On a frigid Sunday morning in downtown Detroit, economists from Cox Automotive threw icy cold water on consumers’ hopes of swinging a brand new vehicle this year. But don’t blame the messengers. They were simply reviewing for reporters how the combination of rising new vehicle prices and a change in federal tax withholding laws could simply put factory-fresh cars and trucks out of reach for many consumers, sending them to used car lots instead.
Let’s start with pricing. Expensive pickup trucks, sport utility vehicles and crossovers ruled the market in 2018 and are likely to do so again this year. So much so, passenger cars accounted for less than 30% of the U.S. market, leading several automakers to all but abandon those lines.
The result is the greatest selection of new vehicles on dealer lots may be out of reach for many customers. It’s a trend that’s been brewing for several years, explained Cox Automotive Chief Economist Jonathan Smoke. “Affordability is reducing the pool of people who can afford to buy new vehicles,” said Smoke. “Over last 7 years over 54% of vehicles sold in 2012 were under $30,000. At the same time only 6% were above $50,000. By the end of last year, 23% of vehicles sold in the United States….were above $50,000 and only about a third were under $30,000.”
But most consumers make their choices based on monthly payment and not sticker prices. The news on that front is not good either. Smoke pointed out the average monthly payment for a new car purchase in 2018 was $533 or 10.2% of the median household income in the United States. “Americans can’t afford to spend 10% on total transportation,” said Smoke, “so if it’s more than 10% to buy a single vehicle, how do you handle two vehicles per household?”
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Cox Automotive Senior Economist Charlie Chesbrough wasted no words in assessing the effect of steadily rising transaction prices. “This is an issue as to whether the industry itself is pricing itself out of the consideration set for many consumers because these vehicles are just too darned expensive,” said Chesbrough.
It’s not only the industry creating challenges for consumers. Federal tax reform is making its own contribution to the situation. As both Chesbrough and Smoke pointed out, a feature of reform was an adjustment of withholding rates. The problem is, they point out, many taxpayers didn’t adjust their withholding choices. What that may add up to is a very unpleasant surprise when it’s time to file their 2018 income taxes as they find out they’re either not entitled to a refund, or their refund is much smaller than expected because they didn’t have enough of their wages withheld.
“What we’re concerned about is how the economy and the auto industry is so dependent on the massive amount of refund money that gets distributed every February and March,” said Smoke. “Last year over 102 million Americans received a tax refund with an average check almost 2,800 bucks.”
Smoke predicts consumers will be hit with a double whammy this year when their withholding choices are adjusted which means they’re likely to find less in their paychecks, which, Smoke says, “means there’s basically going to be a tax increase without having the effect of a tax increase.”
That all brings us back to the used car lot, along with a lot of consumers who simply need or want a new or replacement ride. It’s those lots that are actually well-stocked with off-lease, lightly-used passenger cars and offer buyers not interested in a pickup truck or SUV an opportunity to find something they can afford.
“These gently used vehicles are clearly taking away some consumers that could potentially buy new vehicles but have decided they’re going to opt for one of these more gently used vehicles because they can get the content and price point they’re most interested,” said Chesbrough.
As long as we’re piling on the challenges for both consumers and new car dealers, let’s add the threat of a 25% import tariff on vehicles produced outside North America. Smoke imagines a dire consequence in opining, “our modeling suggests that the impact if a 25% additional tariff was applied to everything imported outside of Mexico and Canada, the decline in volumes could be larger than what a recession would produce.”
It’s not all bad news, however. Smoke and Chesbrough point out the U.S. economy is still strong, employment and consumer confidence are high, quality has improved and there are plenty of choices on dealer lots. They predict U.S. sales of new cars and trucks won’t emulate 2018’s 17.2 million, settling just a bit to about 16.8 million. That would be a pretty positive result in the face of a raft of consumers’ financial challenges.