Home Business Lower-priced new cars are gaining popularity, and not just for cash-strapped buyers

Lower-priced new cars are gaining popularity, and not just for cash-strapped buyers

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Lower-priced new cars are gaining popularity, and not just for cash-strapped buyers

DETROIT (AP) — If she wanted to, Michelle Chumley could have afforded an expensive new SUV loaded with options. But when it came time to replace her Chevrolet Blazer SUV, which she paid about $40,000 for three years ago, Chumley opted for something smaller. And less expensive.

With her purchase of a Chevrolet Trax compact SUV in June, Chumley joined a growing number of buyers who have made vehicles in the below-average price range of $20,000 to $30,000 the fastest-growing segment of the nation’s new car market.

“I just don’t want that big vehicle and paying all that gas money,” said Chumley, a 56-year-old nurse who lives outside Oxford, Ohio, near Cincinnati.

Across the industry, auto analysts say, an “affordability shift” is taking root. The trend is led by people who feel they can no longer afford a new vehicle that would cost them roughly the current average sales price of more than $47,000 – a jump of more than 20% from the pre- pandemic.

To buy a new car at that price, an average buyer would have to spend $737 per month, if financed at the current average borrowing rate of 7.1%, for just under six years before the vehicle would be paid off, according to Edmunds.com . a site for car research and pricing. For many, this is financially out of reach.

Still, there are other buyers who, like Chumley, can handle the financial burden but have concluded it’s just not worth the cost. And the trend is forcing U.S. automakers to reassess their sales and production strategies. As buyers faced high prices and continued high borrowing rates, sales of new U.S. cars rose just 1% through September from the same period last year. If the trend toward cheaper cars proves to be permanent, more generous discounts could lead to lower average car prices and declining industry profits.

“Consumers are becoming more cautious as they face economic uncertainty, interest rates that remain high and vehicle prices that remain elevated,” said Kevin Roberts, director of market intelligence at CarGurus, an auto shopping site. “This year, all the growth is in what we would consider the more affordable price segments.”

Under pressure to release their higher-priced models, automakers have lowered the retail prices of many such vehicles, largely by offering higher discounts. According to Edmunds, the average incentive per car nearly doubled in the past year to $1,812.

General Motors said it kept discounts in check and average car prices held steady around $49,000 from July to September. That delivered a pretax profit gain of $900 million from a year ago, but the company doesn’t expect that in the fourth quarter.

Roberts calculates that sales of new vehicles to individual buyers, excluding sales to rental companies and other commercial fleets, are up 7% through September. Of that growth, 43% came in the $20,000 to $30,000 price range – the largest share for that price range in at least four years. (For used vehicles, the shift is even more pronounced: 59% sales growth in the $15,000 to $20,000 price range over that period.)

Sales of compact and subcompact cars and SUVs from mainstream car brands are growing faster than in any year since 2018, according to data from Cox Automotive.

The sales gain for affordable vehicles is in some ways a return to a pattern that existed before the pandemic. As recently as 2018, compact and subcompact vehicles – which tend to be among the most popular, reasonably priced vehicles – accounted for nearly 35% of new vehicle sales in the country.

The stock began falling in 2020 as the pandemic caused a global shortage of computer chips, forcing automakers to slow production and reallocate scarce semiconductors to pricier trucks and large SUVs. As buyers increasingly embraced these higher-priced vehicles, companies posted robust profit growth.

In the meantime, they found profit margins on cheaper cars too meager to justify significant production of them. By 2022, the market share of compact and subcompact vehicles had fallen below 30%.

This year that share has risen to almost 34% and is still rising. Sales of compact sedans rose 16.7% through September compared to twelve months earlier. In contrast, CarGurus said full-size pickups rose just under 6%. Sales of large SUVs have barely increased: less than 1%.

Ford’s F-Series truck remains the best-selling vehicle in the United States this year, as it has for nearly half a century, followed by the Chevrolet Silverado. But Stellantis’ Ram pickup, usually No. 3, fell to sixth place, surpassed by a number of cheaper small SUVs: the Toyota RAV4, the Honda CR-V and the Tesla Model Y (with a $7,500 tax credit in the US).

The move in buyer sentiment toward affordability came quickly this year, catching many automakers off guard as there were too few vehicles available in lower price ranges. One reason for the shift, analysts say, is that many buyers willing to shell out nearly $50,000 for a new vehicle have already done so in recent years. People who are less able (or less willing) to spend that much have, in many cases, held on to their existing car for years. It was time for them to replace it. And most of them don’t seem inclined to spend more than necessary.

With borrowing rates still high and average auto insurance prices up as much as 38% over the past two years, “the public just wants to be a little more frugal,” says Keith McCluskey, CEO of the dealership where Chumley bought her Trax.

CarGurus’ Roberts noted that even many higher-income buyers are choosing smaller, cheaper vehicles, in some cases due to uncertainties about the economy and the upcoming presidential election.

The shift has left some automakers overcrowded with too many higher-priced trucks and SUVs. Some, like Stellantis, which makes Chrysler, Jeep and Ram cars, have warned that the shift will hurt their profitability this year.

At General Motors’ Chevrolet brand, executives had anticipated the shift away from “very expensive” vehicles and were prepared with the redesigned Trax, which went on sale in spring 2023, said Mike MacPhee, Chevrolet’s director of sales operations.

Trax sales in the US are up 130% so far this year, making it the best-selling subcompact SUV in the country.

“We are essentially doubling our (Trax) sales volume over last year,” MacPhee said.

It is unclear how long the preference for cheaper vehicles can last. Charlie Chesbrough, chief economist at Cox Automotive, notes that the succession of expected Federal Rate cuts should ultimately lead to lower auto loan rates, making larger vehicles more affordable.

“The trends will likely start to change as these interest rates start to decline,” Chesbrough predicted. “We’re going to see consumers moving into these larger vehicles.”

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AP Economics writer Christopher Rugaber in Washington contributed to this report.

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