The Fed is making new cars something only the wealthy can afford.
On Nov. 2, the Federal Reserve raised interest rates for the fourth time in seven months. The move raises the rate banks charge each other for overnight loans, requiring them to raise interest rates on the loans and credit cards most consumers use to fund big purchases.
The Fed has moved the rate by a total increase of 375 basis points this year — a rate of change not seen since 1981.
Further increases may be coming, but the Fed signaled that they would likely be smaller and further apart.
“Fed rate hikes are making new cars a luxury — now even the lowest price cars are out of reach for many, and automakers are aiming their products at the richest buyers.”
For a household making $50,000 a year, a $400 a month car payment consumes nearly 10% of their gross income.
The least expensive new car in America for most of 2022 was the Chevy Spark. Factoring in tags, title, and assuming a 10% down payment, a Spark would now cost the average buyer more than $400 a month.
That pushes the least affluent buyers into the used car market. But things aren’t much better there. “In today’s market, subprime buyers are mainly limited to vehicles that are 6-9 years old and with at least 75,000 to more than 120,000 miles,” Smoke says.
Those cars can be expensive to own because they often need constant repair.
Automakers focusing on wealthier buyers
If you were paying close attention, you noticed that we said the Chevy Spark “was” America’s least-expensive new car. Chevrolet recently discontinued the Spark. Hyundai
did the same with its inexpensive Accent.
Cheap cars are disappearing.
“Before the pandemic, the auto industry was already shifting towards more expensive vehicles with a move to more trucks, SUVs, and luxury vehicles at the expense of smaller, more affordable sedans,” Smoke says.
See: 10 cars that are being discontinued this year (and there could be bargains here)
When a microchip shortage left them unable to build as many cars as they’d like, the manufacturers used the chips they could find to produce their most profitable cars — primarily expensive vehicles in expensive configurations.
The Fed’s move, Smoke says, will force automakers to double down on that strategy. “With rates expected to go even higher and stay there for at least the duration of 2023,” he says, “the auto market will become more dependent on cash-rich, higher-income, and higher credit-tier consumers.”
The companies that build our cars will have to “focus on that demand pool” since high earners will be the only buyers able to drive off a dealership lot in something new.
The affordability problem, Smoke says, is “not the Fed’s fault” but “a side effect” of its attempts to control inflation.
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But that effect, combined with the microchip crisis, will snowball. “Transportation in the U.S. is heavily dependent on personally owned vehicles. And unfortunately, an increasing share of the population is running out of options for affordable transportation,” he concludes.
This story originally ran on KBB.com.