Car Buyers On Sidelines, Waiting For Lower Prices & Interest Rates

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The automobile industry is likely to sell 15.9 million cars this year. That’s a hefty number but still below pre-Covid levels, according to Cox Automotive. 

“The market remains a long, long way from what might be considered pre-pandemic normal,” said Cox. “In the five-year stretch prior to the pandemic, from 2015 to 2019, the new-vehicle sales in the U.S. averaged 17.3 million each year, peaking in 2016 at 17.5 million.”

The problem, to a large degree, involves money. New cars cost a lot and car prices may be headed lower, all of which is keeping some buyers on the sidelines as they wait for better deals.

Auto Loans & Interest Rates

At the start of 2024 there were widespread predictions that interest rates would fall. The Federal Reserve, it was said, would push down bank rates three to five times during the year and lower rates would lead to lower monthly costs for autos, SUVs, and pick-up trucks.

Such predictions no doubt put off auto sales. Why buy today if you can save big money in just a few weeks or months by financing at a lower cost? This is a view that makes a lot of sense if rates are falling. 

Unfortunately, the Fed has not budged. Bank rates did not drop at all as of May, and there are no guarantees that interest levels will decline later this year. 

“Punxsutawney Phil may have predicted an early spring, but high interest rates continued to cast a dense shadow over the car market in Q1,” said Jessica Caldwell, Edmunds’ head of insights. “Compelling new product launches combined with the reintroduction of incentives and rebounding inventory in the new vehicle market are all positive signs for shoppers, but elevated interest rates have dampened any positive market momentum.”

New & Used Car Prices

While interest rates have been stuck, the same is not true of auto prices. The average new car cost $47,218 in March, according to Kelley Blue Book (KBB).

Is $47,218 a bargain? KBB says the March price was 15.5% higher than the typical prices available in March 2021, but also 5.4% lower than the market peak in December 2022. Depending on which comparison you make, you can be a pricing optimist or a pricing pessimist.

However, $47,000 is a lot of money when combined with rising interest rates. In March 2021 and with strong credit, you could finance a new or used car for as little as 3%.

In March 2024 the same loans were priced above 6%. Little wonder that a growing number of auto buyers now have monthly car payments of $1,000 or more. 

The odds of finding a low-cost new car are remote. Edmunds points out that in February 2024, just “0.4% of new vehicles sold were $20,000 or under, compared to 7% five years ago.”

“Over the last decade,” said Caldwell, “low interest rates combined with longer loan terms allowed Americans to embrace the ‘bigger is better’ mentality and buy larger, more richly equipped trucks and SUVs that dominate the roads and driveways across the country today as small vehicles are going extinct. But now that interest rates have shot up, and without many new vehicle options left on the lower end of the price spectrum, buying a new vehicle has become a challenge for many consumers. In fact, it’s shocking how few vehicles are purchased at ‘affordable’ prices.”

Are Lower Prices Headed This Way?

There are several factors which may lead to lower costs.

First, new technologies are changing the marketplace. Electric, hybrid, and battery electric vehicles (BEV) are gaining market share.

Equally important, they’re cutting prices. Tesla, as an example, is expected to produce a $25,000 electric vehicle next year, a price point substantially below current models. Both electric and gas-vehicle manufacturers will have to adjust their prices as a result.

Second, China already has electric vehicles priced around $10,000. You won’t see them in the US because of tariffs and import barriers. Prices would likely be higher if sold in the US to satisfy safety and other standards. 

Chinese imports raise some tricky issues. It would be nice to have cheaper vehicles in the marketplace, but there is also a need to preserve the American industrial base. The 2022 chip shortage, for example, left Ford with 45,000 cars it could not complete, a lesson not being ignored in either Detroit or Washington.

One result has been strong bipartisan support for the CHIPS and Science Act, legislation that sets aside $280 billion for chip manufacturing in the US. 

Third, owners will hang on to current vehicles for longer periods because of higher costs. We’re already seeing this: S&P Global Mobility reported last year that “the average age of cars and light trucks in the US has risen again this year to a new record of 12.5 years.”

Fourth, it may happen that the Fed will lower bank rates. This is entirely possible – though, as we have seen, not guaranteed.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.

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