In a world of near-record auto prices and a high-rate environment, the average American’s dream of owning a new car is increasingly becoming out of reach. Cox Automotive reports that the average monthly payment for new cars reached an astonishing $754 in March, forcing an increasing number of prospective buyers into the used car markets.
The Federal Reserve’s latest update on auto loan interest rates only worsens the situation. Their data reveals that new auto 60-month loans hit 7.48% in February, a level not seen since November 2007 and just shy of the record high of 7.82% from August 2006. In the first quarter of 2022 alone, the new auto 60-month loan rate leaped nearly 3% from 4.5% to 7.48%, and 2% from the start of the third quarter. These steep, sudden increases – or interest rate shocks – are a hard blow to consumers.
Alongside soaring borrowing costs, the average price of a new car, according to Kelley Blue Book data, hit a staggering $48,000 in March, marking a 30% increase from the same month the previous year.
In a world where real wage growth has been negative for the past 24 months, primarily impacting lower and medium-tier households, affording a new vehicle is increasingly a luxury reserved only for the wealthy. “The idea of a new car in every American’s driveway is not the world we live in,” said Charlie Chesbrough, a senior economist at Cox.
Many Americans are grappling with this harsh reality. For them, a new vehicle is far from their primary concern; instead, they struggle to pay rent and put food on the table in this high-rate environment.
Despite the decrease in the number of vehicles sold in the US — 13.9 million in 2022 compared to 17 million in 2019 — automakers saw a $15 billion increase in revenues in 2022 compared to 2019. According to Cox Automotive, this revenue surge is primarily due to the higher prices of new vehicles. This trend, squeezing affordable new cars out of the market, will likely drive even more buyers to the used car markets.
The affordability crisis is limiting access to the new-vehicle market for lower-income and lower credit quality buyers, says Cox economist Jonathan Smoke. He notes that “subprime lending in the new market has decreased substantially since 2019, and deep subprime has disappeared.” This trend prompts automakers to focus on profitable products for consumers who can afford to buy, excluding less affluent consumers from the new-vehicle market and limiting options in the used market for years to come.
As auto prices continue to surge in this high-rate environment, the dream of a shiny new car is slipping away for many Americans. It seems that in today’s market, a new car is indeed a luxury only the wealthy can afford.