CHICAGO (Bloomberg) - The American consumers who were stretching themselves to buy or lease a new car are starting to go missing from showrooms.
Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market. In the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9 per cent, according to JD Power.
The researcher's data highlights what's happening beneath the surface of a US auto market in its second year of decline after a historic run of gains.
Automakers probably will report sales in March slowed to the most sluggish pace since Hurricane Harvey ravaged dealerships across the Texas Gulf Coast in August, according to Bloomberg's survey of analyst estimates.
"There's not a bubble of subprime. But as interest rates rise, it's going to affect" those customers first, said Dan Mohnke, senior vice president of US sales for Nissan Motor Co.
"That's the part of the market that's really coming down."
When the financial crisis and recession hit the US a decade ago, many Americans who had been affluent enough to buy new vehicles suffered investment and job losses that hurt their credit scores.
During the recovery, lenders took chances on consumers with lower Fico scores, partially on the notion that borrowers prioritise car payments ahead of other expenses. Several financial companies started to tighten their standards more than a year ago.
Westlake Financial Services has specialised in subprime lending since its founding in Los Angeles thirty years ago.
Subprime loans now make up just 55 per cent of its portfolio, down from 75 per cent five years ago, said David Goff, vice president of marketing.
"Subprime losses increased maybe to pre-recession levels a year or so ago," Goff said in an interview last month. "That caused you to require a little bit more from the subprime customer. And those people, instead of buying a new car, are switching over to a used car."
The silver lining for those who now find new models too expensive is that millions of lightly used cars and SUVs are now coming off lease, providing a good supply of better-equipped, nearly new models at falling prices.
AutoNation chief executive officer Mike Jackson projects that even as new-vehicle sales slip again this year, the combined sales of new and nearly new ones will increase, meaning more business for the nation's largest dealership group and its peers.
The annualised pace of new sales last month was probably about 16.8 million cars and light trucks, according to the average estimate of 11 analysts. That would roughly match the rate in March 2017, which had one fewer selling day.
While rising interest rates under Federal Reserve Bank chairman Jerome Powell will reduce consumers' buying power, tax reform passed by the Republican-controlled Congress and signed by President Donald Trump largely benefited high earners and may support demand for premium brands and well-equipped models.
Through February, sales of vehicles priced at US$40,000 and up rose by 4 per cent, JD Power said, while those priced at less than US$20,000 fell by 19 per cent.
"On a macro basis, we do see that the luxury side continues to grow; prices continue to go up there," Henio Arcangeli, Honda Motor Co's top US sale executive, said in an interview at Bloomberg News headquarters in New York.
"But more in the mass market, pricing is staying firm, so I do say where the industry is probably leaking is on the bottom."