Why Americans are loading up on cars
The rest of the economy may be stuck in the slow lane, but the auto industry is on a tear.
Auto sales in November continued to strengthen, hitting an annualized rate of 17.1 million vehicles, according to Reuters, which is comparable to the boom year of 2006.
Even better news for the automakers: the average buyer paid about $33,750 for a vehicle in November, the highest average transaction price on record, according to car-research site KBB.com. The biggest beneficiaries are General Motors (GM) and Chrysler (FCAU) which are selling pickup trucks and SUVs as if gas were once again below $3 per gallon. (Wait…. It is!)
The strength in auto sales is surprising given that a lackluster recovery following the 2007-2009 recession has left the typical family with less wealth and disposable income, at the same time the soaring cost of healthcare and other essentials demands more of the family budget. Still, the American love affair with cars seems to persist, despite many premature reports of its demise. Here are three reasons cars sales have been so strong:
Auto loans are the only kind of credit many people can get. The total amount of auto loans outstanding has hit new highs in 2014, according to the Federal Reserve Bank of New York. The only other credit category that’s been growing like that is student loans, and many of those are subsidized by the government. Other types of credit, including credit cards, mortgages and home-equity loans, are still well below pre-recession levels, with some people unable to qualify for loans and others simply cutting back on debt.
Subprime loans—those granted to the riskiest borrowers—account for about 20.4% of all auto loans, according to credit-monitoring firm Experian. That’s a fairly high level that has prompted some concern about an auto-lending bubble that could end in a spasm of defaults and repossessions. But auto-loan default rates have fallen steadily since 2010, as buyers prioritize car payments above other obligations. Lenders may be aided by new technology that allows lenders to electronically disable a vehicle from afar if the buyer has falleb behind on payments. And there are no signs yet of a subprime bubble about to burst.
Meanwhile, the average term of a loan has crept up to five-and-a-half years, according to Experian—the longest ever—while interest rates, averaging about 4.5%, remain extremely low. A combination of relatively easy credit, lengthier loan terms and very low rates has helped new-car buyers borrow an average of $28,000 while keeping the monthly payment at about $470. That’s just about the best deal car buyers have had in decades. With many people locked out of mortgages and resigned to renting, a shiny new SUV may be the new starter home.