Cars are more expensive than ever before. And the dream of buying a brand-new one is seeming like more and more of a luxury purchase to most Americans.
We’re not talking about Teslas, Porsches, or Mercedes. We’re talking about your basic everyday new car: the Fords, Chevys, and Hondas of the car market.
The average price for a new car has hovered around $47,000 since December. But thanks to the Fed’s rising interest rates, car payments are now more expensive than ever before. The average new car payment is now $712 in the U.S.
That’s a lot. And that doesn’t even include insurance, maintenance, or fuel costs.
In fact, that’s getting uncomfortably close to mortgage payment levels, which averaged $1,100 a month in the most recent Census American housing survey.
And as far as that $47,000 price tag is concerned…. The average American is putting anywhere between $10,000 and $15,000 down on a house right now and $6,000 down on a new car.
The numbers here are just too close. And those looking to alleviate the strain by buying a used car are in for some big trouble.
As of May, used car prices had risen 16.1% over the last year as well. Meanwhile, the Bureau of Labor Statistics only clocked new cars at a 12.6% increase – which many market experts disagree with. They’re saying it’s a whole lot higher.
Take a look at this chart that shows the number of weeks of median income it takes an average American to buy a new car:
In one year, the cost of a new car has gone from just under 35 weeks of income to 41.3 weeks.
The average American brings in a little over $1,100 per week. So that’s an increase of over $7,000 per new car, or an 18% increase in price in just about a year according to one source.
At this rate, a new car will be on pace to rival our mortgage payment in another year.
Prices Can’t Stay Up Forever
The good news is that auto prices have to come down at some point.
In fact, the sky-high auto prices may end sooner than we might expect.
Semiconductor shortages at the beginning of the pandemic spurred the rapid increase in new and used car prices.
Carmakers slashed their orders for chips, expecting little demand for new cars amid a global pandemic.
Meanwhile, demand for laptops, iPads, smartphones, and other electronic devices surged as schools and work went online. So semiconductor makers took on orders from electronics makers.
Yet not long after the world began reopening, demand for cars surged back up with a vengeance. Carmakers were scrambling, as semiconductor foundries now didn’t have room for any extra production.
The war in Ukraine also disrupted the supply of neon, which is required for making many semiconductors.
The additional strain on supply chains meant the needed chips for cars were nowhere to be found. Given that luxury and high-tech cars can use 100 or more microprocessors, this was a big problem. Even regular cars can use two or three dozen of these semiconductor-heavy parts.
But the global shortage of semiconductors will come to an end.
High inflation and a potential recession are already dissuading consumers from spending on discretionary items like new phones, computers, and tablets that boomed during the pandemic. Computer shipments are already down 7% and are on track to be down 8.2% from last year.
The crypto downturn and massive changes in crypto mining recently have also put a damper on demand for chips from those areas. All of this will return electronics semiconductor demand to more normal levels and free up more chips for cars.
Meanwhile, chipmakers have been scaling up production for desperate automakers, and supply chains are returning more to normal.
Last month, Mercedes Benz and BMW reported they were receiving sufficient high-tech components for their full production capacity. Volkswagen likewise shared that it is now getting “steady supplies.”
While it will take time for this to reach all corners of the automotive industry, it’s great to see the tides finally – if slowly – beginning to shift.
Where We’re Headed
For now, we should aim to keep our current vehicles if at all possible instead of buying a new car. That’s because, in the coming months, we should expect to see car prices begin to trickle down.
More supply will come to the market and slowly fill out carmakers’ backlog, enabling more people to get that new Ford or Tesla.
In fact, it’s possible that we will see an oversupply hit the market in a year or so. Consumers have little interest in purchasing new vehicles at these elevated prices and high-interest rates if they don’t have to. So while supply and demand find their new equilibrium, we could briefly see a supply glut. If so, that should force prices for new and used autos back down to reasonable levels.
Again, this won’t happen overnight. But if any of us are looking at our current car and wincing, then please keep hanging on.
Soon enough, the car industry will return to something more normal, enabling us to get a new vehicle… without taking out the equivalent of a second mortgage.
Talk soon,
Jason Bodner
Editor, Outlier Insights