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Smoke on Cars

Auto Market Weekly Summary: March 27


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Article Highlights

  1. Access to auto credit tightened due to the banking crisis; sales momentum may fade
  2. Federal Reserve increased its rate by a quarter point
  3. Home sales and housing starts improved but could stall on higher rates

The Federal Reserve increased the Fed Funds Rate by a quarter point despite the still-evolving banking crisis. Even before the Fed’s move, auto credit access tightened in March due to the banking situation.

Interest rates are going higher because of widening yield spreads while terms are shortening. Both make payments move higher. Momentum for vehicle sales will likely fade and fail to live up to typical spring patterns because of affordability challenges.

The housing market may see similar issues from credit tightening, despite a strong start to the year. Home sales improved in February as buyers responded to lower mortgage rates. Jobless claims remain at low levels, especially relative to the job base.

Auto Credit Access Tightened; Sales Momentum May Fade on Rate Hike

Auto credit access expanded in February. Cox Automotive’s Dealertrack Auto Credit Total Loan Index measured auto credit loosened as the approval rate improved, the subprime share increased, and the share of loans with negative equity grew. However, rates increased, and terms shortened. Preliminary data shows auto credit access reversed course and tightened during the first half of March, with the widening of yield spreads and shortening of terms.

The Federal Reserve increased the Federal Funds rate by 25 BPs last Wednesday despite the still unfolding banking crisis. The Fed Funds Rate is now 4.75% to 5.00%, the highest since 2007. The Fed softened its language regarding needing additional increases. The median expected terminal Fed Funds Rate remains 5% to 5.25%, which indicates one more 25 BPs move left.

Auto loan performance deteriorated in February, but the pace of deterioration slowed. Loans that were delinquent for 60 days or more increased in February for the tenth month in a row and were up 21.9% from a year ago.

In February, 1.90% of auto loans were severely delinquent, an increase from 1.89% in January and the highest severe delinquency rate dating back to 2006. Compared to a year ago, the severe delinquency rate was 32 basis points higher. In February, 7.34% of subprime loans were severely delinquent, an increase from 7.30% in January and the highest severe delinquency rate dating back to 2006. The subprime severe delinquency rate was 135 basis points higher from a year ago. Higher delinquencies are still not leading to pre-pandemic levels of defaults, but defaults are increasing. Loan defaults increased 2.2% in February from January and were up 16.2% from a year ago.

Home Sales Improved but Could Slip on Even Higher Mortgage Rates

Existing home sales increased in February for the first time in over a year. The existing home sales SAAR increased 14.5% to 4.58 million from 4.00 million in January. At the February rate, existing home sales were down 22.6% from a year ago but at the best pace since September.

Inventory was unchanged at 980,000 units, up 15.3% from last year. The National Association of Realtors reported that buyers were responding to lower mortgage rates. Inventory keeps moving quickly, as 57% of the homes sold in February were on the market for less than a month, and the typical time on the market was 34 days, up from 33 days in January and up from 18 days in February last year. The months’ supply of homes for sale declined to 2.6 months, which is less than half of what is considered normal and was the lowest supply level in nine months.

The median sales price increased to $363,000, which was up down 0.2% from a year ago.

New home sales, based on new contracts signed on newly constructed homes, delivered a small gain in sales when a decline had been expected in February, but prior sales were revised down. New home sales at an annualized pace of 640,000 were up 1.1% from January but down 19.0% from last year. January’s sales were revised down. Compared to February 2019, new home sales were up 0.3%.

New home inventory declined 0.7% from January but was up 10.1% from last year. New-home supply fell to 8.2 months, which is about 33% higher than what is considered normal. The share of new homes sold that are finished units is declining. The share was 35% in February, down from 40% in January. Total home sales were up 12.7% for the month and down 22.2% from last year.

Labor Market Still Strong but Not as Strong as a Year Ago

Seasonally adjusted initial jobless claims declined by 1,000 to 191,000 for the week ending March 18. Non-seasonally adjusted initial claims fell by 4,700.

Continuing claims, representing people who previously filed and remain on traditional unemployment compensation, increased by 14,000 w/w, pushing the total to 1.69 million as of March 11. That level of continuing claims was 69,000 lower than before the pandemic.

The broadest measure of continuing claims declined by 61,500 to 1.94 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 40,600 over the last four weeks and is 164,000 lower than the pre-pandemic level but at the highest level in a year.

The labor market is not as strong as it was a year ago, but there is little evidence of major deterioration in the jobless claims data. Moreover, jobless claims remain at historically low levels relative to the job base.

Today: Join us for the Q1 2023 Cox Automotive Industry Insights and Forecast Call hosted by Chief Economist Jonathan Smoke and the Industry Insights team on Monday, March 27, at 11 a.m. EDT. During this 90-minute session, you will hear how the auto industry performed in the first quarter and how the Cox Automotive team sees the industry progressing this year.

Jonathan Smoke is the chief economist at Cox Automotive.

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