A salesperson (left) shows vehicles to a buyer at a Toyota dealership.
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DETROIT – Look no further than the auto industry for the latest signs that U.S. consumers may face a “K-shaped” economy in which the rich continue to post gains while those with lower incomes struggle.
The average price paid for a new vehicle last month topped $50,000 for the first time ever, Cox Automotive’s Kelley Blue Book reported Monday. Meanwhile, auto loan default rates for people with poor credit remain near all-time highs.
According to Erin Keating, principal analyst at Cox Automotive, consumers who can afford a new vehicle are on a buying spree, while those on tighter budgets are staying away from the market.
“Although there are many affordable options, many price-conscious buyers choose to stay on the sidelines or sneak around the used car market,” she said in a statement. “Today’s automotive market is driven by wealthier households who have access to capital and good borrowing rates, supporting the higher end of the market.”
Economists have warned that the U.S. economy is becoming increasingly “K-shaped” in the wake of the coronavirus pandemic, with consumers experiencing different realities depending on their income levels.
Wealthier Americans benefited from rising home values, lucrative stock market returns and cheap credit, while low- and middle-income buyers faced tighter budgets and were hit hard by rising inflation.
“We’ve been talking about the ‘K-shaped’ outlook for the consumer for some time. Some consumers are doing well, some are doing less well,” Torsten Slok, chief economist at Apollo Global Management, said Monday on CNBC’s “Squawk on the Street.” “Now we also have a K-shape for the overall economy, where there is a booming industrial renaissance but the consumer faces more headwinds.”
Slok addressed the overall U.S. consumer market against the backdrop of a potential trade war with China, but also said affordability concerns and rising auto loan defaults by subprime buyers were concerns.
New car buyers have faced rising sticker prices, smaller discounts and higher loan interest rates since the coronavirus pandemic — especially for those with the worst credit.
According to Cox Automotive’s Dealertrack, the average interest rate on new vehicle loans was about 9% as of the most recent data in August. These included interest rates of around 18% to 20% for subprime or “deep subprime” customers, who have poorer credit scores and are more likely to default.
Last month’s price record of $50,080 comes as auto loan delinquencies, delinquencies and repossessions have increased in recent months and years, particularly among consumers with subprime credit — or those with a FICO score below 620.
According to Fitch Ratings, 6.43% of subprime auto loans were at least 60 days delinquent in August, up from the record high of 6.45% reached in January. Default rates for borrowers with higher ratings have remained relatively stable.
The Consumer Federation of America, a nonprofit advocacy group, last month described auto financing in the U.S. at a “breaking point, with Americans owing over $1.66 trillion in auto debt.”
The report was released as the Consumer Financial Protection Bureau received a record number of complaints about auto loans. This followed a New York Fed analysis last year that found car buyers with above-average credit scores (620-679) were twice as likely to fall behind on loans than before the pandemic.
Cars.com’s Edmunds reported earlier this month that the share of buyers who committed to monthly payments of $1,000 or more accounted for 19.1% of all financed new-vehicle transactions in the third quarter, near the previous quarter’s record high of 19.3%.
Rising delinquency rates and other concerns recently led to the unexpected collapse of subprime auto lender Tricolor.
Cox’s Keating noted that while tariffs have increased costs and reduced affordability, last month’s record prices were due to strong sales of all-electric vehicles. Consumers rushed to buy electric vehicles before federal tax incentives of up to $7,500 expired at the end of September.
Electric vehicles are typically more expensive than their traditional counterparts. Cox Automotive said the average transaction price for a new electric vehicle last month was more than $58,000.
“We were expecting to break the $50,000 barrier,” Keating said. “This is today’s market, and it’s ripe for disruption.”
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