Ford and General Motors announced this week that the vast majority of all their global profits are again coming from North America, in part due to low interest rates, affluent baby boomers, and Americans’ rekindled passion for pickup trucks, pushing the average price of a new vehicle above $31,000.
Coupled with Americans willingness to pay higher prices, automakers are also spending much less on rebates, cut-rate financing, and other sales lures.
“People complain cars are expensive, but they also buy the most expensive ones,” commented analyst Jesse Toprak of TrueCar, which tracks pricing data. “People are happy to pay more if they get more.”
A cause for concern is that loans are getting longer. In the fourth quarter of 2012, loans lasted for 65month on average which, according to Experian, is the longest ever. Longer-term loans allow buyers to reduce monthly payments.
Accounting for 30% of new-vehicle retail transactions in the first half of 2013 are loans of 75 months or longer, up from 29% in the first half of 2012, according to J.D. Power and LMC Automotive.
Compared with 21% in the same period of 2012, leasing has increased to 24% of all sales in the first half of 2013. But John Humphrey, senior vice president of the global automotive practice at J.D. Power, stated the rise in new-vehicle leasing “is providing a counterbalance” to the increase on long-term loans.
Consistent with long-term loans, leasing tends to make a $30,000 vehicle more affordable than buying it with three-year to four-year financing. Additionally, dealers embrace leasing because it assures those customers return in three to four years.
For the Detroit Three, this can be likened to a surfer’s perfect wave. Trucks have had one of the largest impacts on Ford and GM, increasing average transaction price by $2,000, higher than the industry average – $33,272 for Ford and $33,218 for GM in June.
According to Kelley Blue Blook, the average pickup sold for $40,361 in June, up 2% from a year earlier, even with GM selling down inventories of their outgoing 2013 models.
Industry-wide new vehicle prices are up 2% from a year earlier, only slightly more than the 1.8% increase in the consumer price index (the inflation rate) from June 2012 to June 2013, TrueCar reports.
The Federal Reserve potentially retreating from its stimulative policy of buying about $85 million of government bonds every month also creates a potential risk. However, Thomson Reuters and the University of Michigan report that consumer confidence in May and June was as strong as at any point in the last six years. According to Bankrate.com, the average interest rate on a four-year new car loan is 2.7%.
“The stage is set for stronger growth for the rest of the year,” added Robert Dye, chief economist at Comerica Bank.
Jessica Caldwell, economist with Edmunds.com, stated that the average age of vehicles on the road remains at 11-12 years, underscoring that there is still plenty of pent-up demand that will push more people into showrooms.
The fact that the majority of buyers are older, wealthier baby boomers – while young millennials don’t have the income or interest to buy a car – is another aspect to monitor. The Consumer Financial Protection Bureau projects that Americans now owe the federal government more than $1 trillion in student loan debt.
A report released in May by the University of Michigan Transportation Research Institute found that people between the ages of 55 and 64 are 15 times more likely to buy a new vehicle than those born after 1980.
However, Dye said a robust economic cycle “starts with wealthy baby boomers buying cars, and then we put more autoworkers to work and income growth and confidence and more jobs for millennials. That’s the way it works. It is not necessarily a bad and unsustainable thing if a certain segment of the market is buying cars.”
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