Two years after the pandemic tore the economy apart, the US auto market looks like this: Prices have risen dramatically. The supply is drastically reduced. And gasoline is much more expensive.
The result? A growing disparity between the wealthiest buyers and everyone else.
Wealthier buyers continue to shell out big bucks for new vehicles, including the less fuel-efficient among them – trucks, SUVs, large sedans.
As for the rest of America, millions of people feel increasingly excluded from the new vehicle market. Instead, they compete for a reduced supply of used cars, especially the smaller, cheaper and more fuel-efficient ones. Soaring prices at the pump since Russia’s invasion of Ukraine have only intensified their urge to cut costs.
It’s people like Natalia Ponce De Leon from North Palm Beach, Florida. She was renting a Toyota Tacoma pickup truck that she had acquired like new four years ago and used for her custom drapery business. When it came time to replace it recently, she didn’t even consider a new vehicle.
Instead, she opted for a 9-year-old vehicle with 14,000 miles – a Toyota RAV4, a small SUV, which she purchased from Earl Stewart Toyota in North Palm Beach. Although it cost her $23,000 to buy the SUV and pay off the rest of her lease, Ponce De Leon is happy with her decision. For just under $400 a month for six years, she says, she has a vehicle that’s easier to drive than her old pickup, but roomy enough to carry a 6-foot ladder for her business.
Even better, gasoline having reached $4 a gallon nationally, it enjoys superior fuel efficiency.
“I think I’ll save, per month, between $100 and $200,” said Ponce De Leon – money she plans to spend on online marketing to help grow her business.
The new vehicle market is a whole different story. Of all new car purchases last month, nearly 79% were trucks and SUVs. Ten years ago, this proportion was only 52%.
And that’s despite a whopping 22% increase in the average price of a new car since the pandemic hit two years ago — to more than $46,000, in December.
Based on March prices and interest rates, the monthly payment for an average new vehicle would be $691, well above what a household with a median gross income of $65,732 would be expected to spend, based on calculations by Cox Automotive and Moody’s.
That’s not the case for many of the wealthier-than-average buyers who now dominate the new-vehicle market.
“Those who can afford it always buy what they want,” said Jeff Schuster, president of global forecasting for LMC Automotive, a consulting firm.
Ivan Drury, senior executive at automotive site Edmunds.com, was surprised by the demand from affluent buyers for high-priced new vehicles.
“I can’t imagine a situation where we had so many people willing to spend so much money,” Drury said. “It’s just abnormal for someone to go out and spend (sticker price) or more. I can’t think of any other time periods unless it’s on specific models. And that’s every car on the road.
Largely excluded from this group, buyers of more modest means compete for the most fuel-efficient used vehicles and drive up their prices. At auctions where dealers buy many of their vehicles, the average price of a 2-8 year old compact car has risen 1.1% over the past three weeks to an average of $12,560. This is an annual rate of almost 20%. The price of older cars is even higher, according to data compiled by Black Book, which monitors these prices.
In contrast, over the same period, the average 2-8 year old full-size SUV actually fell 2.3%, to $32,700.
“Demand is driving dealers to buy smaller, more efficient and older vehicles,” said Alex Yurchenko, chief data officer at Black Book.
Behind this trend lies an economic reality: Americans as a whole have less money to spend. Although the US labor market is robust and many people have received wage increases in recent months, accelerating inflation has more than wiped out those gains in most cases.
Consumer prices have soared 8.5% over the past year, the fastest pace in four decades. Additionally, the stimulus checks and other federal aid that most households received after the pandemic have long since expired.
In many cases, too, households have drawn on much of the money they had accumulated during the pandemic. In response, Americans as a whole are taking on more debt to pay for their expenses.
“People in the lower price range are just stuck,” Drury noted. “It’s weird to have so many people with so much money, and we have this other bunch of consumers who say, ‘I’m exhausted.’”
The dwindling availability of leasing, which has long enabled ordinary households to keep monthly payments low, has further aggravated the low-cost market. Leasing has almost dried up because car manufacturers no longer offer attractive offers.
“They don’t have to,” said Cox Automotive chief economist Jonathan Smoke, “because[automotive]supplies are low.”
Even among high-income households, soaring gasoline prices have left more shoppers focused on fuel efficiency. In particular, many have purchased electric vehicles, sales of which have jumped 66% over the past year, according to Edmunds.com. Even so, the share of electric vehicles in the overall automotive market remains only around 4%.
Meanwhile, prices for new and used vehicles have begun to decline or stabilize. From February to March, average prices for used cars and trucks actually fell nearly 4%. That may suggest, Drury said, that people got it and won’t continue to pay inflated prices. Automakers have even started increasing discounts on pickup trucks.
“They may have appealed to consumers who pay any price to get what they want,” Drury said.
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