Summary
Auto credit conditions improved to their highest level in more than two years in December, offering a relative bright spot for dealers despite persistent affordability headwinds from inflation and housing. Lenders eased terms and expanded access—especially into subprime—potentially supporting sales into tax season, even as budgets remain pressured by thinner incentives and elevated transaction prices.
Credit conditions
- Dealertrack Credit Availability Index: 99.6 in December (near the 2019 baseline of 100); 2025 average: 97.3 (up ~4% vs. 2024).
- Pricing/approvals drove the month’s gain: yield spreads narrowed to 6.6%; approval rates rose to 73.7%.
- Subprime expansion accounted for over half of the full‑year improvement; lenders also extended loan terms.
- Banks showed the strongest loosening year over year: +9.3%.
- Channel details: franchise used‑vehicle credit +6.7%; non‑captive new‑vehicle channels +5.4%.
Inflation and producer prices
- CPI: +0.3% m/m in December; core CPI +0.2% m/m; headline CPI +2.7% y/y (above the Fed’s 2% target).
- Energy: lower gasoline offset by higher electricity and natural gas; CPI energy component +2.3% y/y.
- Shelter re‑accelerated to a 3.2% y/y increase, adding upward pressure to overall inflation.
- PPI (through November): +0.2% m/m; +3.0% y/y, with goods driving gains while services were flat.
Vehicle affordability
- Wages rose 3.5% y/y, keeping the weeks of income needed for a typical new vehicle unchanged at 36.2.
- Typical monthly payment: $767 (below the December 2022 peak of $795).
- Incentives were 5% lower y/y; average transaction price nearly +1% y/y, squeezing budget‑conscious buyers.
- Affordability in December 2025 was only marginally better than December 2024, aided by lower rates and rising incomes despite higher prices.
Housing market linkage
- NAHB/Wells Fargo builder confidence fell to 37 in January (negative sentiment), with affordability pressures most acute in lower‑ and mid‑priced segments.
- Average 30‑year fixed mortgage rate: 6.06% as of Jan. 15 (down 79 bps y/y but still elevated).
- Fannie Mae and Freddie Mac announced plans to purchase $200B in MBS (survey occurred before this news).
- Builder actions: 40% cut prices (average cut 6%); 65% offered incentives; all three index components remained below 50.
What it means for dealers
- Easier credit—higher approvals, narrower spreads, and broader subprime access—could support near‑term sales, particularly into tax refund season.
- However, thinner incentives, higher transaction prices, and a cautious housing sector limit how far demand can stretch.
- Momentum hinges on lenders’ risk appetite versus ongoing affordability strain; banks’ loosening and spread compression were notable 2025 drivers.
What to watch next
- Upcoming data on retail sales, income, and inflation to gauge whether wage gains continue to offset rates and prices.
- Credit approval trends and subprime participation to assess the durability of December’s improvement.
- Housing activity and mortgage trends for potential spillover effects on vehicle demand.
