New-vehicle affordability and rising interest rates are increasingly worry points for U.S. dealers, a Cox Automotive study finds. Photo credit: DAVID PHILLIPS

Alongside affordability challenges, high interest rates and difficulty obtaining credit for customers have clouded dealers’ typically rosy outlooks, according to Cox Automotive’s Dealer Sentiment Index survey.

The fourth-quarter shift marks the first time that more dealers have expressed the current market was weak rather than strong since Cox began reporting survey results in the third quarter of 2017.

The survey, which measured responses from 1,124 franchised and independent dealers from Oct. 24 to Nov. 6, tracks how dealers view their current market on a scale from weak to strong. A score higher than 50 indicates optimism. Overall, dealers scored the current market at 44. Though franchised dealers reported in positive territory at 51, independent dealers dragged down the average, with a score of 42.

For franchised dealers, credit availability for consumers and interest rates were not even in the top five list of factors holding business back last year, according to Cox Chief Economist Jonathan Smoke.

Concerns over interest rates jumped year over year, with 38 percent of dealers citing it as a problem in the fourth quarter, compared with just 5 percent a year earlier. In the third quarter, 22 percent of franchised dealers cited interest rates as a problem.

“Something clearly made franchises wake up to interest rates,” Smoke told Automotive News.

Interest rate concern

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Independent dealers cited interest rate discomfort long before franchised dealers, Smoke said, likely due to absence of automaker incentives to help drive down the cost of vehicle financing. But for franchised dealers, those incentives have been declining, and now they are starting to feel the pinch of rising rates.

The Federal Reserve has raised its benchmark interest rate, the federal funds rate, three times in 2018.

However, the survey’s interest rate question is broad, Smoke added. Dealers citing interest rate trouble also could be referring to its impact on their floorplanning costs.

Confidence in credit availability for consumers in the fourth quarter remained consistent with the third-quarter outlook, but it was the fifth-most-cited factor holding back dealers’ business, tied with limited inventory, at 23 percent. Credit availability was cited by just 15 percent of dealers last year.

Ability to obtain credit for their stores was one of the few positive factors dealers cited in the survey, which franchised dealers scored at 69, one point higher than last year. Credit availability for business was cited as an issue by just 2 percent of dealers in the fourth quarter, an amount Smoke considered statistically insignificant.

In written responses to the question of which factors are softening the market over the next three months, dealers blamed economic uncertainty and consumer awareness of the rate increases.

“People are tightening up due to interest rate increases,” according to a Ford dealer in the Northeast.

A Chevrolet dealer in the South wrote: “With rising interest rates and everything else going on out there, I feel like we are headed for a slump.”