A ‘bifurcated economy’ is keeping some car buyers out of the market
Average new car prices remain above $48,000, and affordability has been slow to improve.
The automotive industry is in danger of running out of rich people, according to one economist.
Cox Automotive’s chief economist, Jonathan Smoke, spoke at a recent industry conference about the effect a “bifurcated economy” is having on the car business. Wealthy consumers are still willing to pay up for expensive cars, while another 10-20% of the market is sidelined by affordability issues, he said.
The average price paid for a new car in July was $48,401, according to Kelley Blue Book estimates. While affordability has been improving since the pandemic when vehicle shortages and a lack of deals sent prices skyrocketing, Smoke said consumers with subprime credit are facing more pronounced affordability challenges.
That could pose a problem for car companies, which still rely on big, expensive cars to support their bottom lines.
US car sales last month reflected a demand shift toward more affordable segments despite the industry’s high average transaction price.
Small and midsize SUVs are some of the most popular vehicles in the US market—1 in 4 vehicle sales in July were in these segments. According to Cox data, these cars are getting the most discounts in the industry right now, leading to transaction prices between $30,000 and $36,000.
Smoke said this “tale of two cities” version of the automotive industry is leading to underperformance, with the new and used car markets combined operating between 5 and 10% below the industry’s true potential, according to analyst recaps from the event.
What happens when the auto industry runs out of rich people?
Other studies paint an even gloomier picture of the industry right now, with some industry experts warning car companies to course-correct on affordability.
A recent report from Cars.com found that new car demand was down 26% in July, compared to the same month a year ago, while new car supply has risen 45% in the same period.
The same report, released monthly by the car-shopping website and based on pricing and consumer behavior data from across the company’s platform, found that the US car market has lost more than 750,000 sub-$30,000 vehicles since 2019.
Smoke has already warned about the impact a lack of affordable options can have on the automotive industry. Earlier this year, he said the US car market is on the verge of what economists call a “deflationary spiral,” which occurs when delayed purchases cause supply to pile up and pressure prices.
We’re already seeing a microcosm of this issue playing out in the EV market, where demand has shifted sharply away from large and expensive electric cars to more practical vehicles in the segment.
That has left car companies scrambling to amend their EV strategies and pushed out predictions for when car companies — other than Tesla — will be able to profit from battery-powered cars.
