New-vehicle ‘sticker shock’ expected to fuel used market
Higher new-vehicle prices and rising interest rates this year will drive more buyers to used vehicles or hang on to their old cars longer, industry experts believe.
The average new vehicle sold for more than $36,000 in February, according to industry analysis company Edmunds.com. That's a 29 percent increase from the $28,000 sale price a decade ago, and far outstripped the 6 percent rise in median household income during roughly that same period.
Meanwhile, the average annual percentage rate for new-car loans climbed to 6.26 percent in February after spending most of the last decade below 5 percent, according to Edmunds. That could hurt both automakers and consumers if borrowing costs continue to rise and make cars even less affordable.
Rising prices and higher borrowing costs will likely surprise some customers returning to dealerships for a new car this year, analysts said.
"For consumers coming back into the market, it's going to be a bit of sticker shock," said Jessica Caldwell, executive director of industry analysis at Edmunds. "It's going to be a bit shocking for consumers when they realize how much vehicles cost now."
The average car owner hangs on to a vehicle for six years, Caldwell said. If someone purchased a new car in February 2013, on average they put $3,533 down and borrowed $26,700 at 4.36 percent interest. The length of the loan was, on average, 65.79 months.
In contrast, the average down payment in February 2019 was $4,187; consumers financed on average $32,071 over 69.28 months at 6.26 percent interest. The average monthly payment grew from $462 per month to $556 per month over that same time period.
Those factors could drive buyers to used-car lots.
"Affordability is leaving more and more people out of the new-car market," said Michelle Krebs, executive analyst at Autotrader.
But changing consumer preferences are part of the reason that average prices are higher, said Mark LaNeve, Ford Motor Co.'s vice president of U.S. marketing, sales and service: Buyers increasingly opt for larger — and pricier — SUVs and trucks instead of the sedans they drove at the beginning the last decade. New standard technology, materials used to lighten vehicles for better fuel economy and other changes drove up prices, too.
"In the end, the customers largely determine what the pricing is going to be," LaNeve said.
Automakers are betting on a continuation of the trend to larger and more expensive SUVs and trucks.
Ford plans to eliminate sedans from its lineup entirely within the next couple of years and believes nearly 90 percent of its new-vehicle sales will be trucks or SUVs in the immediate future. General Motors Co. is leaning on trucks and SUVs to drive profits to fund investments in electrification and autonomous technology. Jeep and Ram almost single-handedly drove a 9 percent sales surge for Fiat Chrysler Automobiles last year. Kia Motors and others debuted big, boxy SUVs at the Detroit auto show this year.
Krebs and Caldwell see a correction coming. Both said sales figures are likely to plateau or slip this year if new vehicles become much more expensive, though they're not sure where the tipping point is. Caldwell said she expects automakers to get more competitive on crossover pricing as new models flood the market this year.
Don't count on carmakers cutting prices. More likely they will turn to discounts and incentives to move new metal.
But the prices could also drive more consumers to shop used vehicles, experts said. The 4.1 million vehicles expected to come off lease this year will boost used-vehicle supplies and offer cheaper options.
However, even used prices are on the rise: Buyers spent on average $24,499 for used vehicles in February, up from $17,980 a decade ago, according to Edmunds data. That's a more than 36 percent jump in spending.
The robust used-vehicle market isn't lost on Ford, which has a slew of new vehicles launching over the next 18 months or so. There's a small team working on getting every Ford dealer's used-vehicle inventory uploaded to one spot so potential buyers can more easily find what they're looking for.
LaNeve said Ford isn't worried that interest rates will drive too many people away from the new vehicles it plans to launch. Customers have been paying more due to rising interest rates over the last 20 months, he said, but things should level out.
Said LaNeve: "Customers have to make a judgment when they come in."