A salesperson (left) shows a car to a shopper at a Toyota dealership.
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DETROIT — For the latest sign that U.S. consumers may be facing a “K-shaped” economy, look no further than the auto industry, where the wealthy continue to profit while lower-income families struggle.
The average price paid for a new car last month exceeded $50,000 for the first time in history, Cox Automotive’s Kelley Blue Book reported Monday. Meanwhile, auto loan delinquency rates for people with poor credit ratings remain near record highs.
Cox Automotive executive analyst Erin Keating said consumers who can afford a new car are buying up new cars, while those on a tight budget are staying out of the market.
“While there are many affordable options, many price-conscious buyers are choosing to remain on the sidelines or cruise the used car market,” she said in a statement. “Today’s auto market is driven by wealthy households with access to capital and favorable loan rates, supporting the luxury market.”
Economists are warning that the U.S. economy is becoming increasingly “K-shaped” after the coronavirus pandemic, with consumers experiencing different realities depending on their income level.
While wealthy Americans have been helped by rising home prices, favorable stock market returns and favorable credit, low- and moderate-income buyers are facing strained budgets and have been hit hard by rising inflation.
“We’ve been talking for some time about a ‘K-shaped’ outlook for consumers. Some consumers are doing well, some consumers are not doing so well,” Thorsten Slok, chief economist at Apollo Global Management, said Monday on CNBC’s “Squawk on the Streets.” “The overall economy is currently in a K-shaped phase, with an industrial renaissance booming, but consumers facing additional headwinds.”
Throck was referring to the overall U.S. consumer market amid a potential trade war with China, but also concerns about affordability and rising auto loan delinquency rates among subprime buyers.
Since the coronavirus pandemic, new car buyers have faced higher list prices, smaller discounts and higher loan rates, especially for buyers with the worst credit scores.
As of the latest data in August, the average interest rate on new auto loans was about 9%, according to Cox Automotive Dealer Track. This includes interest rates of about 18% to 20% for subprime or “deep subprime” consumers, who have lower credit scores and are more likely to default on their loans.
Last month’s price record of $50,080 comes as auto loan delinquencies, defaults and foreclosures have increased in recent months and years, especially among consumers with subprime credit or those with FICO scores below 620.
Fitch Ratings reported that the percentage of subprime auto loans that were at least 60 days past due in August was 6.43%, matching January’s record high of 6.45%. Delinquency rates for high-scoring borrowers are relatively stable.
Consumer Federation of America, a nonprofit advocacy group, said last month that U.S. auto financing is “at breaking point, with Americans carrying more than $1.66 trillion in auto debt.”
The report was released after the Consumer Financial Protection Bureau received a record number of complaints about auto loans. This followed an analysis by the New York Fed last year that found car buyers with above-average credit scores (620-679) were twice as likely to be late than before the pandemic.
Cars.com Edmunds reported earlier this month that buyers committing to monthly payments of $1,000 or more accounted for 19.1% of all financed new car transactions in the third quarter, close to the 19.3% recorded in the previous quarter.
In particular, there are concerns about the rising delinquency rate, which recently led to the unexpected bankruptcy of subprime auto finance company Tricolor.
Cox’s Keating noted that while tariffs have raised costs and reduced affordability, last month’s record prices were driven by strong sales of all-electric vehicles. Consumers rushed to buy EVs before a federal tax break of up to $7,500 expires at the end of September.
EVs are typically more expensive than traditional EVs, with Cox Automotive reporting that the average transaction price for a new EV last month was more than $58,000.
“We were hoping to break the $50,000 barrier,” Keating said. “That’s the market today, and it’s ripe for disruption.”
