Car Prices Might Be Unsustainable for Buyers

Car Prices Might Be Unsustainable for Buyers

Surging loan delinquencies signal that many consumers can’t afford their auto loans.

Five years ago, there were a dozen models of new cars that sold for less than $20,000. In 2023, there was only one: the spartan Mitsubishi Mirage hatchback, which accounted for about 5,300 of the 7.7 million new vehicles sold in the U.S. in the first half of the year.

If you are willing to spend more than $100,000, you can choose from 32 models. For the average American, paying off a new car at current prices demands 42 weeks of income, according to data from Cox Automotive, up from around 33 before the pandemic.  

Bargains have been hard to come by on the used-car lot as well, where the average vehicle listed for about $27,000—up more than 30% from prepandemic levels, according to Cox’s data.  

Higher interest rates have made the situation more difficult for buyers. Today’s average new car loan has a monthly payment north of $750, with an interest rate of 9.5%. For used cars, the average rate is above 13.7%, according to Cox. The average term for loans issued over the past three years is nearly six years, according to data from Experian.

These numbers could explain a mystery bedeviling auto lending. Seasonalized rates of severe delinquency for auto loans are the highest since at least 2006, but the jobs market is strong

“Usually you get the default spikes when unemployment spikes—it’s the biggest correlation in consumer credit,” said Clayton Triick, a fund manager at fixed-income investor Angel Oak Capital Advisors. “To see them go up that much while unemployment is still low is not typical.” 

Automakers leaned into their pricing power during the pandemic, giving priority to selling more expensive vehicles and features as supply-chain issues constrained inventories and shoppers had more savings from pandemic stimulus packages. They have continued to boost prices. General Motors said last month that the average price paid by its buyers rose 3% quarter over quarter, to $52,000. 

So far, higher prices have been a positive for automakers and dealers. Share prices for public dealership groups have surged this year. Automakers have generated profits that they can put toward their expensive transition to electric vehicles. The large dealerships have made big profits from their parts and service businesses as drivers hold on to cars for longer.

But there are signs that the market might already be struggling to sustain itself. If consumers rebel against the higher prices, sales—which so far have been stronger than expected—could slow, particularly among the pricey vehicles that have been generating most of the industry’s profits. And consumers who want to trade in their vehicles might be disappointed with the prices they get. 

And among those who braved the market at its highest prices last year, many are already struggling to keep up with their payments. The performance of loans issued in the first half of last year at the peak of the price surge has been especially poor.

Defaults and missed payments on pools of auto loans made in the first half of last year to people with subpar credit are matching or outpacing those issued in 2008, according to an analysis published last week by S&P Global that called the data “ominous.”

The squeeze faced by borrowers might soon ratchet tighter, with a payment holiday for student loans set to expire at the end of the month. According to credit-reporting agency TransUnion, more than a third of consumers with student loans took on new auto loans during the pandemic. 

Prices for used cars are slowly coming back to earth and inventories are slowly going up. But cars remain expensive. Used-car dealers nationwide had 32 days of sales worth of cars on hand with a price of $10,000 or less, compared with 55 days of used cars listed at $35,000 and up. 

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