COMMERCE CITY, Colo. – For nearly two decades, car transporter Tom Kingston has had a front row seat to the ups and downs of the U.S. auto sales market.
Car dealers are currently struggling to make sales and are increasingly tempting consumers with incentives and offers for longer loan repayment periods.
During the COVID-19 pandemic, with supply scarce and buyers cashing in on stimulus payments, cars have sold like hotcakes, sometimes for well above list price.
“For two years, every load I had in my truck was sold by the dealership,” said Kingston, 58, during a break from loading nine Audi sedans and hatchbacks. “Now that COVID is over, they’re like, ‘More? We don’t have the space.'”
Autos have long been a key component of the U.S. economy, but the current state of the auto market reflects a series of contradictions: Sales of new and used cars are rising, even as loan delinquencies and foreclosures are also rising from mid-pandemic lows.
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“These are strange and unusual times, and consumers are certainly feeling the pinch,” said Zach Schevska, CEO of New York-based car-buying service CarEdge.
Polls show the economy is Americans’ top concern in this year’s election and a key factor in deciding who should be the next president to occupy the White House.
Economic data is generally strong, the Federal Reserve cut interest rates for the first time in four years this week, the stock market is at an all-time high and inflation is falling, yet polls show Americans consistently think the economy is doing poorly.
But even as Americans curse the economy, they’re still buying lots of new cars.
Ford, last month’s top seller, sold more than 171,000 vehicles in August, up 12% from the same month last year but still short of its previous record of more than 241,000 sold in May 2019.
Most other manufacturers reported similar improvements as they emerge from the pandemic-induced downturn and a cyberattack earlier this summer that temporarily halted sales and financing transactions at an estimated 15,000 dealerships.
At the same time, loan delinquencies have increased for nearly the third consecutive year.
Experts say the combination reflects pandemic-era buyers’ decision to pay top dollar for vehicles, new sales incentives from automakers and increasingly tough loan terms offered by lenders.
Jeremy Robb, senior director of economic and industry analysis at Cox Automotive, echoed Siekowska’s sentiments, saying the auto market has been in a “weird” state for years.
He said that in addition to supply and demand issues, the so-called “K-shaped” economy is a factor — people with stocks and other investments see their incomes rise while those without investments are hit especially hard by inflation, rising gas prices and interest rates.
“We’re not in a recession, but the economy has slowed significantly over the past few years because the Fed has set interest rates so high,” he said.
New lending conditions are ‘frustrating’
Auto sales fuel the economy, providing more than 4 million jobs, from union line workers to car salespeople to repair-shop workers.
Schevska said the average interest rate on a new car loan today is 9 percent, while the average interest rate on a used car loan is 14.5 percent.
And as consumers continue to buy new cars and trucks, lenders are increasingly offering loan repayment terms of seven or even eight years, he said. In those situations, it can be nearly impossible to pay off a vehicle before it needs major repairs, Siekowska said.
Most people keep their cars for about six years, meaning people buying cars today may not realize how much prices have skyrocketed since they last bought one in 2018 because of things like premium entertainment systems, massaging seats and hands-free driver-assistance technology, according to auto industry data firm Edmunds.
“We’re seeing more and more consumers taking out 84-month loans, which is disgusting,” Schevska said of the seven-year loans. “That always puts you in debt negative.”
More than 4% of auto loan payments are now over $1,000 a month, and the average payment is $655, up from $619 last year, according to Experian. New car prices had been rising steadily for decades but have skyrocketed during the pandemic due to computer chip shortages and other supply chain issues. Prices have fallen by several thousand dollars a car in recent days, and the average selling price for a new car is now $48,000.
“Who can afford that? I pulled a $140,000 station wagon out of here the other day,” said Kingston, the car transporter. “They’re too expensive for people to buy, but they have a monopoly. For most people, you can’t live without a car.”
Experts say today’s high loan costs won’t hurt the economy for years, but customers who bought with federal stimulus money during the pandemic are increasingly having their cars repossessed as pandemic-era buyers overpaid and are now being squeezed by rising auto insurance, gasoline prices and the cost of housing and food.
During the pandemic, some dealers have been charging and accepting $20,000 more than list price from some buyers. Those sums were easier to swallow when interest rates, gas and insurance were low. Now, some drivers are stuck with used trucks and SUVs that are worth significantly less than comparable new vehicles in dealer lots. This is known as the “upside down” on a loan.
In some cases, people are just giving up their cars, taking a hit to their credit, to avoid the hassle of making payments. The number of auto loans that were 60 days or more delinquent rose nearly 2% last month and is now up 6% from a year ago, according to Cox Automotive. But after months of increases, the number of actual defaults fell 3% last month and is now down 9% from a year ago, Cox said.
“People are racking up balances on credit cards and car loans,” Robb said. “In many cases, they’re paying more interest than they ever paid before, which means they have less money to spend on other things.”
Going electric?
One area where used-car prices are falling sharply is battery-electric vehicles: Currently, EVs are generally more expensive than gasoline-powered cars, at $61,702 for an EV versus $47,450 for a conventional model, according to Edmunds.
But as the federal government and many state governments encourage drivers to switch to EVs, along with significant tax incentives that weren’t available during the pandemic year, a new EV today could be significantly cheaper to buy than a comparable car from three years ago. EVs accounted for about 8% of all new-vehicle sales in the second quarter of this year, according to Kelley Blue Book.
EVs aren’t overwhelmingly popular with buyers, so manufacturers that made big moves toward them, like Ford and Volkswagen, are now saddled with overpriced and unpopular vehicles. Ford’s electric-vehicle business lost $1.1 billion in the second quarter, and the company slowed plans to build large EVs. GMC’s base electric Hummer SUV starts at nearly $100,000.
Kingston, a car-hauler who grew up in the motor city of Detroit and has transported thousands of EVs to dealerships around Colorado, said he was skeptical of EVs. But he also heard Volkswagen would lease its all-electric ID.4, a small, five-seater SUV, for just $140 a month.
“I mean, $140 a month? That’s something I might consider, even as a Detroiter,” he said. “For a $60,000 car, that’s a bargain.”
