Vehicle ownership represented freedom, mobility, independence, and, in some cases, prosperity. Yet, today, whether consumers are purchasing new cars or used automobiles, driving a vehicle has turned into a luxury. It turns out that not only are rampant price inflation and the prolonged supply chain crisis impacting the production and purchasing of automobiles, but rising interest rates are also erasing this symbol of middle-class success. Indeed, this primary mode of transportation is becoming out of reach for a growing number of Americans nationwide.
No New Cars for You
Is car ownership reserved only for the affluent these days? For now, this seems to be the case, according to a treasure trove of data on the subject that reveals a concerning national trend.
A recent report from Kelley Blue Book owner Cox Automotive found that the average monthly payment for a new car spiked to an all-time high of $777, roughly double the pre-pandemic level. Used models have also jumped to about $544 per month. Cox noted that the average transaction price for a new vehicle is up 5.9% year-over-year to $49,388.
A separate study by automotive research firm Edmunds discovered that a record 15% of drivers who financed a new car at the end of last year are paying more than $1,000 per month. Overall loan balances swelled 7.6%, and long-term loans between 73 and 84 months jumped from 2021. "Just as new and used car prices finally started to cool off in Q4, rapidly rising interest rates created an even greater barrier to entry for consumers who rely on financing – which is the vast majority of car shoppers," said Ivan Drury, Edmunds' director of insights, in the statement.
Motor vehicle insurance has risen exponentially over the last year, soaring nearly 15%. On a month-over-month basis, car insurance rose 1.4% in January. According to Bankrate statistics, insurance costs have increased to an average annual price tag of $1,771, or $148 per month.
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So, how much will owning a car cost you in the end? A recent American Automobile Association (AAA) assessment learned that the average yearly cost to own and operate a new car advanced to nearly $11,000 in 2022, or $894 per month. “Consumers are paying more attention when purchasing a new vehicle since everything is more expensive right now,” said Greg Brannon, AAA’s director of automotive engineering. “With the recent increase in fuel prices, more and more people want to know the true costs of owning a car beyond their monthly payment.”
Considering that average hourly earnings have failed to keep up with the increasing cost of living – real wage growth (inflation-adjusted) has fallen for 22 consecutive months – many consumers are tapping into credit markets to finance their new cars and used automobiles. The Federal Reserve Bank of New York (FRBNY) total household debt report confirmed that Americans took on an additional $28 billion in auto debt in the fourth quarter, bringing the 2022 total to $1.55 trillion. This was up from roughly $1.45 trillion in the previous year.
More of the Same in 2023?
When the world turned the calendar year to 2023, there was much hope that the Federal Reserve would begin to pivot on monetary policy by cutting interest rates sometime in the second half. However, investors have abandoned these hopes based on recent comments from central bank officials and the latest disappointing consumer price index (CPI) and producer price index (PPI) data. In other words, rates are likely to inch higher and remain elevated longer than what businesses, consumers, and investors would want. Unfortunately, even if rates did come down, the cost of new car ownership would remain high as everything associated with driving is up, from tires to motor oil to vehicle repairs. Perhaps, for many Americans, the nightmare of public transportation is about to become a long-term part of their futures.
