In this Sunday, April 15, 2018, photograph, unsold 2018 Renegades sit on a Jeep dealer's lot in the ... [+]
Consumers may finally be nearing a breaking point as new vehicle prices continue to rise, causing a seismic shift in the marketplace as shoppers scramble to find the models they desire at prices they can afford—and that’s danger for the automakers.
That was the sobering message from Cox Automotive economists during a briefing for the media in Detroit on Monday.
Charlie Chesbrough, Senior Economist, Cox Automotive, speaking in Detroit, Jan. 13, 2020.
The average sticker price for a new vehicle last year was $40,000 according to Cox senior economist Charlie Chesbrough who warned, “that's a huge amount of money for most Americans.”
Indeed with the growing popularity of crossovers, SUVs and pickup trucks and the decline of generally less expensive passenger cars, sticker prices have been on a steady road north, giving consumers fewer choices on the lower ends.
In 2012, for example, vehicles priced below $30,000 accounted for 51% of the market, but by last year, that share shrunk to just 28%, according to Cox research. In comparison, vehicles priced above $50,000 accounted for just 6% of the market in 2012, but grew to 24% last year.
If new vehicles cost so much, then how did the industry crack the 17 million mark last year? The answer, in large part, is automakers laying on incentives for retail sales and turning to a generally less profitable fallback strategy.
“What's keeping us at 17 million is the fleet side of the business,” explained Chesbrough, who pointed out that a change in federal tax laws in 2017 provided a windfall for businesses who bought new vehicles for their commercial fleets. The new regulations allowed for increased tax write-offs for vehicle depreciation—some as high as 100%.
But after two years of being able to take advantage of that spiff, fleet sales are liable to slow down, putting more of the sales onus on the retail side, that's already challenged by a growing number of consumers who simply can't afford a brand new vehicle.
Used car lot at dealership in Novi, Mich.
The most logical place for priced-out shoppers to turn are used car lots where an infusion of what's known as “gently used” vehicles are becoming available. Those are vehicles from model years 2000-2004. In addition, about 4.1 million vehicles turned in at the end of leases are expected to show up on used car lots this year, according to Chesbrough. Good news for shoppers, scary news for automakers.
“This is a real threat to the new vehicle side because these vehicles are selling at a fraction of the price of new vehicle counterparts,” said Chesbrough. “The products consumers are most interested in are selling at 30%, 40%, 50% discount to their new counterparts.”
Feldman Kia used car lot in Novi, Mich.
The attraction to gently used vehicles is evident in rising sales. Combined, 28 million new and gently-used vehicles were sold last year with gently used, model year 2000-2004 vehicles, accounting for 11.6 million units, or 41% of the total market.
Further evidence of the affordability challenge is what could be rising interest rates charged on so-called subprime car loans given to the most marginal customers.
Jonathan Smoke, Chief Economist at Cox Automotive.
“At the end of December we measured 18.9% average rate for a subprime new vehicle loan, said Cox Chief Economist Jonathan Smoke. “That's more than two percentage points relative to the year prior. It's substantial. It helps explain why affordability is one of the industry's big challenges.”
Despite an array of threats hanging over the industry, Cox economists remain fairly upbeat for this year, predicting only a slight decline in new vehicle sales to about 16.6 million units. It would be the first time in more than a half decade sales fell below 17 million.
But Chesbrough warns, while 16.6 million is still a “healthy” number, “be prepared, it's gonna be a rough ride.”
