

Fed chair Jerome Powell offered this assessment following the rate announcement.

“The expansion is in its 11th year, the longest on record. Growth in household spending moderated toward the end of last year, but with a healthy job market, rising incomes and upbeat consumer confidence, the fundamentals supporting household spending are solid,” Powell said.

“In contrast, business investment and exports remain weak, and manufacturing output has declined over the past year,” he continued. “Sluggish growth abroad and trade developments have been weighing on activity in these sectors. However, some of the uncertainties around trade have diminished recently, and there are some signs that global growth may be stabilizing after declining since mid-2018.

“Nonetheless, uncertainties about the outlook remain, including those posed by the new coronavirus. Overall, with monetary and financial conditions supportive, we expect moderate economic growth to continue,” Powell went on to say.

The Fed chair’s comments describe a similar path as to what the American Bankers Association Economic Advisory Committee outlined a couple of weeks ago.

“Sustained job gains, low unemployment and strong wage growth will enable consumers to continue supporting the economy, although less robustly than last year,” said Catherine Mann, chair of the committee and chief economist at Citigroup.

“The U.S. economy will be stronger if trade tensions dissipate and other economies stabilize globally. On balance, the risk is to the upside for consumers in that wages could rise more rapidly, especially for those at the lower end of the income distribution, providing greater spending power,” Mann continued. “On the other hand, the risk is to the downside for business investment because of economic uncertainty, as well as concerns about ongoing issues in the aerospace industry.”

Average APR on used & new financing softens as 2019 closes

While most used-vehicle financing metrics closed 2019 at a steady pace, Edmunds noticed the average interest rate for a new-vehicle retail installment contract fell for the third month in a row in December, dropping to its lowest point since February 2018.

Edmunds reported the annual percentage rate (APR) on new financed vehicles averaged 5.4% in December, compared to 5.5% in November and 5.9% in December of 2018.

Edmunds data showed that 22.4% of shoppers who financed their vehicle purchases in December 2019 got an interest rate below 3%, compared to 20.4% of those who financed purchases in December 2018.

“Automakers and dealers gave new-car buyers a lot of reasons to feel some holiday cheer in December,” Edmunds executive director of insights Jessica Caldwell said in a news release.

“Everyone knows new-car deals are usually sweetest at the end of the year, but it’s been a long time since financing offers were this good,” she continued.

Meanwhile on the used-vehicle side, Edmunds determined that while terms and monthly payments in December mirrored the figures seen a year earlier, average APR on used financing dipped to 8.2% while the total amount financed rose by more than $400 year-over-year to $22,660.

Although interest rates took a dip, Edmunds pointed out new-vehicle retail prices are expected to hit near-record highs in December.

Edmunds data indicated that the average transaction price for a new vehicle will climb to $38,377 in December, compared to $37,260 last year and $33,773 five years ago.

“The December numbers aren’t always indicative of larger market trends because people tend to buy pricey luxury vehicles, trucks and SUVs this time of year,” Caldwell said. “This drives up the average transaction price and lowers the average APR since these shoppers can usually qualify for the lowest promotional rates.

“But the fact that rates have been on a steady decline for the last several months bodes well for more favorable financing conditions in 2020,” she continued.

Two other firms weighed in on how new-vehicle prices behaved in December, beginning with Kelley Blue Book.

The valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States was $38,948 in December. New-vehicle prices increased $656 (up 1.7%) from December of 2018, while falling $80 (down 0.2%) from November.  

“New-vehicle transaction prices finished the year on a high note, with the average rising nearly 2% and approaching the record set in November 2019,” Kelley Blue Book analyst Tim Fleming said in a news release. “However, as retail demand fell in 2019, dealer discounts grew, approaching 7% of MSRP in December – the highest since July 2009.

“On a positive note, the discounts appear to be working as the average days in inventory fell by two days from the previous month,” Fleming continued. “With sales expected to be down in 2020, anticipate the pressure to continue on new-car prices and incentives.”

And over at ALG, a subsidiary of TrueCar, analysts there projected average transaction prices (ATP) to be up 2.4% or $836 from a year ago and up 0.5% or $174 from November.

“Average new-vehicle transaction price has increased in every single month of 2019 when compared with the same period a year ago,” said Oliver Strauss, chief economist at ALG, a subsidiary of TrueCar.

“Consumers have continually opted for higher-priced vehicles, including trucks and utilities, but also for luxury,” Strauss continued in a news release. “In this year’s slightly decreasing automotive market, we’re seeing luxury sales declining at a slower pace than mainstream sales.”

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds

More 2020 expectations on affordability and interest rates

As part of its expectations for the 2020 credit market, TransUnion acknowledged that issues surrounding vehicle affordability will continue to persist in the coming year.

But with the Federal Reserve leaving interest rates unchanged this week — and policymakers alluding to the option of repeating the action throughout 2020 — there appears to be some momentum in place to help the auto-finance industry.

Members of the Federal Open Market Committee (FOMC) voted unanimously to maintain the target range for the federal funds rate at 1.50% to 1.75%.

Policymakers explained the labor market remains strong and economic activity has been rising at a moderate rate. They added job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

“As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate,” Fed chair Jerome Powell said this week after the latest interest-rate announcement.

“Looking ahead, we will be monitoring the effects of our recent policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course,” Powell continued.

Considering how interest rates play a role in auto financing, Cox Automotive chief economist Jonathan Smoke made these points on the company’s blog.

“The rate cuts in 2019 did not help the average car buyer. Rates have actually gone up dramatically — more than 2 full percentage points — for consumers with subprime credit,” Smoke said. “Most of the rate gains for borrowers with good credit preceded the last Fed meeting.

“The one factor that could lead to better rates would be more zero or low APR offers from captive finance companies,” he continued. “Those offers tend to be only for consumers with good credit. But with new vehicle supply down, manufacturers may be more conservative over the winter months with incentivized rates.”

No matter the APR, TransUnion expects the amount of risk finance companies absorb will be on the rise.

Analysts projected that average auto balances are expected to grow 1.6% year-over-year by Q4 2020, a slightly slower rate of growth than what they observed in Q4 of this year (1.9%).

TransUnion thinks certain segments of consumers may look to offset these rising costs by opting for extended contract terms, a recent trend taking place in the market.

TransUnion added that originations will flatten relative to 2018, and the share of originations in the prime and above risk tier will remain steady at 66.5%.

“The growth pattern of new auto sales will remain concentrated toward prime and above consumers, while the overall growth curve will flatten in 2020 due to declining new-vehicle sales, said Satyan Merchant, senior vice president and TransUnion’s auto line of business leader.

“External pressures such as higher gas prices and the looming threat of auto tariffs, combined with rising vehicle prices, are all contributing to the concern of auto affordability,” Merchant continued in a news release. “Despite these headwinds, loan performance in the auto industry remains strong. 

“We expect the auto delinquency rate to decrease at a higher rate on a year-over-year basis during the first half of 2020, and serious delinquencies are expected to slightly decline by the end of next year,” he went on to say.

Editor’s note: More 2020 expectations will be included in upcoming online and print reports published by Cherokee Media Group.

APR on new & used financing stays nearly steady in October

As experts from ALG and Kelley Blue Book watched average transaction prices (ATP) for new models climb again in October, Edmunds noticed average interest rates for new-vehicle financing remained below 6% for the fourth month in a row.

Edmunds pegged the average APR on new financed vehicles at 5.7% in October; the same reading as September and down from 6.2% in October of last year.

Meanwhile, the average APR for used-vehicle financing edged slightly lower in October, according to Edmunds, ticking down to 8.4% from 8.7% year earlier.

Edmunds experts say new-vehicle shoppers found much better financing offers this year compared to last October, when interest rates spiked above 6% and stayed there through the first six months of 2019.

“Car shoppers got to take advantage of some decent financing offers as automakers continued their model-year sell-down efforts in October,” said Jessica Caldwell, Edmunds’ executive director of industry analysis.

“Auto loan interest rates still aren’t as low as they were a few years ago, but it’s good news for shoppers that rates appear to be reaching a point of relative stability,” Caldwell continued in a news release.

Edmunds experts noted that the Fed rate cut at the end of the month happened too late to do much for October sales, but could help ease financing conditions for vehicle shoppers through the rest of 2019.

“The end of the calendar year is a popular time for expensive vehicle purchases,” Caldwell said. “Shoppers in the market for a large truck or SUV, or a new luxury vehicle, can look forward to taking advantage of lower financing rates as a bit of an early holiday gift.”

The valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States came in at $38,259 in October. KBB calculated new-vehicle prices increased $1,064 (up 2.9%) from October of last year, while decreasing $141 (down 0.4%) from last month.  

“Average transaction prices were generally favorable for most automakers, as the industry average climbed 3% year-over-year, partially due to the shifting sales mix from cars to trucks and SUVs,” Kelley Blue Book analyst Tim Fleming said in a news release.

“However, car prices did grow by 2% in October 2019, their biggest improvement in nearly a year,” Fleming continued.

KBB added Manufacturers are focusing incentive programs on the increasingly competitive utility segments, helping make those vehicles more affordable to consumers. Analysts said trucks have shown the most strength of any segment with full-size trucks up 3%, while mid-size trucks rose 6%, aided by new and redesigned models. 

And over at ALG, a subsidiary of TrueCar, analysts there projected average transaction prices to be up 2.6% from a year ago and 0.2% from September to reach $35,239.

“With the economy remaining resilient, consumers have not been afraid to opt into premium trims and luxury models leading to higher average transaction prices,” ALG chief economist Oliver Strauss said in a news release. “With incentives up year-over-year, consumers are getting some help to offset the higher transaction prices.”

ALG shared four other additional insights in its latest update, including:

• Honda and Nissan are the only automakers expected to be down on ATP year over year, 2.9% and 1.1%, respectively. Meanwhile BMW is expected to be up 7.1%.

• ALG projects that U.S. revenue from new vehicle sales will reach $47 billion for the month of October 2019, up 1.5% or $717 million from a year ago and 5.5% from last month.

• The ratio of incentive spend to ATP is expected to be 10.7%, up 2% from a year ago but down 5.4% from September 2019.

• In ALG’s Retail Health Index (RHI), which measures automaker brand health, Hyundai and Kia stood out for mainstream brands and BMW and Mercedes stood out for luxury brands due to a mix of strong retail sales and lower incentive spend utilized to drive retail volume.

“The broader shift in consumer preference from cars to SUVs is leading to a notable spike in BMW’s average transaction price, fueled by exciting new or redesigned SUV products in the X5 and X7,” ALG chief industry analyst Eric Lyman said.

“BMW’s strong Retail Health Index performance shows the brand is holding steady with consumers and that they’ve be able to drive volume at higher price points, all while lowering incentives,” he continued.

Added Lyman, “We expect Honda’s drop in average transaction price to be due to an increase in retail share for the Civic, which overtook the Accord as Honda’s best-selling sedan over the last few years and continues to capture share made available by competitors in the segment overall.”

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds

Fed reiterates timing when rate-cut impact truly surfaces

While referencing conditions of consumers who might be purchasing particular vehicles in your inventory or are already contract holders within your portfolio, Federal Reserve chairman Jerome Powell reiterated the impacts made by policymakers involving interest rates do not necessarily fire as quickly as a vehicle’s push-button ignition.

Powell appeared during another press conference on Wednesday afternoon following the Fed cutting interest rates for the third time this year. By a 7-2 margin, the Federal Open Market Committee (FOMC) decided to lower the target range for the federal funds rate to 1.50% to 1.75%. The two committee members who did not vote in favor of the action supported the strategy of leaving the rate unchanged.

The FOMC will conduct its last meeting of the year just before Christmas with the possibility of policymakers pushing rates down again. Powell cautioned that what the Fed already has done takes time to percolate through the economy.

“The policy adjustments we have made to date will continue to provide significant support for the economy,” Powell said during the opening portion of his latest gathering with the media. “Since monetary policy operates with a lag, the full effects of these adjustments on economic growth, the job market and inflation will be realized over time.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2% objective,” he continued. “We believe monetary policy is in a good place to achieve these outcomes.

“Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate,” Powell went on to say. “Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.”

Earlier in his opening remarks, Powell mentioned the upbeat situation in connection with a specific consumer segment; individuals who sometimes need what the subprime auto finance industry can provide.

“The U.S. economy is in its 11th year of expansion, and the baseline outlook remains favorable. The overall economy is growing at a moderate rate. Household spending continues to be strong — supported by a healthy job market, rising incomes and solid consumer confidence,” Powell said.

“In contrast, business investment and exports remain weak, and manufacturing output has declined over the past year. Sluggish growth abroad and trade developments have been weighing on those sectors,” he continued.

“Looking ahead, we continue to expect the economy to expand at a moderate rate, reflecting solid household spending and supportive financial conditions,” Powell went on to say. “The job market remains strong. The unemployment rate has been near half-century lows for a year and a half. The pace of job gains has eased this year, but has remained solid. We had expected some slowing after last year’s strong pace. Participation in the labor force by people in their prime working years has been increasing. And wages have been rising, particularly for lower-paying jobs.

“People who live and work in low- and middle-income communities tell us that many who have struggled to find work are now getting opportunities to add new and better chapters to their lives. This underscores for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind,” he added.

A treat for the industry? Perhaps another rate cut coming

This week, the Federal Reserve released minutes from its September Federal Open Market Committee (FOMC) meeting that resulted in policymakers leveraging their second consecutive opportunity to lower the target range for the federal funds rate after having not taken a downward action in 11 years.

And at least one economic observer is projecting that the Fed will make it three cuts in a row when the FOMC has its next opportunity just before Halloween. What might be sweet for vehicle buyers as well as other finance companies and operators that depend on that rate is it falling below the current mark of 1.75% to 2%.

Another drop would bring the rate back down to a level seen last February. The National Association of Federally-Insured Credit Unions (NAFCU) chief economist and vice president of research Curt Long offered this assessment and projection.

“Last month’s FOMC meeting occurred right at the outset of the repo market volatility which led to sustained intervention from the New York Fed as well as this week’s announcement that the Fed would resume organic growth of its balance sheet,” Long said in a news release.

“The meeting minutes still show some uncertainty on the part of the Fed as to the reluctance of some holders of excess reserves to lend those out even after rates spiked,” he continued. “On the economic front, the committee was relatively upbeat with regard to current conditions, save for weak inflation, but was growing increasingly anxious about downside risks. The main fear was that trade tensions would move from depressing firms’ investment decisions to hiring.

“On the whole, the minutes reflect an easing bias, and given that trade and political risks have not exactly abated since that meeting, NAFCU expects another 25-point cut later this month,” Long went on to say.

Fed chair Jerome Powell also made a public appearance this week but stopped short of agreeing with Long’s prediction.

Powell participated in the penultimate event in year-long series policymakers have dubbed, “Fed Listens Events.” The series has included speakers and panelists from outside the Fed, offering overviews by academic experts of themes that are central to the review. Themes that include the FOMC’s monetary policy since the financial crisis, assessments of the maximum sustainable level of employment, alternative policy frameworks and strategies to achieve the dual mandate, policy tools, global considerations, financial stability considerations and central bank communications.  

“Now is a good time to conduct the review,” Powell said in his opening remarks at this week’s event hosted by the Federal Reserve Bank of Kansas City. “Unemployment is at a half-century low, and inflation is running close to, but a bit below, our 2% objective.

“While not everyone fully shares economic opportunities and the economy faces some risks, overall, it is — as I like to say — in a good place,” he continued. “Our job is to keep it there as long as possible. While we believe our strategy and tools have been and remain effective, the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges — from low growth, low inflation and low interest rates.

“While slow growth is obviously not good, you may be asking, "What's wrong with low inflation and low interest rates?" Low can be good, but when inflation — and, consequently, interest rates — are too low, the Fed and other central banks have less room to cut rates to support the economy during downturns,” Powell went on to say.

Sales & originations might not see immediate lift despite another Fed rate cut

While the Federal Reserve cutting interest rates twice in less than two months certainly has generated plenty of attention, automotive experts aren’t quite so sure the actions will directly lead to immediate upticks in vehicle deliveries and loan originations.

The chief economists at both KAR Auction Services and Cox Automotive shared their perspectives following the Federal Open Market Committee (FOMC) announcing on Wednesday afternoon that it decided to lower the target range for the federal funds rate to 1.75% to 2%. Policymakers lowered the rate by 25 basis points back in July, too.

“It was pretty much an expected move,” KAR Auction Services’ Tom Kontos told SubPrime Auto Finance News during a phone conversation. “Probably if the Fed had not done it, it would have been even more disruptive. The Fed moves have always been something people keep an eye on.

“To the extent that you would think (interest) rates would come down along with the Fed’s reductions, then that’s a potential boost to new- and used-vehicle sales,” Kontos continued. “Probably it’s helping with the issue of affordability on new cars.

“One of the things many of us have been commenting on has been the used-car market has been benefitting from the growing unaffordability of new vehicles,” he went on to say. “Maybe it puts more people who are on the border between new and used, it shifts them back toward new again. How much we see that in the data might be tough to prove. But it’s a factor that's probably going to help the new-car side of the business a little more.”

Cox Automotive’s Jonathan Smoke offered similar thoughts in a blog post. He pointed to what happened in the automotive sector after the Fed cut the rate for the first time in 11 years less than 60 days ago.

“Despite the fact that auto-loan rates did not decline in August, the retail market was strong for both new and used vehicles. The new market benefitted from a surge in incentives as dealers and manufacturers worked to reduce inventories. Lower prices helped average new-vehicle payments come down marginally despite high rates,” Smoke explained.

“The Fed’s prior action to cut rates and stop quantitative tightening didn’t help the auto market last month, but their actions didn’t hurt it either,” he continued. “Time will tell if this additional rate reduction will actually materialize into real, observed rates on auto loans. For now, we doubt rates will come down, and we think September retail sales will depend on high incentives.

“Consumers continue to deal with the most expensive new vehicles in history and record-high finance payments,” Smoke added. “If manufacturers hope to sell more of these expensive vehicles, they will need to keep incentives high. Lower bond rates could make rate subvention less expensive for manufacturers, so we may see more zero- or low-rate offers. However, we may not see many low-rate offers extended to borrowers with less-than-perfect credit.

“Keep an eye on used-vehicle values as well,” he went on to say. “Higher incentives and more discounting on new vehicles reduce demand for used cars and puts downward pressure on used-vehicle prices. If a new version of a model is now priced less, the market eventually cascades that discount down to its older siblings.”

Both KAR Auction Services and Cox Automotive will be represented during a panel discussion about interest rates, the economy and other trends during Used Car Week, which begins on Nov. 11 in Las Vegas. Early Bird Registration discounts are available through Oct. 1 and can be secured by going to this website.

By the time Used Car Week arrives, the last of the Fed’s chances to adjust interest rates will be about 30 days away. Policymakers also can make a move at the end of October, but they’re already not completely united on this latest action. Seven members voted for this week’s cut of 25 basis points while two members wanted to keep the rate unchanged. One member — James Bullard — sought a decrease of 50 basis points.

“Overall, as we say in our post-meeting statement, we continue to see sustained expansion of economic activity, strong labor market conditions, and inflation near our symmetric 2% objective as most likely,” Fed chair Jerome Powell said at the beginning of a news conference on Wednesday afternoon.

“While this has been our outlook for quite some time, our views about the path of interest rates that will best achieve these outcomes have changed significantly over the past year,” Powell continued.

“As I mentioned, weakness in global growth and trade policy uncertainty have weighed on the economy and pose ongoing risks,” he went on to say. “These factors, in conjunction with muted inflation pressures, have led us to shift our views about appropriate monetary policy over time toward a lower path for the federal funds rate, and this shift has supported the outlook. Of course, this is the role of monetary policy — to adjust interest rates to maintain a strong labor market and keep inflation near our 2% objective.”

And just like the analysts at KAR and Cox Automotive, FOMC members plan to keep a close watch on data to craft their next action.

“Well, what we do going forward is very much going to depend on the flow of data and information,” Powell said in a reply to a question later in Wednesday’s news conference. “We’ve seen, you know, if you look at the things we’re monitoring, particularly global growth and trade develops, global growth has continued to weaken. I think it’s weakened since our last meeting. Trade developments have been up and down and then up, I guess, or back up perhaps, over the course of this intervening period. In any case, they’ve been quite volatile. So, we do see those risks as actually more heightened now.

“We’re going to be watching that carefully. We’re also going to be watching the U.S. data quite carefully, and we’ll have to make an assessment as we go,” he added.

New-model APR sinks to lowest point of year, coinciding with Fed action

Perhaps it’s just happenstance that Edmunds spotted the average interest rate for new-vehicle financing softening to its lowest level of the year in the same timeframe as the Federal Reserve making its first interest-rate cut in 11 years.

Edmunds reported on Thursday that the average APR on new models financed during July declined for the third month in a row to settle at the lowest point so far this year at 5.84%. That’s down from 6% in June but up from 5.75% in July of last year.

Edmunds data showed that 35% of shoppers who financed their new-vehicle purchases in July got an interest rate below 4%, compared to 31% of those who financed purchases in June.

For used vehicles, Edmunds determined the average APR came in at 8.6% in July, nearly steady compared to the previous month (8.58%) but 30 basis points above the year-ago reading (8.3%).

“Rising vehicle costs and high-interest rates have been placing immense pressure on the new-car market all year, so it’s nice to see shoppers get a bit of a reprieve,” Edmunds executive director of insights Jessica Caldwell said in a news release.

“Consumers are still in for a bit of sticker shock if they’re coming back to the market for the first time in a few years, but the fact that interest rates are trending slightly lower is helping soften the blow,” Caldwell said.

The valuation analysts at Kelley Blue Book reported the estimated average transaction price for a new light vehicle in the United States came in $37,169 in July. New-model prices increased $1,246 or 3.5% from July of last year, while decreasing $312 or 0.8% from the previous month.  

“While July is expected to come in below a 17-million SAAR pace, the industry average transaction price continued its steady rise, up 3% year-over-year,” Kelley Blue Book analyst Tim Fleming said. “Trucks were the big story in July as new mid-size and full-size offerings helped to drive truck prices up about 3% while contributing to sales growth in this down market.

“With the new 1500 trucks from RAM and GM that came out last year, full-size truck prices have now eclipsed the $50,000 mark, and new heavy-duty trucks from these manufacturers this year will push those numbers up even more,” Fleming went on to say.

No doubt even with a hefty down payment and modest terms, the monthly payment included in that retail installment sales contract is still likely to be a sizeable amount. Cox Automotive chief economist Jonathan Smoke isn’t too bullish about the Fed’s rate cut opening the financial floodgates for a major growth in finance company portfolios.

“We believe retail new-vehicle sales are not likely to improve this year even with moderately lower rates. Even if auto-loan rates were to come down marginally, the prospective new-vehicle buyer is still contending with the most expensive vehicles ever sold,” Smoke wrote in this blog post.

“It is likely the only way we’ll see retail demand for new vehicles strengthen substantially this year is if we see more rate subvention by the captive finance companies and higher incentives that materially lower payments,” he continued.

“It’s tough to predict where consumer rates will be, but given the Fed shifting policy stance from tightening to easing, the best bet is auto-loan rates will be stable to modestly lower. It takes out the risk of higher rates and therefore removes any sense of urgency to buy sooner than later,” Smoke went on to say.

Turning back to the team at Edmunds, Caldwell noted that one reason average interest rates have dipped is due to automakers and dealers sweetening deals in an effort to clear out lingering 2018 models. Edmunds estimated 3% of new vehicles sold in July were 2018 models, the highest level of outgoing model-year sales of any July in Edmunds’ records, dating back to 2002.

“The fact that there are still 2018 models sitting on dealer lots this far into the year is pretty disconcerting, but at least we’re seeing that automakers and dealers are making a greater effort to get shoppers in the door,” Caldwell said.

Looking ahead, Edmunds analysts projected automakers will likely continue to offer subtle interest-rate incentives over the next few months as the summer sell-down season continues, but dramatic cuts aren’t likely.

Caldwell also noted that the Fed rate cut won’t make much of a real difference to consumers’ wallets either.

“People might hear this news and think this means buying a car just got a lot cheaper, but in reality shoppers aren't going to see much of a difference in their car payment from a quarter percent rate cut,” Caldwell said.

“Even with this move and automaker incentives, we expect to see average interest rates lingering in the 5% territory through the rest of the year,” she went on to say.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds