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New-vehicle prices surge, but there's no shortage of buyers – Automotive News

by Oct 21, 2022Blog0 comments

The average new vehicle now costs nearly what a typical American makes in a year — but few in the industry seem all that concerned.
That average transaction price reached a May record of $45,502, according to J.D. Power. Cox Automotive and Moody's Analytics put the cost of acquiring a new vehicle in May even higher — $55,821 when including factors such as financing, a figure that represented 41.3 weeks of the $70,284 U.S. median household income.
"It's never been higher," Cox Automotive Chief Economist Jonathan Smoke told Automotive News. "It looks horrible."
Yet when speaking to dealers, "you really don't hear affordability as issues," Smoke said.
Smoke: Dealers don’t raise affordability as an issue.
Indeed, the CEO of the country's largest new-vehicle retailer, AutoNation Inc., said this spring that he'd seen no reduction in demand for new vehicles. Other dealership executives say they're readily finding buyers for all the new cars and trucks arriving on their lots — admittedly many fewer in this supply-constrained environment than in years past. And the National Automobile Dealers Association, which has raised concerns for years over affordability, didn't even respond to numerous queries from Automotive News on whether vehicle affordability was worrying.
A major automaker trade association, the Alliance for Automotive Innovation, attributes rising prices to customer demand for larger and more expensive vehicles, particularly trucks. Automakers also acknowledge they've prioritized production of vehicles with higher price points during the last year as microchip shortages limited the number of cars and trucks they were able to build.
It's all led to a market in which new vehicles typically cost more than the sticker price, used vehicles can cost as much as they were priced when new, and consumers are left wrestling with whether to pay today's high amounts or sit on the sidelines — which plenty are choosing to do when it comes to new vehicles.
The typical U.S. consumer has been priced out of the market, Smoke said.
"Median-income households don't buy new vehicles," he said. "And that's the paradox."
It means they must buy used vehicles — or wait. And when inflation is high, as it is now, the market can eventually run out of people who can afford a new vehicle, said Dave Sargent, vice president of global automotive for J.D. Power.
"Who's got that kind of money?" Sargent said, adding that the average American probably shouldn't buy new.
Still, with supplies of new vehicles limited, dealers aren't reporting shortages of buyers.
Paul Walser, partner in Walser Automotive Group, in Minnesota, which operates more than 30 mass-market and luxury dealerships, said his store mangers haven't seen their regular new-vehicle customers being priced out of new models into used ones.
"Everybody's just begging for more new cars," said Walser, who was NADA chairman for 2021.
Manley: A buyer for “everything.”
AutoNation CEO Mike Manley said in April that the retailer had "not seen any reduction in the demand for new vehicles or really any perceivable segment-shifting as a result of current economic conditions."
Manley reported no "perceivable change" in the customer profile of those buying new but said it was difficult to tell whether any "slight movement in terms of affordability" existed.
"We, frankly, have customers for basically everything that's coming," Manley said.
And those buyers are willing to pay more for new vehicles these days.
Kelley Blue Book last week said the average mainstream-brand new vehicle sold for $43,338 in May, $1,030 above sticker, while the average luxury-brand vehicle sold for $65,370, $1,071 over sticker. In May 2021, mainstream models sold for $405 less than sticker, and luxury models sold for $1,298 less.
Marc Levine, of Boynton Beach, Fla., and his 16-year-old son are looking to buy or lease a new vehicle for the newly licensed driver. Levine, who described his family as middle-class but above the median household income, told Automotive News he has found vehicle prices he could accept. But he objects to paying the charges some dealerships are adding in excess of sticker.
"I wouldn't do that," Levine said, adding that he thinks buyers paying those markups will eventually realize the vehicles weren't worth what they paid. "They're gonna be very disappointed."
Many consumers are clearly sensitive to the higher prices, with others also telling Automotive News they are unwilling to pay markups.
ConsumerAffairs, a consumer review and research site, in February said a poll of 1,000 people revealed the maximum amount respondents were willing to spend on a new vehicle was $22,090 and that just 2 out of 5 respondents looking for a new car were able to find options in their price range. And 28 percent of those looking to buy were thinking about giving up.
Morning Consult's U.S. Economic Outlook survey for April found 42 percent of respondents who considered but ultimately rejected buying a new vehicle based that decision on price. A Capital One study of 2,200 new- and used-car buyers in October indicated 60 percent of them felt higher prices made shopping more difficult.
Walser said the majority of dealers he has spoken with have honored sticker prices. That has created an "artificial ceiling" on new-vehicle prices, he said.
While NADA had not responded to Automotive News inquiries on the affordability issue for this story by press time, the dealer group's leaders have spoken out on such concerns in the past. In January 2019, NADA's then-CEO Peter Welch said regular Americans being priced out of new vehicles was "probably the biggest thing" he worried about. The average new-vehicle price then? Nearly $10,000 less than it is now. Welch, when making those comments, referenced reports of the average new vehicle costing $35,377 in October 2018.
"You know, people buying $55,000 pickup trucks with $1,000-a-month payments — I've never seen it," Welch said. "A lot of people don't think that's sustainable."
The average new-vehicle monthly payment so far in 2022 is $649, up $82 from the average for full-year 2021, according to Tyson Jominy, vice president of data and analytics for J.D. Power. That is a big jump after "years and years" of pretty flat payments, Jominy said. From 2017 through 2021, the average, which includes both loans and leases, rose from $488 to $567 — rising $20 to $30 each year.
A migration from more affordable vehicles to more expensive ones is clearly part of the increase, and some of that was happening even before the pandemic and subsequent supply disruptions.
Jessica Caldwell, executive director of insights for data analytics company Edmunds, said that even in 2019, "we were in the high $30s" for average new-vehicle prices, which was "still actually quite high" compared with household incomes.
She attributed it in part to a product shift as automakers reduced the number of cars they produced and built more SUVs and pickups. And consumers themselves drove that change, Caldwell said.
"We didn't want those small, cheap cars," she said. "They reacted accordingly."
The Alliance for Automotive Innovation said customers are now choosing light trucks "at nearly the highest pace ever," with more than 75 percent of sales falling into that category today.
"This trend has been steady for several years (and contributing to the shift in the average transaction price as well)," an alliance spokesperson wrote in an email. The spokesperson cited Kelley Blue Book data showing sales of luxury vehicles rose from 16.7 percent of the market in March to 17.4 percent in April.
"In other words, not only are consumers choosing more expensive segments, but even within the segments, more consumers are opting for high-priced luxury vehicles," the spokesperson wrote.
Luxury sales as a percentage of overall sales steadily rose during the last 10 years from 11.6 percent in May 2012 to 17.3 percent this May, according to KBB data. But the overall gain in share was just 1.5 percentage points during the first eight years of that period. Luxury's share has grown at a much faster rate since the pandemic, increasing by more than 4 percentage points since the end of 2019.
When production was constrained, it was clear automakers prioritized their most expensive or most profitable models, Cox's Smoke said. Manufacturers also prioritized production of the most option-laden configurations of those models, he said.
Retailers have seen how the reduction in car models has played out in the market.
Amy Hitch, finance manager for Laura Auto Group, of Sullivan, Mo., recalled how customers could buy a new Ford Fiesta for less than $15,000. But Ford has dropped the nameplate, and "there is nothing like that anymore," she said. "You can't buy a new car in that price point anymore."
It makes it harder to get shoppers with lower budgets into new vehicles, said Hitch, who was finance manager for Hutcheson Ford in St. James, Mo., until this month. But low interest rates have helped Hitch find workable new-vehicle deals even for those she termed "payment buyers" who can't exceed a specific monthly expense.
Jheury Moran, sales director for Jones Junction, an auto group based in Bel Air, Md., also said the new market is still attainable.
"You have your everyday person buying" new vehicles, Moran said.
But Moran acknowledged that expensive trims have been prioritized by the brands sold by Jones Junction. That could force a customer seeking a new vehicle with a more affordable trim level to buy a used vehicle instead because only more loaded configurations may be available, he said.
J.P. Morgan analyst Rajat Gupta, in a note to investors last week, said Penske Automotive Group executives in a recent conversation described consumer affordability as a used-vehicle challenge but called new-vehicle demand solid.
Anthony Pordon, Penske's executive vice president of investor relations and corporate business development, confirmed that in an email to Automotive News last week. "We still see strong demand on new vehicles, and we continue to sell in the future product allocation pipeline," Pordon wrote.
Greene: Problem is availability
James Greene, sales operations manager for Planet Subaru in Hanover, Mass., said new-vehicle buyers seem to understand how inflation and supply chain snags have affected the market.
"People are used to seeing stuff that costs more," Greene said.
Levine, the Florida customer, described seeking four-wheel drive and certain safety technology when shopping for a truck for his son. But when looking at Ford F-150s, the desired features existed only on higher-tier configurations carrying at least $60,000 sticker prices, which he called too expensive. He ran into the same issue looking at Ram 1500s.
Rising interest rates combined with higher-priced vehicles now could put monthly payments beyond a regular consumer's budget, Hitch said.
"That is gonna be a challenge," she said.
Jominy agreed higher rates would drive customers from the market. In general, each additional 1 percentage point of rate increases a monthly payment by $20 and cuts buying power by $1,250, he said.
Vehicle loan rates will surely rise after last week's rate hike by the Federal Reserve. Even before that move, new-vehicle interest rates had increased by about 0.7 percentage point this year, Smoke wrote on May 4. Average used-vehicle interest rates had grown by about 0.75 percentage point, he said.
But avenues still exist for customers to stick with the new-vehicle market despite price and rate pressure, Jominy said. Switching to longer loan terms would make for lower monthly payments. Based on trends observed by J.D. Power, the average new-vehicle loan should theoretically have reached 75 months by now, he said, but instead has held steady at 69 months the past couple of years.
"That's the one lever that consumers retain," Jominy said.
Leasing could eventually provide another form of price relief for would-be new-car buyers.
Right now, monthly lease payments aren't that attractive to customers, and leasing has collapsed to 18 percent of the market instead of its traditional 30 percent, Jominy said.
When more favorable deals return, likely sometime in 2023, customers could again turn to leasing as way to get into a new vehicle, he said.
"It's not all doom and gloom."
Manley said AutoNation could use equity in vehicles being traded in to help customers afford new ones.
"If you look at the increase in used-vehicle wholesale prices and the increase in new-vehicle prices, the gap between them actually narrowed over the period of last year," Manley said. "So if you were trading in a vehicle, then your position really has been not materially impacted by rising prices because you've got it on both sides. That obviously doesn't apply to people that are buying a vehicle for the first time in the marketplace."
Moran said his group can still sell a new vehicle to first-time buyers without a trade-in, either by sending them to a Jones Junction store with lower-cost new vehicles or by leveraging friendly lenders.
"Banks [have] great programs for first-time buyers," he said.
Walser also said he doubts a first-time buyer would be priced out in the case of a 10 percent hike changing the price of a $40,000 new vehicle to $44,000.
"That difference on a five- or six-year note I don't think is putting people out of the marketplace," Walser said. But a $20,000 used model going to $25,000 could be a larger barrier for some customers, he said.
It stands to reason that eventually, customer demand pent up by the pandemic and supply shortage will be sated.
Are dealers concerned that sticker prices will be too high for consumers to tolerate then? Walser said no. Were sales to slow because of pricing, "you will see a combination of dealer discounts and OEM incentives that will correct that situation and bring it back in line," he said.
A market dominated by vehicles costing less than $30,000 is "long gone," Cox's Smoke said. The U.S. is quickly nearing the point where a quarter of new vehicles are priced above $60,000, he said.
"There's no going back," Smoke said.
But as new vehicles become priced out of the reach of regular Americans, the used and certified pre-owned markets will grow in significance, Smoke said.
Planet Subaru's Greene said customers leaving the new-vehicle market to buy used did so because of availability more than price. He estimated 95 percent of Planet Subaru's new models were sold before they even reached the lot. "It's quite staggering," he said.
Buyers who didn't want to wait bought a used vehicle instead, he said.
Moran agreed, calling availability "a hundred percent" the factor leading buyers to eschew new vehicles.
Other factors besides price and availability could influence consumers' decision between new or used.
Levine said he was leery of used models, citing a lack of certainty regarding their history. And he called current used-vehicle prices so high that it made more sense to buy new.
Jacob, a Jacksonville, Fla., car shopper in his 20s who would not give his last name, had a similar reaction.
"I've briefly thought about getting used but my family has always had a preference for new cars with a warranty to avoid ending up with a lemon," wrote Jacob, who described his ceiling for a new vehicle at $30,000.
He called the technology available on new vehicles another priority, and "any car old enough with that kind of modern safety tech is the exact kind that's being inflated to nearly new car prices with the shortage going on right now."
The typical new-vehicle buyer is likely to have an income well above the median, better credit and more savings, according to Smoke. Those buyers seem less sensitive to price increases, he said.
In addition, higher-income households tend to preserve their jobs and incomes during recessions, Smoke said. The end result could be a less cyclical new-vehicle market for dealerships, Smoke said.
Though pent-up demand might prolong the inflation seen in new-vehicle prices for a few years, the market will eventually stabilize and reach a "new equilibrium," Smoke said.
However, he anticipated future deliveries would max out at 16 million rather than the old norm of "17 million-plus," sustaining a higher pricing floor.
If supply were higher, discounting and incentives could drive down vehicle costs, Smoke said. But given increased input costs such as labor and technology, it's likely prices wouldn't fall much, he said.
"It's more stopping the pace of inflation that we have been seeing," he said. "But we're not there yet."
Jamie Butters and Melissa Burden contributed to this report.
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