U.S. mortgage market signals a cooldown in purchasing, but what about automotive?

The cost of financing a home purchase has risen substantially since the start of the year, throwing water on a blazing-hot housing market. Interest rates have shot up to an average 30-year fixed contract rate of 5.20% as of last week, representing a roughly 2% hike over the same time the previous year. Most of that increase has come since the start of this year, though, with data from Freddie Mac showing a January 2022 average of 3.45%.

For a $300,000 mortgage, the difference in interest rates over a 30-year term adds an additional $208 per month to the payment. Over the full term, homebuyers can expect to pay $111,000 more in interest than they would if buying just three months ago. The total interest paid is almost the same as the purchase price. 

Affordability in the housing market is taking such as massive hit as the Federal Reserve has boosted benchmark interest rates, attempting to quell runaway inflation that’s currently at the highest rate in more than 40 years – 8.5% in the 12-month period engine March 2022.

A less competitive market has already been seen in areas where sellers would have had a red-hot bidding war just weeks ago. Combined with higher payments due to interest rates, the cost of living has surged with utility costs, food costs, and transportation and fuel costs elevated from inflation.

Less dramatic direct effect on automotive purchasing

The direct impact on automotive sales due to rising interest costs is minimal, if at all. For new vehicles, manufacturers offer subvented rates for qualified buyers. And with low vehicle inventory levels, demand continues to be extremely high. On a 1% increase in auto loans, it equates to around $12 more per month for a standard $25,000 auto loan. 

Cox Automotive’s chief economist Jonathan Smoke said in an email, “As rates begin to go up, it usually juices demand a bit as consumers try to get in before the rates go too high.”

However, long-term effects and indirect factors could find that automotive markets are cooled from rising interest costs, albeit to a lesser degree than the housing market. With inflation rates continually high in recent months, affordability is causing worry among consumers regarding general living costs. Higher housing costs, groceries, and fuel leave less expendable income for upgrading transportation, potentially causing shoppers to delay or cancel their purchase plans. 

For those who can afford a vehicle purchase, financing will still be quite reasonable but with potentially tighter qualification criteria.

Smoke says, “It is possible that the rates offered by lenders continue to be relatively favorable relative to what the Fed is doing and what the bond market is doing, but lenders are likely to manage risk in other ways if yield spreads do not expand. For example, higher down payments could be required, terms offered could be shorter, thus increasing payments, or lower credit applicants may have a harder time getting approved.”

Although the Fed’s interest rates are climbing quickly and with more rate hikes expected throughout the rest of the year, dealers need not worry about sales plummeting. The pressure from high demand is a cushion that should ensure dealers continue to see clientele coming through their doors, highly intent on buying the limited inventory that arrives.

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