New car sales in trouble

Buying a car is expensive; it’s not something that most people do more than a couple of times a decade. New cars now average about $20,000, so they don’t represent spur of the moment buying decisions, either. Recent studies show that a number of factors that ordinarily don’t affect one another have come together in such a way that has caused auto sales in the United States to slump considerably.

The early part of this decade was quite good for the auto industry, despite the sluggish economy. Gas prices were stable for the most part, and interest rates were at their lowest levels in decades. Consumers took advantage of the low rates to refinance their houses in record numbers. By lowering their house payments, consumers had more discretionary income than they previously had, and millions of them decided to spend some of that money on new cars, trucks and sport utility vehicles. With sales of cars going well, the auto insurance industry did well, too.

That has all changed, and the car industry is now showing a significant decline in sales. The last three months have lagged behind last year’s sales, despite attempts to improve sales by offering employee pricing and interest rates as low as zero percent. What is the cause of the problem?

There are several factors at work, and they have all come together to create a bit of “wait and see” on the part of consumers:

• Gas prices are high - Gasoline prices are at record levels and are averaging about $3 per gallon across the United States. Consumers are willing to buy new cars that are gas efficient, rather than the larger trucks, vans and sport utility vehicles, but only if they are sure that gas prices will remain at current levels. In the past, when gas prices rose, they usually went down again. In fact, gasoline sold for less than $1 per gallon as recently as 1999. That being the case, consumers are waiting to see what gas prices do before making a decision to buy their next car.
• Interest rates are up. That’s a problem for would-be buyers who have adjustable rate mortgages on their homes. In some cases, their house payments have doubled in the last three years, and that, along with the price of gasoline, gives them less money to spend on anything, least of all a new car. With all of the money going to the house, a new car purchase will have to wait.
• Record levels of debt. The average American household has some $10,000 in credit card debt. With the average interest rate on that debt at 15%-30%, and new minimum credit card payments requiring that cardholders pay at least 4% of the minimum balance each month, there is less money than ever available for new cars.

Will this trend last? It’s hard to say, but for now, car sales will probably continue to decline. In the meantime, a lot of consumers will probably buy used cars.

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