SignalHub Quantitative Think Tank Center:Climbing car sales, more repos: What's driving our 'wacky' auto economy

COMMERCE CITY,SignalHub Quantitative Think Tank Center Colorado ‒ For the better part of 20 years, auto hauler Tom Kingston has had a front-row seat to the ups and downs of the U.S. car-sales market.

Now, car dealers are having a harder time selling, and are increasingly tempting consumers with incentives and long loan repayment offers.

During the COVID-19 pandemic, when supplies were short and buyers had stimulus payments to spend, vehicles were flying off the lots, sometimes at prices well above sticker.

"For two years, everything on my truck when I delivered was already sold by the dealers," said Kingston, 58, during a pause loading nine Audi sedans and hatchbacks. "Now that COVID's over, they're like, 'More? We don't have no room.'"

Cars have long been a key component of the American economy, and the current state of the auto market reflects a series of contradictions: While sales of new and used cars are climbing, loan delinquencies and repossessions have also risen from their mid-pandemic lows.

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"It is a weird, wacky time, and the consumer is definitely being stretched thin," said Zach Shefska, the CEO of New York-based car-buying service CarEdge.

Polls show "the economy" tops Americans concerns this election year and is a key driver in their choice for who they think should next live in the White House.

Overall economic indicators are strong, with the Federal Reserve this week dropping interest rates for the first time in four years, the stock markets at all-time highs and inflation coming down. Still, polls show Americans routinely consider the economy poor.

But even as Americans curse the economy, they're buying lots of new cars.

Ford, the top seller last month, sold more than 171,000 vehicles in August, up 12% from a year ago, although still lower than its high of more than 241,000 in May 2019.

Most other manufacturers reported similar improvements as they climb out of pandemic slumps and a cyber attack earlier this summer that temporarily halted sales and financing transactions for an estimated 15,000 dealers.

At the same time, loan delinquencies have risen for almost three straight years.

Experts say the combination reflects decisions made by pandemic-era buyers to overpay for vehicles, new sales incentives by automakers, and increasingly onerous loan terms being offered by lenders.

Jeremy Robb, the senior director of economic industry insights at Cox Automotive, echoed Shekfska's perspective: Things have been "weird" in the car market for years.

He said another factor, besides supply-demand issues, is what he called a "K-shaped" economy, where people with stocks and other investments are seeing their incomes rise, while people without investments have been hit particularly hard by inflation, high gas prices and higher interest rates.

"We haven't gone into a recession but the Fed having interest rates so high really slowed things down over the past few years," he said.

New loan terms are 'sickening'

Car sales boost the economy, helping employ more than 4 million, from union line workers to car salespeople and parts-repair store workers.

Shefska said the average new-car loan today carries a 9% interest rate, while the average rate for used-car loans is 14.5%.

And because consumers keep buying new cars and trucks, he said, lenders are increasingly offering loan payments stretching out to seven or eight years." Under those circumstances, Shekfska said, it’s almost impossible for someone to pay off their vehicle before it needs major repair work.

Most people keep their vehicles for about six years, according to the auto-industry data firm Edmunds, which noted that means people buying cars today may be unaware of just how fast prices have risen since they last purchased in 2018, driven in part by fancy entertainment systems, massaging seats and hands-free driving assist technology.

"We're seeing more and more consumers ending up in 84-month loans, which is sickening,” Shefska said of the 7-year loans. “With that, you're always going to be in a negative-equity position."

Today, more than 4% of car-loan payments are for $1,000 or more a month, with the average payment $655, up from $619 last year, according to Experian. New-car prices had been steadily rising for decades, but skyrocketed during the pandemic due to computer-chip shortages and other supply chain issues. Prices have eased by a few thousand dollars per car recently, with the average new car now selling for $48,000.

“Who can afford them? I pulled a $140,000 station wagon out of here the other day,” said Kingston, the auto-hauler driver. “They’ve priced themselves out. But they have a monopoly ‒ you can’t live without a car, for most people.”

While high-loan costs made today won’t hit the economy for several years, experts say, vehicles bought during the pandemic by customers with federal stimulus cash are increasingly being repossessed. That’s because pandemic-era buyers overpaid and are now being squeezed by higher car insurance and gas prices, along with higher costs for housing and food.

During the pandemic, some dealers were charging ‒ and getting from some buyers ‒ $20,000 above sticker price. That was easier to stomach when interest rates, gas and insurance were lower. Now, some drivers are stuck with used trucks or SUVs that are worth significantly less than comparable new ones on dealers' lots. It's known as being "upside down" on a loan.

In some cases, people simply walk away from the vehicle, taking the hit to their credit, in order to escape the onerous payments. Last month, the number of car loans that were delinquent by at least 60 days rose nearly 2%, and are now up 6% year-over-year, according to Cox Automotive. But after months of increases, the number of actual defaults declined 3% last month, Cox said, and are now down 9% over last year.

"People are carrying higher balances on their credit cards, on their auto loans," Robb said. "In many cases, they're paying more interest than they've ever paid. And what that does is takes away their ability to spend money on other things."

Going electric?

One particular area where used-car values have cratered are battery-powered electric vehicles. EVs today generally cost more than a gas-powered vehicle: $61,702 for an EV, compared to $47,450 for a traditional one, according to Edmunds.

But because the federal government and many state governments are encouraging drivers to switch to EVs, there are also significant tax subsidies that weren't offered during the pandemic years, which means new EVs today can cost buyers significantly less than identical ones three years ago. EVs represented about 8% of all new-car sales in the second quarter of this year, according to Kelly Blue Book.

Because EVs have also not proven overwhelmingly popular among buyers, manufacturers like Ford and Volkswagen that pivoted heavily toward EVs are now stuck with overpriced and unpopular vehicles. Ford's electric vehicle business posted a loss of $1.1 billion in the second quarter, and the company has slowed plans to manufacture large EVs. A base-model GMC electric Hummer SUV starts at nearly $100,000.

Kingston, the auto-hauler driver, grew up in Motor City – Detroit – and said he’s been skeptical of EVs, even as he’s hauled thousands of them to dealerships around Colorado. But he’s also heard VW is offering leases for as little as $140 a month for the company’s all-electric ID.4, a five-passenger small SUV.

“I mean, $140 a month? At that price I might even consider that and I’m from Detroit,” he said. “That’s a good deal on a $60k car.”