The supply is dramatically down. Gasoline costs significantly more.
The result? The result? A wider gap between the wealthiest buyers and everyone else.
The most wealthy buyers continue to spend big on new cars, even the fuel-efficient ones — trucks, SUVS and large sedans.
Millions of Americans feel increasingly priced out in the new-vehicle marketplace. They are now competing for smaller, more fuel-efficient used cars, particularly those that are less expensive and less expensive. Their desire to lower costs has been intensified by the dramatic rise in pump prices following Russia’s invasion Ukraine.
These are people like Natalia Ponce De Leon from North Palm Beach, Florida. The Toyota Tacoma pickup that she bought as a new vehicle four years ago was her lease. She used it for her custom drapery business. She didn’t consider buying a new vehicle when it came time to replace the Toyota Tacoma pickup she had just purchased as new four years ago.
Instead, she chose a 9-year old vehicle with 14,000mi — a Toyota RAV4, which is a small SUV that she purchased at Earl Stewart Toyota in North Palm Beach. Ponce De Leon was happy with her purchase of the SUV and the remaining lease payments, even though it cost $23,000. She said she was happy with the vehicle she bought for just $400 per month over six years. It is easier to drive than her old pickup and has enough space to hold a 6-foot ladder for her small business.
She’s also enjoying excellent fuel efficiency, as gasoline has risen to $4 per gallon in the US.
Ponce De Leon stated, “I think I’m going save, per month between $100 and $200,” which she intends to use to fund her online marketing efforts to grow her business.
Another story is the new-vehicle marketplace. Nearly 79% of all new cars purchased last month were trucks or SUVs. This was only 52% a decade ago.
This is despite the staggering 22% increase in the average cost of a new vehicle since the pandemic two years ago, to over $46,000 as of December.
Based on the March prices and interest rates, the average monthly payment for a new vehicle would be $691. This is far more than what a household earning $65,732 per month, according to calculations done by Cox Automotive or Moody’s.
Not so for many of the wealthier-than-average buyers who now dominate the new-vehicle market.
Jeff Schuster, president, global forecasting at LMC Automotive, a consulting company, stated that “Those who can afford it are still purchasing what they want.”
Edmunds.com senior manager Ivan Drury was surprised at the high demand from wealthy buyers for expensive new cars.
Drury stated that he couldn’t think of a scenario where so many people would be willing to spend so much money. It’s not normal for someone to go out spending (sticker price) or more. Other than for specific models, I cannot think of any other period. This applies to all cars on the road.”
Buyers with less means have been competing for fuel-efficient vehicles, pushing up their prices. The average price for a compact car aged between 2 and 8 years rose 1.1% to $12,560 during the last three weeks at auctions where many dealers sell their vehicles. This is a rate of almost 20% annually. According to Black Book data, the price of older cars has risen even more according to their monitoring.
However, in the same time period, the average price for a full-size SUV 2-8 years old fell 2.3% to $32,700.
Alex Yurchenko (chief data officer at Black Book) stated that “the demand is driving dealers to purchase smaller, more efficient and older vehicles.”
This trend is a result of an economic reality: Americans have less money to spend. While the American job market is strong and many Americans have been awarded pay increases in recent months, inflation has more than offset these gains.
The past year has seen consumer prices rise 8.5%, which is the fastest pace in over 40 years. Additionally, most households have lost their federal assistance and stimulus checks that they received following the pandemic.
Many households also have taken out large amounts of cash that they saved during the pandemic. To pay their bills, Americans are going deeper in debt.
Drury stated that “people in the lower price ranges are just jammed up.” It’s strange to have so many people who have so much money. But, we also have this other group of consumers that says, “I’m tapped out.”
The declining availability of leasing is another factor that stresses the market’s lower-priced segment. Leasing had been a way for ordinary households to keep their monthly payments low for many years, but it has become less common. Because automakers no longer offer attractive leasing deals, leasing is almost dead.
Jonathan Smoke, Cox Automotive’s chief economist, stated that they don’t need to, because (auto) supply is low.
Higher-income households are not the only ones affected by rising gas prices. More buyers now focus on fuel efficiency. Edmunds.com reports that electric vehicles have seen a 66% increase in sales over the past year. Despite this, EVs still only represent 4% of the total auto market.
Prices for new and used cars have started to drop or level off in the interim. Average prices for used cars or trucks fell almost 4% between February and March. Drury stated that this may indicate that people are satisfied with their vehicles and will no longer pay high prices. Pickup trucks have seen discounts from automakers.
Drury stated that they might have “tapped out consumers who will pay any price to obtain what they want.”