Auto payments near record high: Here's what to know

Key Concepts

• Average Transaction Price: The actual amount paid for a vehicle at the dealership, excluding Manufacturer's Suggested Retail Price (MSRP).
• Auto Loan Monthly Payments: The recurring cost of financing a new or used vehicle.
• Trim Levels: Different versions of a vehicle model that offer varying features, technology, and price points.
• Input Costs: Expenses incurred by automakers, such as raw materials, labor, and tariffs.
• Inflation Moderation: A slowing down of the rate at which prices increase, but not necessarily a decrease in prices themselves.
• Base Model: The most basic version of a vehicle, typically with fewer features and a lower starting price.
• Features and Technology: Add-ons and advancements in vehicles that consumers desire, such as navigation and heads-up displays.

Auto Prices and Loan Payments Surge

Congressional leaders are expressing a desire to lower auto prices, but the current market conditions present significant challenges to achieving this goal. Phil LeBeau reports on the substantial increase in average transaction prices for vehicles.

Data on Price Increases

• October 2018: The average transaction price for a new vehicle was just under $50,000.
• October [Current Year]: The average transaction price has risen to approximately $61,000, representing an increase of roughly $11,000 or 29.5% since 2018. This surge is attributed to the period before the pandemic.

Impact on Auto Loan Payments

The rise in vehicle prices is directly reflected in auto loan monthly payments.

• New Vehicle Loan Payments: According to TransUnion, the average monthly payment for a new vehicle loan now exceeds $750. These payments have been steadily increasing, with a significant jump occurring during the pandemic.
• Used Vehicle Loan Payments: Monthly payments for used vehicles are approximately $150 to $170 less than for new vehicles, falling in the range of $575-$580.

Factors Driving Auto Price Increases

Several key factors are contributing to the elevated prices and loan payments for automobiles.

Automaker Strategy: Focus on Higher Trim Levels

Automakers are prioritizing the production and sale of higher trim levels of vehicles.

• Consumer Demand for Features: Consumers increasingly desire advanced technology and features in their vehicles, leading to a preference for higher-end trims.
• Limited Demand for Base Models: Very few consumers opt for base model vehicles. Automakers recognize that the majority of sales come from models equipped with desirable features.
• Profit Margin Protection: By focusing on higher trim levels, automakers can better protect their profit margins in the face of rising costs.

Increased Input Costs

Automakers are experiencing significant increases in their operational costs.

• Raw Materials: The cost of raw materials used in vehicle manufacturing has gone up.
• Labor Contracts: New labor contracts have contributed to higher labor expenses.
• Tariffs: In some instances, tariffs have added to the overall cost of production.
• Supplier Cost Pass-Through: Suppliers are passing on their increased costs to automakers.

Congressional Scrutiny and Future Outlook

The issue of auto affordability is drawing attention from lawmakers.

• Upcoming Hearing: A hearing is scheduled for January, initiated by Senator Ted Cruz, to examine auto affordability.
• Consumer Dissatisfaction: There is widespread dissatisfaction among consumers regarding monthly loan payments exceeding $750 for new vehicles.
• Price Plateau, Not Decline: While auto prices may have plateaued to some extent, there is no indication that they are expected to decrease in the near future. The moderation of inflation does not automatically lead to price reductions; prices tend to remain at elevated levels.

The Challenge of Rolling Back Prices

The current pricing structure makes it exceptionally difficult to reduce auto prices.

• Interconnected Costs: The increase in input costs, labor expenses, and other factors creates a complex web that makes reversing price hikes a near-impossible task.
• Consumer Expectations: Consumers have become accustomed to and expect certain features and technologies in new vehicles. Even when considering more modestly priced vehicles (e.g., $35,000-$40,000 starting price), adding desired features quickly escalates the final price.
• Lack of Customization: Consumers cannot easily opt out of specific features to lower the price of a vehicle; the options are often bundled into higher trim levels.

Discussion on Vehicle Customization and Features

The conversation touches upon the flexibility of vehicle customization, particularly regarding features.

• Limited Customization Options: It is not generally possible for consumers to select specific features and exclude others to achieve a lower price point. Vehicles are typically offered in pre-defined trim levels with bundled features.
• Example: Jeep Doors: The discussion briefly veers into the topic of removable doors on vehicles like Jeeps and Ford Broncos, highlighting that such customization options have historically been available and can be performed by owners or dealers. This serves as a tangential example of how certain vehicle configurations can be altered, though it doesn't directly address the core issue of price reduction through feature selection.

Conclusion

The current auto market is characterized by significantly higher vehicle prices and loan payments, driven by a combination of automaker strategies to focus on feature-rich, higher trim levels and escalating input costs. While congressional leaders aim to address affordability, the underlying economic factors and consumer demand for advanced features present substantial obstacles to price reductions. Prices are expected to remain at elevated levels, with no clear indication of a reversal.