Buying a car is the most expensive purchase most Americans will make outside of buying a home. And just like with home shopping most consumers like to cross their t’s and dot their i’s before they make such a serious purchase.
But much like the housing market, the automotive market is influenced by a lot of outside forces that are pushing affordability out of the grasp of an increasing number of Americans.
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According to a note viewed by TheStreet, analysts at Morgan Stanley recently identified two of the biggest issues that are making cars unaffordable in 2026: higher interest rates and gas prices.
Auto affordability is being tested by interest rates and gas prices
U.S. new light-vehicle sales seasonally adjusted annual rate (SAAR) reached 16 million in September, down from the August SAAR of 16.8 million units. Still, SAAR is still strong with an expected 16.1 million vehicles expected to be sold this year, topping 16 million for the sixth straight month.
So what is causing the dip? According to Morgan Stanley analysts, higher interest rates and gas prices are forcing some consumers to delay their purchases.
¨Rising rates and gas prices have put affordability back in focus SAAR has remained resilient so far,¨ Morgan Stanley analyst Andrew Percoco wrote. ¨However, Auto Nation’s profit warning has highlighted affordability pressure in certain pockets of the
market.¨
AutoNation reported a new vehicle same store sales decline in the second quarter as total revenue fell 1% to $6.9 billion.
According to Morgan Stanley U.S. auto consumers are facing two simultaneous pressures: rising financing costs due to higher interest rates and higher fuel costs.
Thanks to the fallout from the war with Iran, fuel costs have jumped 54% year over year to $4.47 a gallon from $2.89 in December. Diesel prices have risen even faster, jumping 77% year to date.
Interest rates are also hampering affordability
The United States Federal Reserve has been hawkish this year, raising its benchmark interest rate by 25 basis points in September to a target range of 3.75% to 4%. It was the central bank’s first rate hike in over three years.
As the federal government raises the cost of borrowing the rest of the financial sector follows suit, including the banks financing auto loans.
¨Borrowing cost relief has also stalled, with a potential increase ahead following the sharp move higher in Treasury yields. As our US Economists highlighted, declines in auto loan rates from mid-2024 through early 2026 have leveled off as financial conditions tightened, while mortgage rates have already reaccelerated,¨ Percoco said.
¨Our economists expect these pressures to weigh on spending, largely through goods, which is contributing to the 40 basis point deceleration in real consumption growth that they expect next year.¨
U.S. consumers may be hesitant to take on new debt
According to Morgan Stanley, nearly 85% of existing U.S. household debt is fixed-rate, which means most of it is insulated from the recent changes to interest rates.
But consumers looking to finance the purchase of a new vehicle would be taking on more debt.
¨Consumers taking on new debt, however, remain directly exposed to tighter financial conditions, particularly for large-ticket purchases such as autos,¨ Percoco said. ¨Wealth provides an additional cushion for higher-income households, while lower- and middle-income consumers have less balance-sheet support. This helps explain why broader consumer spending can remain resilient even as affordability deteriorates.¨
That resiliency makes Morgan Stanley more optimistic for the automotive sector.
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¨This keeps us more optimistic on the outlook for Ford and GM, given their skew towards higher-end trucks and SUV’s, which tend to be concentrated towards higher income and wealthier consumers,¨ Percoco said.
That resilience is consistent with broader consumer backdrop, according to Morgan Stanley, but for autos ¨we think the more important near-term question is therefore not simply whether consumers continue to buy, but whether there is a significant mix deterioration ahead for OEMs.
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