Be glad you’re not selling cars
By Joe Higgins, Quest 4 Quality
- The average price of a new car is now $48,000
- The inventory of new cars has dropped from 3.5 million in 2019 to 1.2 million today
- Credit card debt has reached an all-time high of $986 billion, with interest on loans at 5.9%
The automobile business has been in upheaval for three years due to production problems, COVID-19 and the shortage of chips. It will worsen as auto manufacturers are now racing to enter the electric vehicle market dominated by Tesla and other formidable competitors vying for this rapidly expanding business.
Ford and General Motors have invested heavily to keep up with Volkswagen, Kia and upstarts like Rivian. Electric vehicles now comprise about 7.3% of total auto sales, up from 4% last year.
The cutoff in the U.S. for the production of internal combustion engine vehicles (ICEVs) is 2035, which seems like a brief timeframe to switch to electric cars. With only 12 years left, it is unlikely that this industry’s chaos will diminish soon.
The federal government is offering incentives to buyers who make the jump, which should keep the volume up over the next few years. And while the rebate rules have changed with the Inflation Reduction Act, if you follow the guidelines there is still a $7,500 credit for buying an electric car or truck.
Presently there is a significant shortage of cars and trucks, with the inventory of vehicles dropping from 3.5 million in 2019 to 1.2 million in 2023. This severe supply-and-demand situation has driven the average cost of a new car to $48,000. A moderately-equipped Ford F-150 can cost you upwards of $60,000; the F-150 Lightning goes for $86,000; and if you want a fast truck, the F-150 Raptor will set you back $100K.
And it’s not just Ford; other car makers are in the same position. The passenger car business is almost extinct as an increasing number of buyers opt for SUVs and trucks. These vehicles are more expensive and thus more profitable for the manufacturers.
In order to buy a new car or truck, most consumers must take out an auto loan. Interest rates on these loans are a problem for both consumers and our economy. There was a time in America when car loan terms were three years, but today you can get loans ranging from two to seven years. In the past, manufacturers offered special financing, sometimes at meager rates. It was not uncommon to find a 2.5% interest promotion on a 3-year auto loan, but today rates are in the 5.9% range and can last for more than twice as long.
The average auto payment today is $730, while monthly nut for higher-end cars and trucks can easily exceed $1,500 — the same amount for a 30-year mortgage not that long ago. But unlike a real estate, purchasing an automobile is an investment in a product that depreciates every year of ownership. After five years, a car with 100,000 miles could require a significant investment in brakes, tires and other out-of-pocket maintenance.
As a result, auto loan sub-prime delinquencies are on the rise and have reached 12% as of this writing, which is near the all-time high of 16% in 2008 and 2009 during the “Great Recession.” It is even worse for borrowers with low credit scores and lower incomes. If the Federal Reserve successfully pushes the unemployment rate up, auto loan delinquencies will skyrocket along with defaults and repossessions.
In addition to this credit issue, a report last week from Trading Economics indicated that credit card debt balances were closing in on a trillion dollars in the first quarter, higher than the $927 billion in 2019. Overall, credit card debt increased by $140 billion in 2022, a 25% increase over what consumers accumulated in 2021. This could seriously affect our economy as current credit card interest rates range from 18% to 26%.
Don’t get me wrong — there is great pleasure and satisfaction in buying and owning a new car. Few experiences are as sweet as driving a shiny, loaded automobile off the lot for the first time. We spend hours every day on the road and a quiet interior with an excellent sound system and comfy seats is beyond fun.
However, any economist worth his or her salt will tell you that buying a depreciating asset like a luxury car, or any new vehicle for that matter, is not the best investment choice, especially during a period of high inflation and faltering wages. So be glad you’re selling necessities like washers, refrigerators and mattresses. I’m sure I could get by without an F-150 Raptor, but clean clothes, fresh food and a firm bed are musts.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.