The good news is the supply situation is much improved from a year ago when dealers didn’t have enough cars to meet demand. The bad news? Sharply higher interest rates make the monthly payment less affordable.
While supply chain issues have largely been resolved, a major reason for the increase in inventory is dealers are selling fewer cars. According to Cox Automotive, inventory levels have been steadily rising since late summer, giving car shoppers more choices.
The supply gains, however, have been uneven, with many bestsellers from Asian automakers hard to find, while many of Detroit’s top products have ample supply. That required some consumers to either compromise or postpone their purchase.
But waiting could carry a price. As inventory improved, the Federal Reserve's aggressive interest rate increases have driven auto loan costs to levels not seen in more than 20 years, pushing some shoppers out of the market due to vehicle affordability concerns. That resulted in a decline in sales.
“This December, there were fewer giant red bows than dealers would have liked,” said Charles Chesbrough, senior economist at Cox Automotive. “Given the large improvement in supply levels, it seems likely that rising interest rates are now constraining demand in the retail auto market. With record-high prices and elevated loan rates, the pool of potential new-vehicle buyers is shrinking.”
Here's how the slowdown may benefit consumers
But the sales slowdown has had an added benefit for consumers. Earlier this year many dealers were charging buyers well above the manufacturer’s suggested retail price (MSRP). Today, dealers are back to accepting below the sticker price, especially on certain brands and models.
Cox Automotive analysts say car sales may continue to slow in 2023 because the Fed is not finished raising a key interest rate. Every time that rate goes up, the interest rate on car loans rises as well.
That could be an advantage for car shoppers in the New Year if they are flexible. Supplies of the most popular vehicles may improve, but if demand remains strong for them dealers and manufacturers may be less likely to offer financial incentives.
However, if dealers find themselves with growing inventories of less popular models they may be required to offer below-market financing and cash back in order to move inventory.