The Federal Reserve has again raised interest rates, but this time only by a quarter of a percent to a target range of 4.5% to 4.75%.
The announcement marks the eighth interest rate hike since the start of last year, the last adjustment arriving last December. Unfortunately, the Fed seems likely to issue even more in the near future. So what does this mean for the car market?
Rising interest rates and coalescing indicators of a recession mean that the auto industry is far from out of the weeds. Since the COVID pandemic began, the biggest concern for dealers and automakers alike has been production. Now, since supply chain stabilizations have helped to overcome this problem, their main worry is affordability.
Monthly auto loan payments and new car prices have skyrocketed since the introduction of interest rate hikes, to all time highs of $777 and $49,507 respectively in December of 2022. Consumers are increasingly more strapped for cash, and their interest in buying a car will only lessen as rumors of a recession grow. Bringing clients back to the dealership will require automakers and storeowners to challenge the affordability issue together.
However, assuming new car prices and payments remain elevated, certain dealers could still profit in the coming months in spite of the interest rates. Used car values have consistently dropped since the start of 2022. Although buyers abandoned the market last year once the vehicle shortage began to wind down, this could soon change. Consumers who have been waiting on a vehicle purchase since 2020 but still cannot afford a new model are likely to turn to the preowned market, as they did in 2021.
The new interest rate hike and the possibility of more down the road are certainly not good news for the auto industry’s short term future. However, there are strategies which storeowners can employ to safely navigate the coming months. By addressing new vehicle affordability and taking advantage of used car sales, dealers can both lead their businesses through the challenges presented by increased rates and prepare them for a normalization, whenever that comes.
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