Automobile Financing

Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.‌Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices.A Wild Ride for Car PricesUsed car prices have been volatile, while new car costs have continued to climb, adding to overall inflation.

Source: Bureau of Labor Statistics By The New York Times“Inflation is not going to be a smooth path downward — there are going to be bumps along the road,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at play right now, and I think some of that has to do with demand post-pandemic.”Elevated car prices have proved uncomfortably sticky. Used car prices have declined, but in a more muted — and volatile — fashion than economists had anticipated. And new cars have continued to get more expensive this year as manufacturers strive to maintain the margins established in 2021.“The big question now is: Are companies going to start competing with one another on price?” Ms. Uruci asked.But that’s a difficult question to answer, because the automotive market has drastically changed. To understand the situation, it’s useful to examine how the auto industry worked before.“Going into the pandemic, the dynamic in the automobile business was this idea that retail profitability was under constant pressure, driven by the internet,” said Pat Ryan, the chief executive of CoPilot, a car shopping app that monitors prices across about 40,000 dealerships.Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with lower-cost imports. Dealers made their profits on volume and financing, often resulting in customer complaints of excess fees.As the coronavirus spread, factories shut down. Even when they reopened, semiconductors remained scarce. Manufacturers allocated chips to their highest-priced models — trucks and sport utility vehicles — offsetting lower volume with higher profits on each sale. About five million cars that normally would have been produced never were, Mr. Ryan said.Dealers got in on the action, charging thousands of dollars above list price — especially as stimulus programs rolled out, and consumers sought to upgrade their vehicles or buy new ones to escape cities. A study by the economist Michael Havlin, published by the Bureau of Labor Statistics, found that dealer markups accounted for 35 percent to 62 percent of total new-vehicle consumer inflation from 2019 to 2022.There were downsides to the lower sales volumes; dealerships also make money on service packages years after cars drive off the lot. But on balance, “it was the best of times for car dealers, for sure,” Mr. Ryan said.It was the worst of times, however, for anyone who suddenly needed a car.Hailey Cote with her recently purchased Toyota Corolla.Ross Mantle for The New York TimesThat’s the position that Hailey Cote of Pittsburgh found herself in last summer. After tiring of low-wage jobs on farms and in restaurants, she built a business cleaning houses for $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she knew she had to find a replacement quickly to ferry cleaning gear to each job and get to school, where she’s pursuing a degree in counseling.At that point, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she went with a 2022 base model Toyota Corolla. Her loan payment is about $500 a month. Insurance, which has also become more expensive, is another $200. Including gas and maintenance, Ms. Cote’s transportation cost is almost as much as her rent, leaving nothing for savings or recreation.“I think it’s the basic necessities that are really the worst,” Ms. Cote, 29, said. “Food’s gone up a bit, but the cost of housing, health care and cars is pretty brutal.”The car price frenzy began to ease in the second half of 2022, as more vehicles started rolling off assembly lines. But the supply has risen only gradually. Automakers, loath to relinquish profits enabled by scarcity, started talking about exercising “discipline” in their production targets.“During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model,” Tom Barkin, the president of the Federal Reserve Bank of Richmond, said in an interview.Car Dealers Reap Big Profits in Inflation EraCar companies have been increasing prices by more than their input costs have climbed, leading to big profits on new vehicles.

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Percent markups for publicly traded dealerships
Source: Michael Havlin (Bureau of Labor Statistics)By The New York Times“The experience of higher prices, and the ability to move prices, does broaden the perspectives of business people in terms of what their options are,” he said. “It’s attractive if you can do it.”One way the automakers tried to buoy prices was jettisoning cheaper models, like the Chevrolet Spark and Volkswagen Passat. Responding to federal subsidies, car companies rolled out electric vehicles, but that didn’t help to bring prices down — they started with luxury versions, like the $42,995 Mustang Mach-E.And there have been added supply constraints. The generation of cars that would typically be coming off three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at the prices that were locked in before everything became more expensive.On top of that, some rental car companies are aggressively restocking their fleets after being starved for several years, leading dealership groups like Sonic Automotive to complain on earnings calls that they’re being outcompeted at auctions.“There are so many sources of used vehicles that just dried up over the last few years,” said Satyan Merchant, a senior vice president for financial services at TransUnion, a credit monitoring company. “And it all has this downstream effect.”The Fed has been raising interest rates sharply to slow demand — including for cars — and cool price increases. But during the adjustment period, that is making it even tougher for many Americans to afford a vehicle. According to TransUnion, the average monthly payment for a new car rose to $736 in the first quarter of 2023, from $585 two years before. Used cars average $523 per month, up $110 over the same period.Prices for Cars of All Ages Are Above Prepandemic LevelsA new car will run you about $51,000 on average – about 30 percent more than in January 2020. 

Source: CoPilotBy The New York TimesCars are now a bifurcated market: Demand remains strong on the high end, where wealthy buyers with excess savings from the past two-plus years are able to absorb higher interest rates, or simply pay cash. Some are only now receiving vehicles they ordered in 2022 at inflated prices.Competition for vehicles is also fierce on the low end, since people with thin financial cushions and in-person jobs can’t afford to forgo transportation, which in most of the country is synonymous with a car. The job market has remained strong, especially for in-person jobs in fields like hospitality and health care, so more people have workplaces to get to.And many people in between, who might switch cars every few years, are waiting for prices to fall.“What we’ve seen is the disappearance of the middle,” said Scott Kunes, chief operating officer of a dealership group in the Midwest. He faults the automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially as interest rates put fancier versions beyond reach. “It doesn’t make any sense to me at all.”The situation may start to resolve itself soon. Wholesale car prices have begun to fall, and carmakers are offering more incentives. Kelley Blue Book data shows that average prices have fallen below list for the past two months, which Jonathan Smoke, chief economist at Cox Automotive, said signaled that demand was easing. Prices have come down in recent months for electric cars — the fastest-growing segment of new car sales, though a small portion of the overall market.Recent history has shown, however, that pricing trajectories are rarely linear. Adam Jonas, an auto industry analyst with Morgan Stanley, said that over the short to medium term, more inventory was the only answer.“Even though the statements from the Japanese and the Koreans are that the chip shortage is ending, it takes many months to spool it up,” he said. “Dealers should prepare for a tight summer.”Jack Ewing More