High-end car showroom and man

The average monthly U.S. payment for a new car has reached a record $777, industry research firm Cox Automotive reported, about 15 percent of American households’ median income after taxes.

The average payment was $691 a year ago, as we noted in “Who Can Afford to Buy a New Car?” (22 Mar 2022).

The payment has almost doubled since 2019, Cox said.

“The idea of a new car in every American’s driveway is not the world we live in,” senior Cox economist Charlie Chesbrough said in comments quoted by Bloomberg.

Combining sky-high car prices with stiff new interest rates means “new cars—like home ownership and a college education—are fast becoming the domain of the rich,” Bloomberg said. 

Used-car payments have climbed to an average of $544, Cox reported.

A shortage of computer chips slashed inventories of new cars on dealers’ lots over the past two years, sending the average new car price to a record $49,507 in December, about 30 percent above 2019’s average, according to Kelley Blue Book, which Cox owns.

Buyers turned to used cars, sending the average price to about $27,000 now, the Kelley book noted.

Through this century’s teen years, the average new-car payment was about $400 a month, which is roughly what the typical American household can afford without short-changing other expenses, Jonathan Smoke, chief Cox economist, told Bloomberg. 

Average payments began rising above $400 in November 2019, he noted.

A key to the problem is a groundshift in the industry’s business model.

Instead of turning out as many cars as possible and using discounts and promotions to fight for customers as in the past, makers are now producing fewer cars, making them more scarce, which enables dealers to keep prices higher, Bloomberg said.

That strategy, discovered by accident during the COVID War’s computer chip shortage, has boosted profits across the industry and convinced makers and dealers to make it permanent.

In 2022, auto companies collectively sold about 13 million vehicles in the U.S., 8 percent fewer than in 2021 and the fewest in ten years. At the same time, Ford booked a gross profit 4.4 percent higher than in 2021; GM’s adjusted earnings grew by $200 million year over year to $14.5 billion. 

“We’ll never go back to the inventory levels that we were at in the past,” Mary Barra, GM’s CEO, said to a gathering of investors last year.

James Farley, Ford’s chief, has said the company will no longer pay for billions of dollars’ worth of inventory or offer discounts and other incentives to get rid of it. Toyota and Nissan have said they also will adopt the “lean and pricey” approach.

Analysts see prices for cars edging down only 4 to 5 percent this year, Bloomberg noted, giving car makers continued incentive to follow the new model.

Car prices also are at record levels in Europe and Japan.

TREND FORECAST: High prices will curtail new car sales in the West, while China churns out an array of low-priced cars for sale at home and, increasingly, in Europe, Latin America, and the Middle East, as we reported in “China Ranks World’s #2 Automaker” (31 Jan 2023).

As the world shifts to electric mobility, the cash flooding into China’s car companies will enable that country to lead in developing new transport technologies and claim an even greater share of the global economy.

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