Will those looking to buy a car ever catch a break? With interest rates around 7% and average monthly payments above $700, it has never been more expensive to buy and finance a new car while affordable used cars remain hard to find.
A glimmer of hope has arrived for hopeful buyers: According to a recent UBS report, global automakers are overproducing, which could lead to an excess of 5 million vehicles and price cuts to clear lots later this year. But a looming strike could throw a wrench in it all.
United Auto Workers vote to strike the ‘Big Three‘
The United Auto Workers union voted Friday, Aug. 25, to authorize a strike against Detroit’s “Big Three” – General Motors, Ford Motor Co. and Stellantis, the Jeep and Chrysler maker – if contracts aren’t reached by Sept. 14.
Union president Shawn Fain said on behalf of the 150,000 workers, he is calling for 46% raises, the return of traditional pensions and 32-hour work weeks. The UAW has never had strikes for all three houses at the same time.
“There might not be any impact right away, but eventually what that would lead to is something that we saw about a year ago and maybe even back into the pandemic era,” said Brian Moody, executive editor at AutoTrader.com. “The way it will impact consumers is the prices will eventually go up and they may not be able to find exactly what they want. Again, not dissimilar to what we were seeing about a year ago.”
For now, Moody said there’s an abundant supply of vehicles and it would take some time for supply to be constrained in the event of a strike.
Average auto loan payments accelerating
As of July 2023, the average monthly new car payment is $733 a month, a 37% increase in the past 5 years, according to Edmunds. The figure marks roughly 15% of the average pre-tax salary, while experts suggest spending no more than 15% of take-home pay.
A lot of the increase is certainly tied to rising car prices and rising interest rates. But Moody said buyers are also overextending themselves.
“A lot of people who are buying a new car are opting for a luxury brand,” he said, pointing to a rise in luxury market share. He said based on the data, buyers are also leveling up in trim, even in lower-priced models.
Edmunds reported that more than 1 in 6 people – 17.1% – who financed a vehicle in the second quarter of 2023 have a monthly payment of $1,000 or more, an all-time peak. In the second quarter of 2019, only 4.3% of people financed a vehicle with a monthly payment reaching or exceeding $1,000.
“That’s crazy,” Moody said. “The idea that people are maybe overextending themselves with $1,000-a-month car payments, I think that’s concerning.”
Hunting for used cars
The average used car payment is $569, compared with a new car payment of $733, Edmunds reports. But finding a used car, especially a near-new car, is proving more difficult these days.
One factor is similar to what’s being experienced in the housing market: Prior interest rates are so much more favorable that auto owners aren’t interested in trading up and facing higher rates.
“But there’s also the fact that the cars are more reliable. The average used car on the road right now is about 12 years old. That means that those cars are working for them right now,” Moody said.
He also added that price point is key to selection.
“The more expensive the used car, the more abundant the supply, the more inexpensive the used car, the harder those are to come by,” he said. “There are very few cars available across the country if you’re looking for something under $10,000. If you’re looking for something over $30,000, you’re gonna have plenty to pick from.”
Auto loan delinquencies are at 7.3%, above pre-pandemic levels. Is it alarming? Brian Moody gives his thoughts in the video above.
