Text size
In the second quarter, 17.1% of people who are financing a vehicle purchase are paying more than $1,000 a month, a record.
Dreamstime
It isn’t getting any easier for people looking to buy a car. The tide might be turning, however, which would be good for consumers. A turning tide might not be as good for automotive stocks.
In the second quarter, 17.1% of people who are financing a vehicle purchase are paying more than $1,000 a month, a record. That’s up from 16.8% in the first quarter, and up from just 4.3% in the second quarter of prepandemic 2019, according to automotive-data provider Edmunds.
A thousand dollars is roughly 25% of pretax monthly wages for the average 25- to 34-year-old, and the average person in that age range might not be able to afford that.
“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market,” said Ivan Drury, Edmunds’ director of insights, in a news release. “The Federal Reserve’s recent pause in interest rate hikes, unfortunately, didn’t offer much relief for consumers, and hints at further raises later this year mean auto-loan rates could even continue to increase.”
Rates could continue to increase some, further pressuring payments. But buyers can take some solace in the idea that the Fed is closer to ending its cycle of interest-rate hikes as inflation starts to slow. Consumer prices rose roughly 4% year over year in May, down from an 8.5% rise in May 2022.
Car prices should be coming down, too, offering additional relief. The average price of a new car came in at $48,528 in May, up about $250 from April, according to automotive-data provider Kelly Blue Book, which is owned by Cox Automotive.
“The modest new-vehicle price increase in May was offset by increased incentives, so many buyers were able to find deals below sticker,” said Rebecca Rydzewski, research manager of Economic and Industry Insights for Cox Automotive, in a news release. “This is good news for consumers as manufacturers are seeing higher inventory and increased competition and need to push sales to keep inventory moving.”
Lower prices and flat, or lower, interest rates will eventually help buyers. It might not help car makers. “Pricing has been growing at a 6.6% [compound annual growth rate, or CAGR] since 2019, outpacing the historical CAGR of less than 2%,” wrote Wells Fargo analyst Colin Langan in a Wednesday report. Average selling prices “on new and used vehicles will begin to decline in the face of high interest rates, tighter lending, and if broader macroeconomic weakness materializes.”
Lower used-car pricing will also result in lower new-car prices, he says. The Manheim Used Vehicle Value Index dropped almost 8% year over year in May. The June reading isn’t available yet.
Weaker pricing can pressure car-maker profits, a reason Langan rates both
Ford Motor
(F) and
General Motors
(GM) shares at Sell.
To be sure, lower prices are a headwind for the industry, but lower prices also mean more car sales, easing some of the pain for auto makers. U.S. car buyers are purchasing roughly 15 million new vehicles a year. That number was closer to 17 million before the pandemic.
Write to Al Root at [email protected]
Source: https://www.barrons.com/articles/car-payments-expensive-relief-2d4c66d0?siteid=yhoof2&yptr=yahoo