Despite the announcement last week that U.S. auto sales through August are tracking at an annual rate of 17 million units by year-end, certain economic headwinds are possible which would affect both auto manufacturers and lenders in the future. The industry peaked in 2016 with a record 17.6 million new vehicle sales.

While the availability of credit is not a major concern, economists are watching “affordability” of vehicles combined with rising interest rates, said Charlie Chesbrough, Senior Economist and Senior Director of Industry Insights at Cox Automotive.

“As we see it, buying conditions for consumers are worsening and affordability will become a growing issue,” he said last week in an email exchange with AFSA. “Rising interest rates – up nearly 200 basis points over the last two years – are causing monthly payments to rise. In addition, steel/aluminum tariffs are having a modest impact on new vehicle prices and OEM profitability – leaving less money available for incentives. And, behind the scenes, gas prices are much higher over the last two years, which is also eating away at consumer finances. All these issues are likely to continue and/or worsen.”

He said availability of credit is not a major concern for now. However, rising rates and worsening affordability is “pricing” some subprime buyers out of the market. Subprime share of financing is lower, in part, because potential buyers can’t qualify for financing at these higher interest rates. This issue is going to increase over the next few years as the Fed continues its monetary policy tightening.

“This will impact both captives and independent lenders, but clearly lower income credit buyers will be impacted more (and first) since they are more vulnerable to higher costs – so Independents are likely to be hit a bit harder,” Chesbrough said. “However, captives are also being impacted – interest rate subvention is getting more expensive – we already see less 0% financing offers in the market on new vehicles. And, for all dealers, floor plan expenses are also going up from these higher rates, squeezing profits and taking away “wiggle room” on price when negotiating with buyers.”

Chesbrough said although the buying conditions are worsening, it is still a great time to buy a vehicle, and demand for personal transportation will remain high.

“High consumer confidence + low unemployment + still low interest rates = strong demand,” he said. “There will be a shift though. Our expectation over the near term, is that the new vehicle sales volume will drift down a few hundred thousand units while the used market remains stable.”