High interest rates, prices, continue to stall sales

The affordability crunch for new and used vehicles hits everyone, but high interest rates and  high transaction prices[AR1]  hit dealers   and subprime credit customers the hardest, as illustrated by the just-released Household Debt and Credit Report from the New York Federal Reserve.

Borrowers with superprime credit gained shares in auto loans in the second quarter, according to the report. Meanwhile, the share of loans to borrowers with subprime credit remains flat, the report says.

“Originations are of course overwhelmingly attracted to very high-quality borrowers,” say New York Fed researchers.

What can dealers do about the affordability problem? Selling older used cars is a more-affordable strategy, Karl Brauer, executive analyst for iSeeCars, tells WardsAuto.

“You’ve got a combination of subprime buyers who are unable to realistically afford a car as they are priced today, or to get the financing, and also people who don’t want to take any of that on — not just subprime, but other people, too — and they are simply holding onto their cars longer,” Brauer says.

Older used cars at low prices could get some of those buyers off the sidelines, he says.

The New York Fed defines superprime as credit scores 760 and above. The New York Fed defines subprime as below 620.

The New York Fed reports a total of $179.1 billion nationwide in second-quarter auto originations, almost exactly flat vs. a year ago, an increase of just 0.1%. Total originations include loans and leases, new and used.

Borrowers with superprime credit account for 36.6% of those Q2 originations, the biggest-volume risk tier of all, and up from 35.6% a year ago. Subprime share of originations remains almost exactly flat, at 16.8 percent in Q2, up from 16.6% a year ago.

Meanwhile, auto loan delinquencies are also rising. Loans that are 90-plus days overdue and, therefore, likely to be written off represent 4.4% of the outstanding balance in Q2, up from 3.8% a year ago.

In some cases,  OEMs and their captive finance companies are employing incentives that are only likely to attract prime-risk borrowers, like limiting the best interest-rate incentives to short-term loans, often 36 months, reports the New York Fed. The net effect is to raise the monthly payment but lower the amount of interest over the life of the loan.

In second-quarter earnings calls, some publicly traded new-car retailers say older used cars are a big opportunity.

Bryan DeBoer, president and CEO of Lithia Motors, Medford, OR, says Lithia is looking to increase sales of what the company calls Value Autos — 9 years old or older — at dealerships Lithia acquired in a huge growth spurt the last few years. Some acquired stores didn’t traditionally emphasize used older cars, as Lithia has been doing for years.

“Value Auto sales … is now only 12% of our mix. It used to be in the mid-20% of our mix, meaning that we’re not selling those things that Lithia typically does,” DeBoer says.

He says Value Autos have higher profit margins and sell faster than certified pre-owned units, or what Lithia considers “core” used inventory, defined as 1-to-3-year-old vehicles with up to 40,000 miles.

"We think that there’s a lot of opportunity there,” in growing Value Autos, DeBoer says.