Strategy Upshift: Breaking down the mobility affordability crisis

Driving a car has never been so expensive, and it’s not going to get cheaper any time soon. And that is creating what I would call a mobility affordability crisis. Here’s why. Rising inflation — as a consequence of climbing new- and used-car prices, soaring gas prices and increasing interest rates — has hurt American consumers, and there’s no question it’s affecting mobility, too. Prices for all goods increased an average of 9.1% year over year in June in the largest increase in more than 40 years, according to the Labor Department ’s Consumer Price Index, which measures inflation in the U.S. Inflation cooled slightly in July, falling to 8.5% , but did little to ease economic concerns. Surging new- and used-car prices have been a major contributor to the rise, spiking 12.6% and 16.1%, respectively, in the past year. More than 80% of those purchases are financed or leased, according to Statista . Climbing car prices have contributed more than $1.4 trillion to the nation’s total debt, according to Experian . To make matters worse, Consumer Reports says that nearly 8 million Americans today are more than 90 days late on their car payments, which amounts to approximately 4% — or $56 billion — of outstanding auto debt. [caption id="attachment_57330172" align="alignnone" width="2560"] © Can Stock Photo / aremac [/caption] OEMs prioritize large-sticker models The ongoing shortage of the semiconductor chips needed to power everything from dashboards to diagnostics combined with global supply chain constraints caused by the pandemic are dramatically reducing the production of new vehicles, and the situation is not expected to improve anytime soon. In addition, OEMs are prioritizing their more expensive, higher profit models over their entry-level affordable vehicles; inexpensive small cars like the Chevrolet Cruze, Honda Fit and Chevrolet Trax are virtually nowhere to be found. Because supply is so low and consumer demand is so high, manufacturers are reducing their traditional incentives and subventions to encourage purchases, which means that shoppers are spending more than ever for new cars. In fact, the average price Americans are paying for a new car is hovering above $47,000, driving the current average car payment to more than $730 a month . It now takes 42.2 weeks of median income to purchase the average new car, according to Cox Automotive . And if that’s not expensive enough, Edmunds recently announced that 12.7% of consumers who financed a new vehicle purchase in June committed to a monthly payment of $1,000 or more — the highest level that the car-shopping service has on record — compared with 7.3% in June 2021, 4.6% in June 2019 and 2.1% in June 2010. To make matters worse, soaring gas prices are hitting American drivers hard in the pocketbook and low-wage earners, facing higher prices at both the pump and at the grocery store, have been hit the hardest. In fact, the delinquency rate for subprime auto loans packed in auto asset-backed securities more than 60 days past due rose to 4.15%, the highest since April 2020, according to Deutsche Bank . Meanwhile, demand continues to spill into the used-car market, where prices are up 41.2% YoY, according to the most recent data from the Bureau of Labor Statistics . The average price for 1- to 3-year-old cars is above $41,000, an increase of more than 50% from pre-pandemic prices that averaged $27,300 in January 2020. Used supply pressures unlikely to ease In a dramatic reversal of previous patterns, the supply of used vehicles has declined since the first quarter of 2020 and is likely to continue to dwindle for the foreseeable future. This becomes especially apparent when we anticipate that two of the three main sources for used cars — lease returns along with rental and fleet sales — are about to experience an astonishing drop. A very minimal number of leases were contracted during the first months following the beginning of the pandemic in March 2020 and most of those were written for 36-month terms. Many of those leases are about to end, and their owners are more likely to keep them due to the lack of viable replacement choices, which means one of the largest sources of newer used cars will nearly completely dry up in the coming months. The new car shortage has also affected vehicle rental companies: as they struggle to restock their fleets, they are keeping their vehicles longer — in some cases up to twice as long as before — which also limits the number of vehicles being released into the used-car marketplace. As these used-car sources dwindle, consumers can expect to continue to see fewer options, higher prices and a tighter used-vehicle market going forward. Downturn uncertainty and consumer health For many consumers, traditional vehicle ownership isn’t financially possible, especially for those with low FICO scores, or those whose delinquencies have caused them to default and lose their vehicle. It’s creating a vicious cycle, as consumers in today’s marketplace are already struggling to make ends meet on rising day-to-day expenses , while also trying to maintain a multiyear commitment to a loan or lease. As financial signs point more strongly toward an economic downturn, the possible outcome is proving to be especially worrisome for the approximately 8 million Americans who are already 90 days past due, and especially for younger drivers, as 2.14% to 2.21% of people between 18 and 40 years old were at least 60 days past due on their auto loans in Q1, according to data from credit reporting agency TransUnion . In the end, it boils down to the total cost of ownership, and that number is doing nothing but going up, up, up in today’s automotive marketplace. Given the historically high profitability of the auto loan industry, what are the options moving forward? Right now, financing services companies are lending more than ever, average loan amounts are high, delinquency levels remain modest, and, in the end, profitability in the auto finance sector remains high. Still, the mobility affordability crisis is more of a problem for consumers who are struggling with a variety of factors that are limiting their options. Given the strong profitability of the sector, is there room to allow consumers to breathe a little in these difficult times? Time will certainly tell. Georg Bauer is president and vice chairman of Autonomy . Auto Finance Summit, the premier industry event for auto lending and leasing , returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com .

Strategy Upshift: Breaking down the mobility affordability crisis

Surging new- and used-car prices have been a major contributor to inflation

Electric vehicle startups seek $9.5 billion after burning through SPAC cash

Growth in refinance could prompt fresh dealer chargebacks

Related Posts

Strategy Upshift: It’s time to rethink the FICO score

Strategy Upshift: Is the mature captive model facing disruption?

Growth in refinance could prompt fresh dealer chargebacks

Stay Informed with Our Newsletters

The Roadmap Podcast

SPONSORED

Driving Innovation in Automotive Refunds: How Onbe and Allied Solutions Are Modernizing the Payment Experience

Navigating the Margin Squeeze: EVs, Tariffs & Pricing — A Q&A with Earnix

Enhancing credit approaches to boost conversion and dealer loyalty

Welcome Back!

Retrieve your password