What The Fed Rate Cut Could Mean For Car Buyers
Good morning! It’s Thursday, September 19, 2024, and this is The Morning Shift, your daily roundup of the top automotive headlines from around the world, in one place. Here are the important stories you need to know.
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1st Gear: Fed Rate Cut Could Encourage Car Buyers
On September 18, the Federal Reserve cut its benchmark interest rate target 0.5 percent, and that could have positive ripple effects throughout the automotive industry.
Since July of 2023, the Federal Reserve has left its federal funds rate target at 5.25 to 5.5 percent after rate increases started in mid-March of 2022 from what had been a 0 or 0.25 percent rate target. This was all done in an effort to fight inflation, but it had the side effect of raising interest rates available to folks who were financing cars.
Now, the Fed’s tune is changing, and on Wednesday it announced a new rate target of 4.75 to 5 percent. From Automotive News:
“Many Americans have been holding off on making vehicle purchases in the hopes that prices and interest rates would come down, or that incentives would make a return,” said Jessica Caldwell, Edmunds head of insights, in a statement Sept. 16 ahead of the Fed’s announcement Sept. 18. “A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood, especially coupled with some of the advertising messages that automakers typically push during Black Friday and through the end of the year.”
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“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate,” the Federal Open Market Committee said in a statement. “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The vote on the 0.5-point rate cut was nearly unanimous. However, Federal Reserve Governor Michelle Bowman voted against it, feeling the Fed should only have cut the rate by 0.25 points.
In July, the Fed’s inflation metric remained at 2.5 percent, above the 2 percent mark the central bank seeks but better than the 3.3 percent in July 2023 and a significant improvement from 6.6 percent in July 2022.
A Cox Automotive Dealer Sentiment Index survey of 536 franchised dealers from July 23 to Aug. 7 found interest rates were the No. 1 factor dealerships saw as hindering their business, with 67 percent of dealers calling them a challenge. Third-quarter polling a year earlier also saw 65 percent of franchised dealers calling interest rates a problem.
“A reduction in interest rates by the Federal Reserve, something that has been signaled previously, will likely be welcome by consumers who are in the market for a new vehicle, and by dealers who finance their vehicle inventory,” said Satyan Merchant, senior vice president and automotive and mortgage business leader at TransUnion, in a statement Sept. 12. “However, the short-term impact may be muted, and it may take until later in 2024 or even 2025 to see interest rates as well as vehicle prices come down enough for consumer demand to materially increase.
Last month, Edmunds conducted a survey of folks who bought a car in the past and planned to buy one again in the next 12 months. It found that 62 percent of them were putting off the purchase because interest rates were too high. The survey also showed that 64 percent of them said they’d change their timing if the Fed cut rates.
The most rate-conscious people were electric vehicle buyers and consumers under 45 years old. It makes sense. We don’t have any money.
Seventy-two percent of vehicle shoppers younger than 45 said a Fed rate cut would change their vehicle purchase timetable, though so did 57 percent of the older borrowers. Seventy-four percent of the consumers considering an EV next said a Fed cut would impact the timing of their vehicle purchases, while 57 percent of the other shoppers called a cut a factor.
Here’s how prices and payments have evolved over the past few years:
In February 2022, the last full month before the Fed’s rate increases, the average new-vehicle buyer saw a $656 monthly payment and a 4.4 percent interest rate on a $39,772 70-month loan, which meant $5,395 in interest over the life of the loan, according to Edmunds. The average used-vehicle buyer received a $544 monthly payment at 7.8 percent interest on a $31,138 loan over 70.5 months, which meant $7,776 interest.
In August 2023, the first full month of the Fed’s 5.25 to 5.5 percent rate target, the average new-vehicle buyer was borrowing $40,186 and committing to $738 monthly payments at 7.4 percent interest over 68.4 months, resulting in paying $9,227 in interest, according to Edmunds. The average used-vehicle buyer was borrowing only $29,203 over a shorter term of 70.1 months — but at 11.2 percent interest, which left them with higher monthly payments of $565 and paying $10,754 over the life of the loan — nearly $3,000 more in interest than their counterparts in early 2022.
The average new-vehicle borrower in August 2024 was taking out an even larger loan of $40,719 but seeing a 7.1 percent interest rate, slightly lower than a year earlier. After 68.8 months of $737 monthly payments on that average new-vehicle loan, the August customers would have paid their lender an average of $8,988 interest. Meanwhile, the average used-vehicle borrower in August was getting an even higher interest rate than a year earlier at 11.3 percent, though they were only financing $28,052 over a 69.4-month term. They received a smaller monthly payment of $548 and will pay $10,297 over the life of the loan.
Listen, new cars are still too expensive, but it’s always a good thing if they can be made that little bit more affordable for regular people to buy
2nd Gear: ID 4 Production Issue Hurts Volkswagen
Volkswagen has issued a stop-sale and is halting production of its ID 4 electric crossover in Chattanooga, Tennessee as the German automaker scrambles for a remedy to fix faulty door handles.
VW is recalling 98,806 ID 4s because the door handles don’t sufficiently protect against water from getting into important components. The recall includes 2021-2024 ID 4s, and all four of its door handles are included. The issue can lead to printed circuit board malfunctions if water seeps through and causes an “open command” to the door lock while the vehicle is moving. This is less than ideal. From Automotive News:
VW does not have a fix for the issue and said in a statement that it will temporarily stop ID4 production at its Chattanooga factory until a repair is available. The statement said VW will furlough 200 employees at the factory starting Sept. 23.
“We are supporting them by supplementing unemployment from the state of Tennessee so they will still receive 80 percent of their base compensation and will continue to be covered by all current benefits during this time,” VW said in the statement. “We are also exploring ways to support our dealers while we determine a remedy for our customers.”
The stop-sale order applies to new, unsold ID4s as well as pre-owned inventory.
It could be a long road ahead for the ID 4. Andrew Savvas, head of U.S. sales for VW told AutoNews that it aims to have a remedy for the door handle issue in place by 2025.
“We’ve had success with this car in the past,” Savvas said. “It’s now about being fully committed to fix the car as soon as possible and get it back on the road.”
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The recall also impacts ID4s that were built in Zwickau, Germany, according to documents posted on NHTSA’s recall database. Production for the U.S. market shifted from Zwickau to Chattanooga in 2022.
U.S. sales of the ID4 fell 28 percent to 11,857 in the first half of 2024, according to the Automotive News Research & Data Center.
Folks, we’ve been making door handles for a really goddamn long time. Why mess with something that wasn’t broken in the name of innovation or whatever? It just makes no sense to me, and now workers are being impacted by it.
3rd Gear: GM EV Owners Must Pay Up For NACS Adapter
Good news, General Motors EV owners! At long last, you’ll be able to access Tesla’s Supercharger network (starting in October). That means owners can now plug into Tesla’s 17,800 fast chargers. Oh, happy days. There’s a catch though: you’ve got to pay up for the $225 North American Chargining Standard adapter at a GM dealer or on the automaker’s website. A small price to pay. From Bloomberg:
The arrival of the adapters comes just as GM is making a big EV push with a new lineup of sub-$50,000 models. The car company is ready to move past software issues and manufacturing snafus earlier this year, but plans to quickly ramp up EV production could be challenged by sluggish consumer demand — due in part to concerns about charging infrastructure.
GM hopes to see EV sales climb in the second half of this year with the addition of more affordable models and the expanded charger access. A plant in Mexico is increasing output of the Chevrolet Equinox EV, which starts at $42,000 before a $7,500 federal government tax credit, and the Chevy Blazer EV that starts at $49,000.
Owners of GM EVs can use any of about 232,000 public EV chargers in the US, of which 48,000 are fast chargers. The automaker said it will add 400 new fast chargers with partner EVgo Inc. starting from next year. DC fast chargers can add 150 miles of driving range in under 30 minutes, according to Consumer Reports.
This is just the beginning, though. Starting in 2026, all GM EVs will come from the factory with a NACS charging port.
Listen, I know $225 seems like a lot, but for the love of Christ do not buy a knockoff adapter on Temu for $11. It will kill you.
4th Gear: EU Car, EV Sales Are In A Nosedive
New car sales in the European Union are dropping like a rock. In August, they fell 18.3 percent to their lowest mark in three years. The news is even worse for the electric vehicle market which saw its fourth consecutive month of decreasing sales. EV sales dropped 43.9 percent during the summer month in the EU as a whole. The two biggest EV markets on the continent, Germany and France, had 68.8 percent and 33.1 percent drops, respectively. Even PHEVs dropped 22.3 percent. From Reuters:
Sales at Europe’s three largest carmakers Volkswagen, Stellantis and Renault fell from a year earlier, by 14.8%, 29.5% and 13.9%, respectively.
Car sales in Europe are below pre-COVID-19 levels and Volkswagen said in September the trend could continue for the foreseeable future.
Sales at EV maker Tesla fell 43.2% in August, and those for China’s SAIC Motor were down 27.5%.
Here’s why this nightmare for automakers is happening and what car companies are doing to fix the issue:
The shrinking EV sales are partly because of diverging policies on green incentives across the EU, while regulators have imposed hefty tariffs to try to keep out cheap Chinese EVs, potentially adding to purchase prices.
To try to revive the market, Germany agreed in September on tax deductions of up to 40% for companies on their EV sales.
Campaign group Transport & Environment, however, said the market will recover, predicting battery electric cars will reach a total market share of between 20% and 24% by 2025 in the EU, mostly because of lower selling prices.
It wasn’t all bad news, though. Regular hybrids actually gained sales in August, up 6.6 percent. That means their market share is now at 31.3 percent. The people yearn for standard hybrids, apparently.
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