After four consecutive years of record-high vehicle sales, manufacturers will face a slump this year in new vehicle sales.
Automakers are off to a rough start this year. January and February sales were down 2.6 percent, the lowest two-month sales since 2009. Sales will continue to decline because of higher vehicle prices, higher interest rates and a record number of expired leases providing competitive used vehicles.
“Monthly payments and affordability of new cars will become more difficult,” said Tom Kontos, chief economist of KAR Auction Services. “New car sales won’t match the 17 million threshold this year. I expect it to be in the high 16’’s at very best.”
Affordability is a big concern for many consumers like recent Bennington College graduate, Elie MacPhee. She decided to lease instead of buy. After seeing the sticker price of new cars, MacPhee, 22, realized she could not manage a new car payment and pay for insurance on the small salary of her first “real job.”
The average price of a new vehicle is $35,000, up 3 percent from the previous year. A major factor driving up costs are the options that now come standard on new vehicles.
Automakers increasingly add luxury and technology to standard vehicles. Consumers expect the rear cameras for backing up and wireless capabilities for their phones. These extras drive up the vehicle costs.
Tariffs on steel and aluminum have also affected the manufacturing costs. Vehicles made in the U.S. still buy materials from overseas like China.
Borrowing costs have risen too. The four interest rate hikes imposed by the Federal Reserve has lifted the average annual percentage rate on new car loans from 5.19 percent to 6.26 percent. This means bigger monthly car payments making bigger dents in fragile monthly budgets, like MacPhee’s.
“I’m on a tight budget, every dollar counts,” said MacPhee. “I might buy the car after the lease ends if I’m making more money by then.”
Affordability and reliability were MacPhee’s primary concerns. She would not even consider a used car after her recent experience with an aging car that was unreliable and expensive to repair. She decided to lease a 2019 Toyota CHR because it had the cheapest insurance rates.
Flexibility was also a concern. MacPhee is planning to go to law school in a couple of years. Lease terms are less than half of new car loan terms.
“With all the things in life that are monthly payment focused, consumers have gone into this short term usage mentality, and leasing enforces that mentality,” said Ivan Drury, senior analyst for Edmunds. “You have to pay more, but it’s significantly cheaper than financing a new car and owning it for six years.”
Shorter terms and a new car for $50 less a month sealed the deal for MacPhee. Her trade in gave her $1,500 to put towards paying 6 months in advance, a deal that saved her an additional $90 per month on her lease payments.
Leasing will become an even more attractive option versus buying a new car. It accounted for nearly 20 percent of new vehicles last year, and has become more popular since its introduction a few years ago. Consumers like leasing because they can get a new car every two or three years without having to deal with the hassle of getting rid of a car after its major depreciation.
Still, leasing was not spared the ravages of last year’s interest rate hikes. Monthly lease payments went up this year by as much as $100 per month. This increase will cause the most cost-conscious potential leasees to consider certified pre-owned cars.
These used cars are not jalopies and unwanted clunkers. They are late-model low-mileage cars from expired leases.
There will be a lot of them too. A record number of leases will expire this year, over 4 million.
The great quantity will come with variety. Leasing reflects the current tastes in cars. Consumers will be able to find the car they want whether it be luxury, crossover or SUV.
Consumers will pay less for the car they want. Buyers save an average of $10,000-$15,000 on off-lease vehicles. Luxury cars have bigger bargains because they depreciate faster. A buyer who has always wanted to own a luxury car can save as much as 40-50 percent less than if they bought it new.
“The sweet spot of ownership is buying it right after the depreciation, which is two years,” said Drury who bought a two-year-old used Subaru Forester XT, and saved $12,000. “You have a newish car to toy around with.”
These “newish” vehicles have appealed to cash-strapped buyers like Lucy Perritt, a nail artist in Lancaster, PA. She has never owned a dependable vehicle, and the 2016 Dodge Dart she just bought feels brand new to her.
“This is my first “new car,”” said Perritt. “I had to build my credit for two years to be approved for the loan.”
Perritt, 28, got $500 on a trade in and was able to afford an extended warranty. She doesn’t mind working extra hours at night as an Uber driver to pay for her car because her favorite thing to do is drive with the windows down while singing loudly on the rolling hills of Amish country.
If the Federal Reserve keeps its word not to raise rates, wages continue to rise and unemployment is low, new car sales might even do better than the pessimistic outlook. After all, Americans love their cars. Last year, nearly one out of every four Americans bought a car. Americans buy cars when they can’t afford to buy a home. It’s the second largest purchase for Americans.
“It’s a sign of good times when new car sales are strong,” said Kontos
The auto industry’s performance is a bellwether for the economy as a whole. When GM announced it would close its Lordstown plant last year, Trump started an unsuccessful Twitter campaign to reopen it. Most auto plants are in states that voted for Trump, and he ran on the promise of bringing manufacturing jobs back to America. The third largest manufacturing company in America is GM, followed by Ford.
If car sales fall that could be trouble for Trump’s 2020 reelection campaign