The modern-day automobile is becoming a luxury item
The Retired Investor
Henry Ford must be rolling over in his grave. His vision of making an automobile that would be accessible to all Americans was embraced by the car industry for decades. That era has come to an end.
The demise of the reasonably-priced auto is happening before our eyes. The last car with an average price of less than $20,000, the Mitsubishi Mirage, a compact, is being discontinued.
It joins models such as the Honda Fit, Chevrolet Spark, and Volkswagen Beetle in the graveyard of small, affordable cars.
Over the last few years, Americans for the most part have forsaken ‘small’ for ‘big’ vehicles like the SUV, pickups, and crossovers. For every Mirage sale in the second quarter of 2023, Ford sold 108 F-series pickups. The big auto companies claim that the U.S. consumer is not interested in buying small cars anymore. That may be true, but the reality is that fewer consumers than ever can afford to shell out $48,000 to $50,000 on average for a new vehicle.
Many blame the Covid-19 pandemic for the death knoll of affordable autos. At that time, used and new car prices spiked higher as global supply change shortages disrupted production.
The microchip area was especially hard. The scarcity of chips forced car makers to ration, reserving this precious commodity for their most profitable, high-end autos. Supply of vehicles overall fell, while consumer demand throughout the country continued to increase. This led to an inflationary spiral in vehicle prices.
As in many other areas of the economy, there is a wide disparity between the haves and have-nots in this country. The ability to purchase an auto has suddenly become a luxury problem.
This year, for example, the bottom 20% of workers reduced their purchases of new cars to its lowest level in more than a decade, according to the most recent Consumer Expenditure Survey, while the top 20% of earners spent more on new cars than any time since 1984.
Adding insult to injury is the rise in interest rates that have pushed car loans into the stratosphere. The number of motorists paying more than $1,000 per month for a new car loan is almost 16%, which is a record. The average monthly payment, according to Edmunds.com, is well over $700 per month. That means if you took out a car loan at 4% a few years ago for a $40,000 car, and now must pay 8% in interest over five years, for a similarly priced car that would add $4,463 to the total cost of the vehicle.
Most of us believed that once the pandemic was over, car prices would return to normal instead, manufacturers continued to raise prices Why, you might ask, have auto manufacturers forsaken Ford’s goal of building “a motor car that the everyday American could afford?’
The truth is simple. After the pandemic, car manufacturers realized that selling fewer vehicles at higher prices was good for both sales and profits. Last year, for example, only 13.9 million units were sold in the U.S. (versus 17 million in 2019), but sales were $15 billion higher.
Electric vehicles are also to blame. The industry is in a do-or-die moment as consumers demand companies offer an increasing array of electric vehicle alternatives, while governments offer generous subsidies to manufacturers. This has led to a massive investment drain to the tune of billions of dollars to overhaul factories in a rush to produce EVs. One way to come up with that money was to accelerate the trend toward producing high-margin SUVs and trucks while reducing production in the less profitable affordable car market.
As most readers are aware, the skyrocketing costs of new cars have forced many car buyers into the used car market. At least they are cheaper, if you can find one. The transaction price of a used car is currently $28,381, according to Edmunds.com. That is still up 44% over 2018. Add in the interest expense on a car loan and it is still a sizable sum.
For many consumers, the only recourse is to keep their aging vehicles, hoping the time will come that this insanity will end, and prices will come down to earth. In the meantime, the average age of a light-duty vehicle on the road stands at 12.5 years in the U.S. That is the highest level of aging autos since the Financial Crisis and subsequent recession.
By 2028, a recent study of S&P Global Mobility predicts that autos that are six years or older will make up more than 74% of the U.S. total vehicle fleet of 2028. If so, and your car falls in that aging vehicle category, it might be a good idea to renew or purchase a five-year warranty on your auto right now.
Bill Schmick is a founding partner of Onota Partners Inc. in the Berkshires. None of his commentary is or should be considered investment advice. Email him at bill@-schmicksretiredinvestor.com.