Why are car sales still strong, even with high prices and interest rates?
Why are car sales still strong, even with high prices and interest rates?
The car industry is supposed to be one of the parts of this economy that economists call interest-rate sensitive. When rates go up, car loans get more expensive, and sales and prices go down. Makes sense, right?
Well, more proof came in Tuesday that vehicles are perhaps less sensitive to higher-for-longer interest rates than you’d think. General Motors told investors it sold 903,000 vehicles in North America last quarter — 70,000 more than the same period last year — and it was selling those cars and trucks at an average price of just under $50,000.
Let’s say you were already sick of your beat-up jalopy back in 2022, when the Federal Reserve started raising rates and there was a pandemic-induced new-car shortage. You might have thought, “Hey, I can stick it out a while longer until rates and prices drop, even if my car makes that weird sound when I change gears and the stereo will only play that Shakira CD that got stuck inside it in 2009.”
But you can listen to “Hips Don’t Lie” in your Pontiac Aztek only so many times before you say, “Fine. I can swallow a 7% rate on my auto loan.”
“When the Fed starts raising interest rates, you may think, ‘I don’t want to buy a car, it’s not the right time, it makes it way too expensive.’ But people can only hold on for so long,” said Jessica Caldwell, head of insights at the car sales website Edmunds.
She said the rising price of keeping an old car on the road has also pushed more buyers to the dealership.
“They still do need repairs. They need maintenance, and some of that is still really costly,” she said.
Right now, buyers are paying an average of $9,300 in interest on a new car, according to Edmunds.
That’s a lot. But a sizable chunk of car buyers are basically rich enough to not need a loan at all.
“We’ve seen the role of cash purchases has risen quite dramatically in the new vehicle market — folks who come in and actually just slap down $50,000 for a vehicle,” said Charlie Chesbrough, senior economist at Cox Automotive.
As recently as a few months ago, 1 in 5 car purchases were all cash. And while high prices and high rates aren’t denting sales — Cox Automotive projects 2024 to be the best year since 2020 — they are changing the types of cars Americans buy.
“There does appear to be a shift towards smaller. So we’re seeing that, for example, midsize SUVs, which used to be the No. 1 product category, we’re seeing market shares now declining,” Chesbrough said.
Compact SUVs and compact sedans are cheaper than the bigger models — somewhat cheaper, at least.
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