LARRY P. VELLEQUETTE

Why a squeeze is coming to auto dealers

Larry P. Vellequette is a reporter for Automotive News.Larry P. Vellequette is a reporter for Automotive News.
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TRAVERSE CITY, Mich. -- Take note: there is a squeeze coming to an auto dealer near you.

Two important factors to new automotive sales -- low interest rates and relatively high values for used automobiles – are forecast to move in unwelcome directions that soon will make it more expensive to buy a new car, SUV or pickup.

The forecasts, delivered at the 2014 Management Briefing Seminars today, will no doubt have a more direct impact on auto dealers than it will on the broader economy. The great hope, according to economists, is that broader trends in the economy might ease the squeeze.

First the bad news: monetary policy has held interest rates historically low since the recession, and as the broader economy recovers, the Federal Reserve is likely to begin tightening the money supply going forward to stave off inflation, likely in 2015.

At the same time, used-car values also have been high because of low inventory in the system, a lingering effect of the 2009 crash. However, sustained industry growth since then, and a return to leasing, is easing inventory restraints at a rapid race.

So what does this mean, in plain language? It means that when customers at an auto dealership get into the finance office, they’ll face less equity for their trade-in and higher interest for the larger amount of money they’ll need to borrow.

Play that trend out, and suddenly consumers likely won’t be able to afford the more expensive vehicle they want. The only way to offset those trends are to extend loans out even further, even beyond six years, or to see broader growth in income levels for the middle class, which could cause inflation.

Those are all scary thoughts for an auto dealer, and for the industry as well.

You can reach Larry P. Vellequette at lvellequette@crain.com.

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