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Prices On Rise, But At What Cost? : News

Expect another frothy sales month when automakers report August results this week. And if the pattern holds, average transaction prices will have risen in lockstep, flirting with yet another record.

Stout pricing has been a hallmark of the four-year sales rebound. Consumers aren't just buying a lot of vehicles. They're springing for pricier ones too, with more features, advanced powertrains and nicer interiors -- stagnant wages and weak job market be damned.

But they're also stretching themselves further to be able to afford those nicer rides. Even with rock-bottom interest rates, new-car buyers are taking on more debt and dragging their payments across longer periods than ever before, according to Experian Automotive.

Some industry watchers see the price issue as a potential stumbling block in an otherwise clear glide path back to the halcyon days of 17 million-plus U.S. light-vehicle sales. They worry that escalating prices, when coupled with an uptick in interest rates, will put a new car out of reach for a swath of prospective buyers.

Through July, the average transaction price of a new vehicle was $30,988 this year, up 12 percent from $27,683 for all of 2008, according to TrueCar. And the extremely long loans many buyers now need to afford that new car will keep them out of the market for years, sabotaging future sales, some industry watchers say.

The rising prices come despite stubbornly flat wages for American consumers. During the five-year period through July, the U.S. Bureau of Labor Statistics measure of real average hourly earnings, adjusted for inflation, slipped 0.05 percent.

"I think it's going to dramatically affect sales," Peter Welch, president of the National Automobile Dealers Association, says of the price spiral. He says many consumers "are still struggling" and won't be able to work a new-car payment into their budgets in light of the rising prices, which he ascribes mainly to automakers adding powertrain technology to meet toughening fuel-economy standards.

"Being able to put people into cars is going to be a real challenge," Welch told Automotive News this month.

Good for now
For now, though, most pundits say there are too many positive factors at work for the price spiral to crimp sales in the near term. Most important, economists generally don't expect short-term interest rates, the ones that banks use to set their auto loan rates, to move significantly higher any time soon. New-car rates averaged 4.5 percent in the second quarter, compared with 6.4 percent for all of 2008.

Pent-up demand resulting from the oldest vehicle fleet on record -- the average vehicle is more than 11 years old -- is forcing many buyers into showrooms. A nascent housing recovery is stoking pickup sales.

Meanwhile, a surge in leasing is putting a new car within reach for many buyers who wouldn't otherwise be able to afford one. With automakers churning out higher-quality, more-desirable rides than they did five or 10 years ago, residual values are rising steadily, making leases easier to afford. Through the first half of 2013, leasing accounted for 26 percent of U.S. sales, the highest level since at least 2002, according to Edmunds.com

Loan delinquencies and repossessions have been kept in check, too.

In the second quarter, just 0.36 percent of all vehicle loans ended in a repossession, down from the previous low of 0.41 percent in second-quarter 2006. Loans that were delinquent by more than 60 days -- the loans most likely to go bad -- accounted for just 0.58 percent of the total in the second quarter, the lowest level since at least 2006, Experian says.

Stretching to buy
Yet consumer loan data suggests many buyers are being stretched thin to get into those higher-priced vehicles:

• The amount of money consumers borrowed for their new-car loans on average has risen steadily to $26,526 in the second quarter, up 12 percent from $23,592 in the same period of 2008. But low interest rates have enabled consumers to keep their monthly payments flat: The $457 monthly average in the second quarter was actually $13 less than the average from the same period five years ago.

"We've all become used to having these extremely low rates," says Melinda Zabritski, Experian's senior director of automotive credit. She says that if rising rates dampen sales, that eventually could lead automakers to increase incentives.

• The average term on a new-vehicle loan hit a record 65 months in the fourth quarter and has remained at that level, according to Experian. Zabritski says she expects the average term to rise even higher by early next year.

• Loans with terms of 73 to 84 months accounted for nearly 19.5 percent of all new-vehicle loans in the second quarter, compared with 15.6 percent in the same period a year earlier and 12.7 percent in the full year of 2008.

Longer terms help people afford a new vehicle, rather than heading to the used-car lot. But they also lead to more cases of negative equity -- when an owner owes more on an auto loan than the vehicle is worth. That typically keeps those customers away from showrooms for longer periods.

84-month loans
George Glassman, dealer principal at Glassman Automotive Group in suburban Detroit, which sells Hyundai, Kia and Subaru vehicles, says he's been seeing more 84-month loans lately.

"To me, that's a concern because it just parks somebody on the sidelines for a much longer period of time," Glassman says.

The same factors that are pushing prices higher -- better quality, richer content, more technology -- also are enhancing residuals and lease terms. Todd Snell, CEO of Snell Motors Inc., a Buick-GMC-Cadillac dealership in Mankato, Minn., says leases account for about one-third of sales, compared with less than 10 percent a few years ago.

"That's opened the door to a whole segment of people who otherwise might be pushed to the used-car market," Snell says.

More features
Automakers have reined in discounts while boosting sticker prices to reflect the rising cost of better-equipped vehicles. Slick infotainment systems, whiz-bang safety features, creature comforts such as heated steering wheels and powertrain technology such as plug-in hybrids and stop-start systems, all are driving prices higher.

That's true even for brands that built their reputations on moderate prices, such as Chevrolet, Hyundai, Kia and Subaru. The average transaction price for a Hyundai Santa Fe crossover, for example, was $30,196 during the first seven months of 2013, up from $25,690 for all of 2009, according to Edmunds.com.

The list price for the redesigned 2014 Chevrolet Impala, long a favorite of budget-minded buyers, is $30,760 with the 3.6-liter V-6, the volume engine -- $2,565 more than the comparable '13 Impala. The large sedan features a touch-screen infotainment system, acoustic-laminated glass and triple door seals to quiet the cabin, active grille shutters and loads of safety gizmos, none of which was available on the phased-out model.

"There aren't any Suzukis on the market anymore," says George Magliano, senior economist at IHS Automotive. "Look what goes into a mainstream mid-sized sedan today. These are features that you'd see in near-luxury models a few years ago. Where are you going to get a cheap new car?"

Magliano predicts that higher prices will be a major factor in the plateauing of U.S. sales beginning in 2015, when he foresees 16.35 million light-vehicle sales, or 5 percent higher than the predicted 15.5 million-unit pace for this year.

After that, IHS sees sales bobbing along around 16.5 million annually from 2016 to 2023, never cracking 17 million. New-vehicle prices, meanwhile, will continue to rise an average of 2.6 percent annually -- faster than the 2.3 percent annual rate of the past eight years -- to $39,200 in 2023.

Emerging caution
But automakers are cautious about their ability to squeeze out further price increases after the recent run-up.

"There's been a lot of net-price increase that we've had over the last five years coming out of the financial crisis," Mark Reuss, president of General Motors North America, told Automotive News last week. "There's not a lot of that left on the table."

Reuss also downplayed the risk that rising interest rates and subsequent lower sales pose to GM's bottom line. He says GM is in far better shape to withstand a sales-volume hit than in the past because its structural costs are lower and its manufacturing capacity is more flexible, which is true of most automakers.

Jim Stutzman, owner of Jim Stutzman Chevrolet-Cadillac in Winchester, Va., says his customers don't seem to flinch at today's higher prices and smaller incentives. He says that's because they see greater value in the cars and trucks Chevy is peddling today.

"It's the same old value proposition that buyers have always looked at," Stutzman says. "Ten years ago we were offering cookie-cutter, plain Jane cars with no pizazz. There was nothing there for people to say 'Wow, I really have to have this car.' It was always, 'How much will you give me off?'"

"Now that they see the value equation," he says, "and they don't have a problem paying more."


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