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If consumers aren’t buying enough clothes or furniture or iPhones, it might be because they’re blowing their wad on cars.
Auto sales in July came in at an annual pace well above 17 million vehicles, sustaining the record levels of the last two years. But the real eye-popping number may be the average price of a new car: $34,264, according to Kelley Blue Book. That’s up 2.5% from last July and 18% from the summer of 2010. Wages have only risen 15% since then. Other parts of the economy are still struggling, but these are glory days for most automakers. Here’s a breakdown of average new car price, by automaker:
CarPrices
Several factors are pushing car prices higher than they’ve ever been: cheap gas, super-low interest rates, longer loans and new features, including costly technology the government is forcing automakers to adopt to improve fuel efficiency. With gas prices barely above $2 per gallon for much of the year, buyers are more comfortable opting for large gas guzzlers. Sales of full-size pickup trucks and SUVs are up about 6% this year, while overall sales are only up about 1.4%. That’s why General Motors (GM) and Ford (F)–heavily reliant on such vehicles–rank second and third in average price. Volkswagen is No. 1 on account of its Porsche and Audi luxury brands.
Low interest rates and friendlier types of financing help buyers keep monthly payments manageable, even as they buy more expensive vehicles. The average loan on a new car now lasts 69 months, up from 62 months in 2010, according to Experian. Some loans last as long as 96 months–eight years–with rates below 5% for borrowers with the best credit. The average monthly payment on a new car crept up from $462 per month in 2010 to $503 this year, which means buyers aren’t taking advantage of favorable financing to lower their financial burden. Instead, they’re buying more car.
Automakers are aggressively investing in new powertrain technology such as electrification, direct-injection and turbocharging to meet tough new government fuel-economy standards—and passing at least some of the cost onto consumers. There’s also strong demand for emerging features such as sensors and systems that detect what’s going on around the car and help prevent crashes, and advanced cruise control that speeds and slows the car on its own, based on the speed of cars up ahead. GPS is more mainstream than ever, and Bluetooth connectivity is standard in most new cars these days. All of that pushes prices up.
There are some concerns about the growing portion of loans to subprime borrowers, but subprime auto loans have never been as big a problem as subprime mortgages, which helped trigger the epic housing bust that began in 2006. Auto loans are collateralized by the car itself, and new types of technology can even lock borrowers out of their car if they fall too far behind on loan payments. Some borrowers even prioritize car payments over mortgage payments, because they need a car to get to work and there’s no alternative. Renting a home, by contrast, is a tolerable alternative to owning.
The biggest risk may be to the automakers in a few years, as consumers who spring for a new car once the old one is paid off wait longer and longer to reach the crossover point. Fear of declining car sales in the future is one reason the stock prices for GM and Ford have been stagnant, despite strong profits. At least their customers are riding in style.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.
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