SAN FRANCISCO -

The newest financing data from Edmunds and Kelley Blue Book reinforced how the newly installed chairman of the National Automobile Dealers Association didn’t mince words as the auto industry gathered for annual festivities in San Francisco.

“Affordability is an issue. All of the new technology, safety features and fuel economy add costs. That’s a real concern,” current NADA chair Charlie Gilchrist told fellow dealers and finance company executives who assembled for the closing day of the Vehicle Finance Conference hosted by the American Financial Services Association.

On Friday, Edmunds arrived with information to illustrate just how much of a potential issue affordability is becoming for possible buyers walking into your showroom, scanning online inventory or completing financing applications.

Edmunds reported that tightening credit conditions and rising vehicle prices continued to squeeze consumers in January. Due in part to an evaporation of zero percent financing deals, the average annual percentage rate (APR) on new financed vehicles hit the second highest point in 10 years in January, averaging 6.19 percent.

The newest reading is up from 4.99 percent last January and 4.22 percent five years ago.

Additionally, the average transaction price of a new vehicle is expected to hit a near-record high of $37,150 in January, and zero percent financing offers dropped to their lowest level since 2006.

The analysts at Kelley Blue Book reported similar figures. They indicated the estimated average transaction price for a light vehicle in the United States was $37,149 in January, up 4.2 percent or $1,481 from January of last year.

“Car shoppers who are returning to the market for the first time in a few years could be in for a big shock,” said Jessica Caldwell, Edmunds’ executive director of industry analysis. “Vehicle prices and interest rates are so high right now that consumers are facing the very real possibility of spending thousands of dollars more on a new vehicle than they did last time they purchased a new car.”

And depending on which new model they choose, that sticker and financing shock could be intense.

“There are several factors contributing to strong average transaction prices, which climbed 4 percent year-over-year,” said Tim Fleming, analyst for Kelley Blue Book.

“First, Tesla has approached BMW and Mercedes-Benz U.S. sales numbers in recent months with even stronger transaction prices,” Fleming said. “Also, full-size trucks are more popular than they have been for over a decade, and the new Chevrolet Silverado, GMC Sierra and Ram 1500 pickups helped drive prices up.”

Although Edmunds experts noted that sales in January showed relative strength and the overall impact of the polar vortex across the Midwest was minimal, analysts caution that sales are likely to take a turn through the rest of 2019.

 “Although January saw a slight lift, higher fleet sales give the false appearance of a more robust sales month,” Caldwell said. “If the economy starts to slip for any reason, we could see significant repercussions for the overall market.” 

Encouraging employment news

At least for now, it appears consumers will need vehicles to get to their employment while gaining income to handle those financing commitments. The trend stems from the U.S. Labor Department’s January Jobs Report also released on Friday.

U.S. Secretary of Labor Alexander Acosta said January’s Job Report demonstrated “the strength of the American economy” as the January Employment Situation report indicated 304,000 jobs were added. Acosta said private sector job creation continued to surge despite the partial government shutdown.

Acosta also noted significant growth in the mining, construction, and transportation and warehousing sectors led the report.

Officials pointed out the unemployment rate ticked up by 0.1 percentage point to 4.0 percent, largely as a result of the temporary lapse in federal government funding. However, January represented the 11th consecutive month that the unemployment rate has been at or below 4.0 percent.

The federal agency went on to mention average hourly earnings rose by 3.2 percent, marking the sixth straight month in which year-over-year hourly earnings have been growing at or above 3 percent. Average weekly earnings rose at an even more robust 3.5 percent year-over-year.

“Another key indicator in the report pointed to the increase of the labor force participation rate to 63.2 percent, the highest rate since August 2013,” Acosta said.

“As the jobs and employment data normalizes over the coming months, we are confident the nation’s economy will continue to build on the strength seen in 2018 and the first report of 2019,” he added.

The latest employment data also impressed Curt Long, who is chief economist at the National Association of Federally-Insured Credit Unions (NAFCU).

“The January jobs report showed no signs that hiring is slowing down,” Long said. “The slight uptick in the unemployment rate owes to the highest rate of labor force participation in over five years.

“Wages growth slowed, which suggests there is still room to run. It also supports the Fed’s patient stance on rates, as inflationary pressures remain muted,” Long added.

Resilient auto industry

Brad Korner, general manager for Cox Automotive Rates and Incentives, described how OEMs didn't lean on a crutch of the past to keep metal rolling over the curb.

"Automakers in January continued a relatively tempered, measured approach to incentives. Our team was tracking fewer programs in the month, notably fewer at Ford, which uncharacteristically held steady and offered fewer-than-normal regional programs," Korner said.

"In January, lease pull-aheads remained popular and there was continued healthy spending on full-size pickups trucks, notably from Ford and GM, who both have money and programs in place on 2019 models to compete with the new RAM model which is offering less incentives due to a high consumer demand," he continued.

"The incentive business is experiencing a transition away from incentive promotion and toward a focus on monthly payments for both finance and lease deals. This is likely to combat the affordability issues and help consumer with budgeting for a new vehicle," Korner went on to say.

"Also, as more digital retailing solutions are offered, consumers are finding more transparency in the deal, with less emphasis on the amount of a rebate or incentive and more emphasis on the resulting monthly payment," he added.

No matter what headwinds might appear in terms of elements like affordability — especially if the Federal Reserve continues to adjust interest rates — Gilchrist is confident dealerships will still be turning used and new metal throughout the year. Along with being NADA chair, he is also president of Gilchrist Automotive, which includes Buick-Chevrolet-GMC, Chrysler-Dodge-Jeep-Ram, Ford, Nissan and Volkswagen franchises at five Texas dealership locations in the Dallas-Fort Worth area.

“We respond well to our local markets,” Gilchrist told the auto finance community during AFSA’s event. “This is a fun business, but it’s an intense business. We have to smile every day and keep our attitude right.”

New-Car Finance Data

 

January 2019

January 2018

January 2014

Term

69.1

69.2

65.9

Monthly Payment

$551

$524

$476

Amount Financed

$31,707

$31,236

$27,573

APR

6.19

4.99

4.22

Down Payment

$4,191

$3,914

$3,628

 

Used-Car Finance Data

 

January 2019

January 2018

January 2014

Term

67.2

66.9

64.4

Monthly Payment

$407

$384

$363

Amount Financed

$21,763

$21,084

$19,441

APR

8.88

7.83

7.58

Down Payment

$2,614

$2,473

$2,200

Source: Edmunds