Rising Car Sales and Increased Repossessions: Understanding Our ‘Bizarre’ Auto Market
COMMERCE CITY, Colorado ‒ For nearly two decades, Tom Kingston, an auto transporter, has witnessed the fluctuations in the U.S. car sales landscape.
Currently, car dealerships are struggling to make sales and are drawing customers in with attractive incentives and extended loan repayment options.
During the COVID-19 pandemic, vehicle demand soared despite limited supplies, with buyers eager to spend their stimulus payments, sometimes paying over the sticker price.
“For a couple of years, everything delivered by my truck was already sold by the dealerships,” Kingston, 58, mentioned as he took a break while loading nine Audi sedans and hatchbacks. “Now, post-COVID, they’re saying, ‘More? We have no room for them.'”
Automobiles have always been a vital part of the U.S. economy, and the current auto market reveals several contradictions: While new and used car sales are on the rise, loan delinquencies and vehicle repossessions are also increasing from the lows seen during the pandemic.
“It’s a strange and quirky time, and consumers are definitely feeling the pressure,” remarked Zach Shefska, CEO of New York-based car-buying service CarEdge.
Surveys indicate that “the economy” remains a top concern for Americans in this election year, significantly influencing their choices for the next presidential candidate.
While overall economic indicators are robust, with the Federal Reserve recently lowering interest rates for the first time in four years, vibrant stock markets, and diminishing inflation, many Americans still perceive the economy negatively according to polls.
Regardless of their dissatisfaction with the economy, Americans continue to purchase numerous new cars.
Ford, the leading seller last month, moved over 171,000 vehicles in August, marking a 12% increase year-over-year, albeit still below its peak of over 241,000 in May 2019.
Most automotive manufacturers similarly reported improvements as they recover from pandemic-related setbacks and a recent cyberattack that disrupted sales for around 15,000 dealerships.
At the same time, loan delinquencies have been rising steadily for nearly three years.
Experts suggest this trend reflects pandemic-era buyers overpaying for vehicles, new sales promotions from automakers, and increasingly harsh loan conditions from lenders.
Jeremy Robb, a senior director of economic industry insights at Cox Automotive, echoed Shefska’s view: The car market has been “strange” for several years.
He noted that, apart from supply and demand concerns, there exists a “K-shaped” economy where those with stocks and investments see their incomes increase, while those without investments are adversely affected by inflation, high fuel costs, and rising interest rates.
“We haven’t officially entered a recession, but the Federal Reserve’s high-interest rates have significantly slowed things down over the past few years,” he said.
New Loan Terms are ‘Alarming’
Car sales are crucial for the economy, providing jobs to over 4 million people, ranging from factory workers to dealership staff and parts repair shop workers.
Shefska highlighted that the average interest rate for new car loans has reached 9%, while used car loans average 14.5%.
Due to ongoing consumer demand for new vehicles, lenders are increasingly providing loans that extend up to seven or eight years. Shefska noted that under these terms, it’s nearly impossible for individuals to pay off their vehicles before they encounter significant maintenance issues.
Data from the auto industry analysis firm Edmunds reveals that most car buyers retain their vehicles for about six years, suggesting that those purchasing cars today might not fully recognize how dramatically prices have surged since their last purchase in 2018, influenced by high-end features like advanced entertainment systems, therapeutic seating, and hands-free driving technologies.
“We’re increasingly witnessing consumers opting for 84-month loans, which is quite alarming,” Shefska remarked regarding the seven-year loans. “With such patterns, they’ll likely find themselves in negative equity.”
Currently, over 4% of car loan payments exceed $1,000 a month, with the average monthly payment reaching $655, an increase from $619 the previous year, according to Experian. While new car prices have been rising steadily for decades, they surged dramatically during the pandemic due to semiconductor shortages and other supply chain disruptions. Although prices have slightly lowered recently by a few thousand, they remain elevated overall.
Recently, the average cost of a new car has surged to around $48,000.
“Who can actually afford these prices? Just the other day, I delivered a $140,000 station wagon,” commented Kingston, an auto-hauler driver. “They’ve priced themselves out of reach for many. However, they have a monopoly – for most people, having a car is a necessity.”
Although the impacts of high loan costs won’t be felt in the economy for a few years, experts indicate that vehicles purchased during the pandemic using federal stimulus funds are now facing a rise in repossessions. This situation arises because pandemic buyers often overpaid and are now burdened with sharp increases in car insurance, fuel prices, and essential living costs like housing and groceries.
During the pandemic, some car dealers charged prices that exceeded the sticker price by as much as $20,000, which was more acceptable when interest rates, gasoline, and insurance costs were lower. Currently, many consumers find themselves in a position where their used trucks or SUVs have depreciated significantly in value compared to new models available from dealerships, a situation referred to as being “upside down” on a loan.
In some instances, individuals choose to walk away from their vehicles, impacting their credit scores, to avoid hefty payments. Recently, the number of car loans overdue by at least 60 days increased nearly 2%, a statistic that represents a 6% rise year-over-year, based on data from Cox Automotive. However, despite these increases, the actual number of defaults saw a 3% decrease last month and has dropped by 9% compared to last year, according to Cox.
“People are carrying larger balances on their credit cards and auto loans,” noted Robb. “In many cases, they are paying more interest than they ever have before. This situation limits their capacity to spend on other necessary expenses.”
Switching to Electric?
One significant area where the value of used cars has plummeted is in battery-powered electric vehicles. Presently, electric vehicles (EVs) typically come with a higher price tag than traditional gas-powered cars, with an average cost of $61,702 for an EV compared to $47,450 for a gasoline vehicle, as reported by Edmunds.
However, as governments at both federal and state levels promote the transition to EVs, purchasers can benefit from substantial tax incentives that were not available during the pandemic years. Consequently, new EVs can be acquired for much less than similar models from three years prior. According to Kelly Blue Book, EVs accounted for about 8% of all new car sales in the second quarter of this year.
Yet, due to a lack of overwhelming popularity among buyers, manufacturers like Ford and Volkswagen, who have heavily invested in EV production, are now left with expensive and unpopular inventory. Notably, Ford reported a $1.1 billion loss in its electric vehicle sector during the second quarter, prompting the company to scale back its plans for producing large electric vehicles. For example, a base-model GMC electric Hummer SUV starts at nearly $100,000.
Kingston, who was raised in Detroit, has expressed skepticism about EVs despite transporting thousands of them to dealerships across Colorado. Nonetheless, he mentioned that VW is now offering leases for as low as $140 a month for their ID.4 all-electric model, a five-passenger small SUV.
“$140 a month? At that rate, I might consider it, and I’m from Detroit,” he remarked. “That’s quite a deal for a $60,000 car.”