By on September 4, 2020

Yesterday, we covered how the economic ramifications of the pandemic has negatively impacted the sales volume of electric vehicles (the ones that aren’t status symbols, anyway) in the United Kingdom. We’ll take a broader view of things today, focusing entirely on the general sales trends taking hold in the United States ahead of the Labor Day weekend.

Under normal circumstances, this would be a period where dealerships tempt the public with juicy discounts to clear out their lots for the subsequent model year. But the pandemic has left factories idle for months and vehicles in short supply. While that wasn’t an issue when everyone was first locked indoors, many states allowed their citizens to reclaim their autonomy as dealers sought new ways of selling without the face-to-face rigamarole of interacting with customers directly. We’re now in a situation where demand remains suppressed but has increased to a level where it outpaces the supply of many popular models — increasing the average transaction price of vehicles.

It’s not a great time to be shopping for a car.

While the months between March and July represented a particularly large gap against 2019 sales, August’s volume is estimated to be nearly 20 percent lower that the previous year’s figures. But with people gradually coming back to a market that’s been idle for months, automakers claim they can’t build some models fast enough to meet demand after exhausting their vehicle reserves.

According to J.D. Power, the average transaction price for a new vehicle rose to $35,420 (a relatively conservative figure) last month. While that’s hardly what someone wants to see in a recession, the situation is said to be the direct result of the laws of supply and demand. The people who are actually buying cars tend to purchase slightly nicer ones and dealerships don’t have many on hand. In recent piece analyzing the market, The Wall Street Journal also noted that the continued trend of lengthening loans has allowing consumers to purchase expensive vehicles with comparatively low monthly payments.

From WSJ:

The auto industry is following a trajectory similar to the housing market, where low interest rates and a shortage of available homes have propelled prices higher.

The automobile market is just one of many parts of the economy in which the divide between haves and have-nots appears to be starker than ever.

With the pool of potential buyers limited by the economic fallout from the ongoing health crisis, U.S. car sales have declined, down 19.8 [percent] in August, according to Motor Intelligence, and car executives say they expect sales to remain depressed for the remainder of the year.

Younger car buyers are getting priced out of the new-vehicle market as auto makers have turned away from cheaper small cars and sedans to focus on bigger, higher-margin vehicles.

Something tells me that further disenfranchising youngsters isn’t a wonderful long-term strategy for the United States, lenders, or the automotive industry in general. The mere fact that demand is down while prices have climbed upward seems to be an overt warning that something is amiss here. But there’s always a chance this crisis will be short-lived. The response to the virus (be it prudent or foolishly reactionary) really mucked up the economy, and the automotive sector has suffered just like everyone else.

Most analysis seem convinced that this will be a temporary issue, however. People are coming back to purchase vehicles and they’re buying the models with higher-than-average margins — which is good news for manufacturers. Yet none of them have ignored the plight of younger adults and those who happen to occupy to lower rungs of the socioeconomic ladder.

“We’ve just been amazed at how resilient the market has been,” Michelle Krebs, an analyst for Cox Automotive, told WSJ. “The people who have money have plenty of it, and they are spending it on expensive vehicles. The low end — that’s where the job losses are.”

But while lower interest rates are supposed to help regular people get into a new vehicle, with the Fed backing the notion to keep them exceptionally low even if inflation starts becoming an issue, this often results in customers paying more money over time. Ultimately, this diminishes their buying power elsewhere — potentially compounding the overall problem. We can certainly fault the industry for pushing high-margin utility vehicles and crossovers and allowing ludicrous loan terms. But it’s not their fault that so many consumers are snubbing their most affordable products for something a little bigger or nicer.

Sadly, years of prioritizing upmarket vehicles has resulted in fewer super-bargains on the used lots. Back when compact cars were all the rage, you could find secondhand dealerships with plenty of budget-focused models in good condition. That’s becoming less true, however. Axios recently published its own estimates on vehicle pricing — claiming that the average transaction for a new automobile in August hit $38,414 (up $400 from January 2020) with used vehicles topping $20,445 (an increase of $900).

Assuming manufacturers see the writing on the wall, we envision economy cars making a gradual return to prominence with larger vehicles holding sway with a large portion of consumers. Otherwise, we’ll be left with a large hunk of the population unable to afford basic transportation as we become a third-world nation.

“The folks that are struggling right now, it’s going to be a real challenge when they need a new car,” said Vince Sheehy, president of Sheehy Auto Stores, which has dealerships around Washington D.C. “And those are customers we’re going to lose.”

[Image: Jeff Bukowski/Shutterstock

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25 Comments on “U.S. Car Sales Are Down, Average Transaction Prices Are Up...”

  • avatar

    Makes sense. Poor don’t buy anything. So, only more expensive models are purchased with people who have money, hence avg trans is higher.

    • 0 avatar
      Art Vandelay

      Yep. Everything going on in the economy is screwing those that can least afford it.

    • 0 avatar

      This flies in the face of what Larry Kudlow said during the Presidential Presser on CSPAN this afternoon when he stated that car sales have taken off during this 3rd quarter of 2020.

      It’s true that car sales plummeted starting mid March 2020 because of the China virus, but with innovative sales strategies like “shop from home” and “we’ll deliver to your home” sales have been chugging along quite nicely.

      Maybe not 17MILLION SAAR, but improving every day as the economy opens up again nationwide, some regions sooner rather than later.

      • 0 avatar
        Arthur Dailey

        Thanks for pointing out for us that we truly cannot believe anything we hear from this White House or the ‘best people’ appointed by the President. Kudlow has no academic training in economics.

        “August’s volume is estimated to be nearly 20 percent lower that the previous year’s figures.” That certainly seems to demonstrate that sales did not “take off” in the 3rd quarter.

        But then the current administration has made many false claims. According to Daniel Dale who tracks them more than one per day. The president himself admitted to making up ‘facts’ after speaking with the Canadian PM in 2018.

        • 0 avatar

          Is it possible that “take off” is referring to the earlier part of the year?

          • 0 avatar
            Arthur Dailey

            No. @HDC wrote “he stated that car sales have taken off during this 3rd quarter of 2020”.

          • 0 avatar

            Yes, it’s possible Kudlow meant that compared to the earlier part of the year, sales have taken off. The industry compares to the same period last year, and that’s what others here are sticking with, despite this year being anything BUT comparable with any other year.

            The old saying is true, that it’s impossible to speak in such a way that you cannot be misunderstood. Toss in biases held by the reader, and the misunderstanding can get heated.

            With those who don’t like Trump, and are skeptical or even hostile to what anyone in his administration says about pretty much anything, rational discourse and analysis will be supplanted by polemics.

        • 0 avatar

          Yes it has “taken off” being 20% less than last year is an improvement over the 2nd quarter where sales were of 40% from 2nd Q 2019.

          • 0 avatar
            Arthur Dailey

            @Lorenzo: that is what is known as ‘putting a spin on things’ or in the immortal words of Warren Kinsella, ‘fart catching’.

            When someone has been caught making false statements numerous times, just like the ‘boy who cried wolf’ then you can no longer give them the benefit of the doubt. Regardless of your political leanings.

            Unless you have willfully abandoned your freedom of thought.

          • 0 avatar

            No Arthur it isn’t spin, it is fact, car sales are increasing from their low point. Year over year are normally used since car sales are somewhat seasonal. However this year hasn’t been an average year and increases over the previous quarter are a much more relevant statistic in this case.

            Come next July there will lots of people saying how the year over year numbers have increased so much, but it won’t really mean much because this year is not normal.

            A good example of why sales vs last year are not always that relevant is the current Silverado. It showed some great YoY increases in the early part of this year. It wasn’t because they were doing particularly great then, it was because they did so bad the prior year due to the lack of supply due to the change over.

          • 0 avatar
            Arthur Dailey

            @Scout. Thanks. So yes 3rd quarter of 2020 sales have increased over the 2nd quarter of 2020 when the economy was largely shut down, but are considerably lower than the 3rd quarter of 2019.

            So much like the glass if half full/half empty debate?

          • 0 avatar

            Yeah it is a little glass half full/half empty debate. In this case I’d be on the half full side since the water level is currently rising. Back in July on the other hand I would have been on the half empty side since the water level was dropping rapidly.

  • avatar

    While tight supply is definitely playing a factor in transaction prices the real reason is that the people who were buying the lower priced cars are the ones that have been negatively impacted the most.

    Those that are buying have money and many of them are now finding that they have more disposable income since they are no longer spending it on gym memberships, salons of all types, a coffee on the way to work, stopping at the bar Fri night, taking the family out to dinner Sat night ect.

    The low end buyers aren’t coming back anytime soon either, so don’t expect a return to economy offerings. We’ve seen that full size trucks have been the most resilient segment while compact and subcompact cars were the least. Even once those low end buyers return to full employment they are going to spend years climbing out of the hole and will be gun shy long after they have their heads above water again.

    • 0 avatar

      “The low end buyers aren’t coming back anytime soon”

      I believe that is largely driven by where they reside, big city, suburbia or the wide open spaces without a public transportation system where a car is a “must have.”

      A person can’t work or make money if they have no way to get there.

  • avatar

    How much of the lengthening loans and higher prices is because cars last longer? It’s one of Bastiat’s unseens, and I imagine it makes a big difference. If I know my next car will either hold off my next purchase for several more years, or bring a higher trade-in value, higher prices with longer loans and the same payment might be a push.

  • avatar
    SCE to AUX

    “The automobile market is just one of many parts of the economy in which the divide between haves and have-nots appears to be starker than ever.”

    Good article, and this is the sad truth about cars. Perversely, if lower income buyers rush to the used car market instead of buying new, they’ll find that supply-demand has driven up used car prices, too.

  • avatar

    I also think that the supply of used vehicles entering the market has come down. A few months ago we were concerned that the Hertz bankruptcy would flood the used car market and drive prices down. That hasn’t seem to occur at all. Let me point up another issue that hasn’t been mentioned before. I know for myself, I have only driven approximately two tank fulls of gas miles in the last five months. My leased car will have plenty of meat left on the bone at the end of the lease. If things continue as they are, I am very likely to buy it, rather than turned it in. I suspect this phenomenon is also true with people who own their car and would normally trade their vehicles at regular intervals. Most of us have driven so much less in the past five or six months that people are not selling a car but keeping it longer. Also, especially true of us older drivers, we are scared to death of the economic uncertainty and reluctant to swap a good running car for a slightly better running brand new one. All these forces conspire to keep vehicles out of the use car supply chain.

  • avatar

    Yeah, it kinda kills me that I’m going to turn in my leased vehicle with so many miles unused — and I’m one of those who HAS gone to work this whole time, I just haven’t done many other journeys. Not much in terms of road trips, jaunts to regional offices or conferences, popping out to dinner or friends’ houses. Never bothered Ubering in this car, which previously was something I did fairly often, albeit to help with insomnia more than bills.

    It has made me rethink whether I should lease another dead-reliable new car at all, or go for something used and stupid.

    • 0 avatar

      @HotPotato, look at selling it to CarMax or Carvana. If you have not driven nearly the miles you thought, you could easily be sitting on some equity that you would give up by turning it in. You can sell a leased vehicle at any time, you are not required to “turn it in”.

  • avatar

    The new vehicle you purchase in 2020 from an old-tech mainstream OEM:
    • Weighs too much
    • Has too many parts, and
    • Costs too much

    With the proper level of innovation and modern manufacturing techniques and materials, it could be:
    • Even more reliable
    • More easily repairable
    • Even more durable, and
    • Significantly more efficient

    Beyond the cost of manufacturing the vehicle, there is a huge amount of cost due to:
    • Lack of shared components between vehicles from the same OEM
    • Very little attention paid to best practices, in everything from the shop floor to G&A expense, and
    • A heinous level of wasted cost in the ordering and distribution process

    (The pandemic has highlighted some of the weaknesses with current practices; smart automakers will learn the lessons and adapt.)

  • avatar
    Arthur Dailey

    Retirement is staring me in the windshield. Depending upon the economy and my health, anywhere from 1 to 4 years from now.

    At which point we hopefully sell the family home in the Toronto area and downsize to a smaller home in a smaller community.

    So do I buy a new car based on my current needs and pay it off over 7 years.

    Or lease a car, and then when I retire purchase a new vehicle based on my ‘new’ lifestyle and that may be the last vehicle that I purchase for myself?

  • avatar

    Need to make all this high tech safety stuff optional and by order only. This stuff is driving up costs and weight. Prices of new cars are crazy high, way too high!

  • avatar

    “Younger car buyers are getting priced out of the new-vehicle market as auto makers have turned away from cheaper small cars and sedans to focus on bigger, higher-margin vehicles”……………

    It does not appear that automakers have turned away from cheaper smaller cars, the buyer has. If the Fit sold even one quarter as well as the F150, would Honda have stopped selling it here?

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