For many consumers higher prices are leading to downsizing. Loan terms are getting longer and higher prices are putting younger, first-time buyers in jeopardy.



New vehicles are more expensive and experts don’t see a reversal in the trend, causing U.S. car buyers to jockey between segments, pursue longer loan terms and lease rather than buy.

“New-vehicle prices are growing,” confirms Larry Dixon, senior manager-marketing intelligence, at the National Automobile Dealers Assn. Year-to-date average transaction prices have jumped 13% to $28,831, from $25,505 in 2008, according to J.D. Power and Associates.

Incentive spending per-unit has dropped 5% to $2,856, from $3,018 in the timeframe, while median household incomes have grown but at a much slower pace of 4%, to $87,834 from $84,406.

The rising price of cars is putting some consumers on the ropes, and unchecked it could jeopardize the U.S. industry’s successful turnaround, experts say. A number of factors are driving prices upward.

For starters, Americans are buying cars and light trucks with more content as record-high prices for used-vehicle trade-ins give them greater purchasing power to check more option boxes at the dealer. It’s a good time to buy new, with interest rates at record lows fueling a surging comeback in car sales for the industry.

Pricey pickups also are helping lead the way. The pricing gains are good news for auto makers looking to fatten up financially from the 2008-2009 recession that pushed General Motors and Chrysler into bankruptcy.

But for many consumers, higher prices are forcing them to reluctantly downsize their new vehicles. For example, an owner of a 5-year-old midsize car will find a new compact car costs as much as the original price for his trade-in. This risks poor customer satisfaction.

While loan terms are getting longer to defray the costs, buyers could be left with negative equity when they go to trade in their vehicles, creating another satisfaction issue and a hurdle to future purchases.

Higher prices also put into jeopardy first-time buyers, who generally are younger and facing a weak job market and record-high student loan burdens for those just completing college.

Still, new-vehicle prices show no sign of retreating anytime soon. Indeed, looming federal fuel-economy rules and new safety mandates are forcing auto makers to add an ever-growing list of costly efficiency-improving technology to their cars and trucks.

Car buyers are left to bear the brunt of these escalating costs and eventually will have to absorb higher interest rates once they begin to climb from today’s rock-bottom levels.



But consumers aren’t necessarily getting a raw deal when it comes to their new-car purchases, industry players say. “Some vehicles are getting more expensive,” Chevrolet marketing chief Chris Perry tells WardsAuto, “but there is also more content and value for the customer.”

Other than mechanical options such as a bigger engine or all-wheel drive, navigation systems once ranked among the priciest add-ons a buyer could choose. Today, costly 3-dimensional global positioning systems are just one element of infotainment packages making vehicles as digitally connected as a person’s home.

“Prices are creeping up because people want navigation systems, creature comforts, safety systems and high-tech equipment,” says Russ Clark, director-marketing for Chevrolet midsize cars, performance cars and cross/utility vehicles. “Consumers are willing to pay for the goodies they want.”

WardsAuto data shows the penetration rate of multimedia systems in the ’12 model year climbed to 7.6% of vehicles sold, from 1.8% in ’08. Interestingly, that pace of growth matches heated seats, a longer-established industry creature comfort.

“A lot of the content today was previously relegated to luxury vehicles,” says Erich Merkle, Ford’s top sales analyst. “Things such as navigation systems, adaptive cruise control, rearview cameras – they are much more commonplace than five or six years ago.

“Consumers are moving to smaller vehicles but also want more content,” he adds. “They are buying more highly contented and richly appointed vehicles.”

Average used-vehicle prices also are on the rise, up a record 17% to $18,626 year-to-date, from $15,941 in 2008, according to J.D. Power. The price gain comes despite Americans holding on to their vehicles longer. The average used-vehicle odometer carries 53,561 miles (86,196 km), compared with 45,642 miles (73,452 km) in 2008.

A comeback for large pickups, buoyed by the housing rebound, is helping drive up the average light-vehicle transaction price. Large pickup sales so far this year are up 20.8% to 747,577 units, from 619,108 year-ago, according to WardsAuto data.

“Whatever the truck, there’s demand right now,” GM North America President Mark Reuss says.

GM is going against pricing trends with the launch of its redesigned-for-’14 Chevrolet Silverado by keeping the base price of the large pickup unchanged from ’13. But the auto maker plans to add more crew-cab models to its sales mix, which it expects will drive up the average price of the truck overall.

GM also adds to the Silverado line for the first time in ’14 a luxury High Country model targeting the growing $40,000-plus pickup segment that currently comprises 30% of large-pickup sales.

Ford, Toyota and Nissan are bringing new pickups to the market in the coming months as well, and Chrysler launched its new Ram less than a year ago.



Analysts say it’s a favorable time to purchase large pickups with interest rates at record lows, making vehicles more affordable. Banks are cranking up lending activity after the recession to fuel an increase in industry sales.

Overall deliveries are up 7.1% to 6.39 million units so far this year, from 5.97 million in like-2012, according to WardsAuto data.

 

Industry expectations call for both short-term interest rates, near 0% since 2009, and long-term rates, equally as low, to begin rising starting in 2014. The monetary policy of the Federal Reserve meant to stimulate the economy is keeping the rates low, but banks can’t make money and that eventually could hinder the recovery by limiting lending.

The Federal Reserve has signaled intentions to curb its activity in the financial markets, too, which also portends a rise in rates. Higher interest rates will make vehicle loans more costly, pushing up the final purchase price for buyers as early as next year.

But NADA’s Dixon insists the effect higher interest rates may have on affordability will be muted. He points to a 4.3% interest rate over 60 months on a $30,000 vehicle bought with no money down translating into a monthly payment of $557.

Move that interest rate to 6.0%, which the typical loan carried in 2005, and the monthly payment rises to $580 or $23 more a month and $1,400 over the loan term. “Rates are going to go up, but it’s not going to add a heck of a lot to the monthly payment,” he says. “And we won’t see 6.0% for some time.”

For now, more buyers are stretching their loans over longer periods. NADA data shows 60% of all new-vehicle loans now extend beyond 60 months. Between fourth-quarter 2010 and fourth-quarter 2012, the average term lengthened from 63 months to 65.

The longer terms risk leaving owners upside down on their loans, in which they end up owing more on their vehicle than it’s worth and finding it more difficult to buy the next time around. “You start to become concerned about the equity position,” Dixon says. “It takes longer to build equity, and the risk is greater for negative equity.”

Expect leasing to become more popular as new-car prices rise. It already represents 24% of the market this year, from 18% in 2008, J.D. Power says. “That’s certainly one way” to improve affordability, says Chevrolet’s Perry. “You see lease penetration go up as the price of the car goes up.”

New fuel-efficiency and safety technologies are other factors that will continue to drive up the cost of new vehicles. The federal government estimates corporate average fuel economy rules peaking at 54.5 mpg (4.3 L/100 km) by 2025 will add about $3,200 to the price of a vehicle. NADA research puts the figure much higher, to about $5,000 per vehicle, warning the increases could price some buyers out of the market.

New safety regulations will come down the pipe, too. Technologies such as rear-vision cameras and safeguards against smartphone misuse will cost the industry billions of dollars to implement, with the upticks passed to consumers.

The pending rear-vision camera rule, which federal regulators tabled at the last minute, was expected to cost upwards of $2.7 billion to install on new vehicles.



Higher vehicle prices also put younger, first-time buyers in jeopardy. The demographic already faces a shrunken labor market with an unemployment rate of 7.5% in April, according to the Bureau of Labor Statistics. That’s much improved over the peak of 10% in October 2009 but still high compared with pre-recession levels.

New college graduates, a demographic auto makers typically counted on to arrive at dealerships fresh from their commencement ceremonies, also face the burden of record-high education debt.

The Project on Student Debt, an independent research and policy organization, finds two-thirds of college seniors graduating in 2011 carried a loan debt of $26,600, while unemployment for those graduates stood at 8.8%.

The interest rates on federal student loans is set to double on July 1 after the lowered rates of the 2007 economic stimulus package expire.

Michael Sivak, research scientist and director-sustainable worldwide transportation at the University of Michigan, says unemployment rates and student-loan debts are combining with higher vehicle prices to keep young people out of new cars and trucks.

Social factors also limit the number of young buyers, he says, as fewer pursue a driver’s license and more move to urban areas with public transportation.

Sivak’s research shows on average Americans aged 45-54 years buy the majority of new vehicles annually, representing about 26% of all new-vehicle buyers in 2011, followed by those aged 55-64 years at 23%. Americans aged 25-34 years accounted for 10% of buyers in 2011, down from 15% in 2007. The research concludes auto makers should market to older buyers for greater sales success.

Michael Sprague, executive vice president-marketing at Kia, an auto maker that primarily caters to the lower end of the price spectrum but now is muscling into segments with better-educated and wealthier customers, says the auto maker’s transaction prices have grown in recent years.

And while Kia customers generally have been younger than the average car buyer, many new customers are moving away from luxury, near-luxury and mainstream products to buy a less-expensive vehicle and then fill it with features.

“A lot of it is driven by consumers that have these premium vehicles and realize (they) don’t need to pay more when (they) can get a Kia with compelling design, filled with the latest technologies and great safety for less,” Sprague says.

The fact is all auto makers are vying for that buyer, forcing them to keep a sharper eye on costs.

“There is a lot of parity in the market,” Chevrolet’s Perry says. “Everyone is fighting for more differentiation, how to bring more value, how to enhance the ownership experience. “You would not believe the effort that goes into taking price out of vehicles. It is counting nickels to make sure we are being as value-oriented as we can. It’s not about the lowest price.”

 

This trend is true of everything for sale anymore. Costs are outpacing wage increases on an annual basis, so if you aren't "climbing the ladder," you're likely getting a phantom pay cut annually. Welcome to the recovery...