The USA Car Market is in Crisis
The car market is in crisis, and so is America’s middle class. Even amid a scenario of crashing used car prices, the cost of a vehicle is still out of the reach of most middle-income households, a new study shows. In the past, new cars were a symbol of middle-class strength, but now only affluent Americans can afford to purchase a new vehicle at current prices — especially considering that interest rates are adding almost $7,000 to the average car loan. Since 2017, while the price of a new car jumped by a whopping $14,000, median wages grew by a mere $1,000. According to some big names in the auto industry, including executives at major companies such as Toyota and Nissan, although some vehicle prices may drop, from now on, cars will remain expensive for middle-class families and prices will never come back to where they were in 2020. In today’s video, we will expose the reason why owning a car is becoming a distant dream for millions of U.S. workers.
Today, the average monthly payment for a new car is at a record $777, nearly doubling since 2019, while used models have climbed to $544 a month on average, according to Kelley Blue Book owner Cox Automotive. A monthly payment of $777 corresponds to almost a sixth of the after-tax income for middle-income U.S. households.
No wonder why many people are borrowing more, for longer periods of time, to finance a car purchase. Experian Automotive said that in the first quarter of this year, the proportion of new cars bought with the help of financing skyrocketed to more than 86%, and the average loan amount topped a staggering $41,000, which is the highest since the firm began tracking the data. The average term for a new-car loan is now 72 months or six years, but longer-term loans carry more risks.
The Consumer Financial Protection Bureau warns that borrowers who take out long-term loans end up paying more for the car overall, and also run a greater risk of being “upside down” on the loans, meaning owing more than the car is worth.
The price typical used car now stands at roughly $27,000, Cox reports. But an average monthly payment of $544 is still too much for middle-income earners. For over a decade, the average new car payment in the U.S. bumped along at around $400 a month and $300 for used cars. That’s about as much as the typical American household can shell out and still meet other major expenses, said Jonathan Smoke, chief economist at Cox. But since it crossed that mark in November 2019, it only got higher and higher.
For those looking for a new car at a budget price, the options are extremely limited. Domestic automakers stopped building compact cars in the U.S. because they couldn’t make money on them. At the root of the problem is automakers’ pricing strategy: Keep inventory lean to keep price tags fat. They are now giving preference to more luxurious cars that can generate a higher revenue than cheaper popular models, which have significantly lower profit margins.
Add historically high-interest rates to the mix, and cars — just like home ownership and college education — are fast becoming the domain of the rich. At the end of the day, the car market crisis is a societal crisis, too. It is a clear demonstration that most hard-working Americans cannot afford to live in America anymore.
Credit to : Epic Economist