Down payments for new and used cars are higher than ever as car loan delinquencies rise
Several months ago, OpenClose™ posted a blog that detailed how soaring car payments could impact a borrower’s ability to qualify for a mortgage or access funds for a desired home at current prices. Now, continued interest rate hikes make this conversation even more compelling, as car new payments have risen from $700 in May 2022 to $762 per month (as of November 2022). That’s a nearly 9% increase in 7 months! And, because a person’s car payment impacts their debt-to-income (DTI) ratio, it stands to reason that higher car payments could impact the mortgage lending landscape or at least the purchasing power that potential buyers have.
Monthly Car Payment Can Be Higher than $1,000 / Month
Higher car prices combined with higher interest rates generally mean higher monthly auto payments (unless the down payment increases, which is discussed below).
Recently, 15.7% of consumers who financed a new car in Q4 2022 committed to monthly payments at or above $1,000 a month. This is over a 49%+ increase when compared to Q4 2021 (when 10.5% of consumers had a monthly payment of $1,000+) and a 134%+ increase when compared to Q4 2020, according to data from Edmunds. “Just as new and used car prices finally started to cool off in Q4, rapidly rising interest rates created an even greater barrier to entry for consumers who rely on financing — which is the vast majority of car shoppers,” said Ivan Drury, Edmunds’ director of insights.
Are Rising Car Payment Delinquencies a Canary in the Housing Market Coal Mine or Just a Blip?
As free money flowed and loan accommodation programs arose, consumers purchased cars—maybe at prices they couldn’t afford (if that money were ever to dry-up). Certainly, that doesn’t apply to all, but recent numbers show it applies to some as car loan delinquencies of auto loans 30 – 59 days past due came in at 2.00% while auto loans 60 – 119 days past due also rose when compared to November 2021.
So, as more borrowers experience loan repayment challenges on their autos, a reduction in their credit scores could result in a smaller pool of credit quality, mortgage borrowers, and/or higher rates for the homebuyers who still can qualify for a mortgage thus potentially creating additional downward pressure on home prices.
Of course, this data isn’t an overly concerning trend—yet! But we should all be keeping an eye on it!
Are Electric Vehicles (EVs) a Choice Between Climate Change and Home Values?
Higher fuel costs and climate concerns that many scientists believe are created by fossil fuels are moving some car buyers to EVs as buyers perceive EVs as an environmentally favorable option (environmental impacts that are created to supply the natural resources for these EVs are for another conversation). And these EVs run at a higher cost, making the monthly payments challenging for many.
Despite the price point, the intent to purchase an EV is up 3 percentage points year-over-year in the US, with an identical increase recorded for hybrid electric vehicles and plug-in hybrid electric vehicles, Deloitte said in its “2023 Global Automotive Consumer Study.” So, should these greater EV prices continue, how much more of a bite could those payments take out of a potential homebuyer’s affordability?
Offsetting Monthly Car Payments with Larger Down Payments
Higher interest rates, mean it’s now necessary for some car buyers to put more money down on their ‘new to them’ vehicles. Edmunds says the average down payment for new and used vehicles hit record highs in Q4 2022, climbing to $6,780 and $3,921, respectively.
And, of course, the more a car buyer puts down on a car, the less they will have to put down on a home purchase, thus lowering how much home they can afford and creating a situation where PMI could be more likely.
What Could This Mean for the Mortgage Market?
Does this mean some potential homebuyers will put off a desired / needed move because they simply can’t afford it (either due to reduced savings, higher DTI and / or a higher interest rate due to a reduced credit score)? And will this lack of affordability ultimately further dampen housing demand, therefore dragging home prices down even more? Certainly, the rising costs of just about everything—including cars—is possibly going to negatively impact the housing market in more markets down the road (pun unintended), but exactly how far that trip will be is yet to be determined.