Tighter underwriting standards and vehicle affordability are spurring new-car shoppers to buy used, Lawrence Dixon, senior director of valuation services at J.D. Power, told Auto Finance News.
“In an environment where new-vehicle demand is plateauing, we believe a big reason for that is affordability,” Dixon said. “New-vehicle affordability is becoming increasingly difficult to attain, consumers have more or less maxed out the term, but interest rates moving higher are obviously going to make new vehicles more expensive. Used vehicles as a substitute just look better.”
The issue, Dixon pointed out, is that with more consumers shying away from new cars, the price of preowned vehicles has been on the rise. J.D. Power estimates that used-car values are up 3% year-to-date when prices would normally be down 2%.
“You’re seeing car prices up much more significantly than what we’re seeing for SUVs and trucks,” Dixon said. “As an example, compact car prices are up by 9% year-to-date, which is incredible from an index standpoint. Even prices in absolute terms [are up] — [for] a 2015 vehicle with 15,000 more miles on it this year than last year, the price is still up by about 3%.”
Compounding the situation is the fact that lenders have scaled back their risk appetite, particularly in the subprime and deep-subprime credit tiers, he said, citing data from the Federal Reserve’s Senior Loan Officer survey.
“These folks need a car,” Dixon said. “If they’re not buying new, are they not buying because [prices are too high], because lenders are more risk-averse, or possibly a combination of both?”