New cars sales are way down – by millions of vehicles annually – but that hasn’t caused new car prices to go down accordingly. In fact, they have gone up – a lot. The average price paid for a new car last year was almost $50,000 – which is both a record high and about $15,000 more than it was just three years ago.
Two factors are driving this.
The first is “electrification,” which is expensive. And becoming more so.
There are more expensive EVs on the market now than there were three years ago, when Tesla was pretty much the only one making them in significant numbers. Now almost every car company is making them, because they have to make them. Well, it’s true that they could decide not to make them – but that would take courage, in short supply in corporate boardrooms these days. Instead, the impetus is compliance. Go along to get along – and pretend it will all keep going, somehow.
Which it did – for awhile – for as long as interest rates remained low and inflation did, too.
A six year loan on a $50,000 car was feasible when the cost of money – interest – was essentially nothing. It was almost an investment to take out a loan. But the cost of money is now three times-plus what it was just a couple of years ago, which has made what was feasible and not financially irresponsible increasingly impossible.
A monthly payment that was $600 is now $800 – and the money available to make the payments has diminished in buying power by at least 10-15 percent, courtesy of what is often inaccurately called “inflation” – effectively increasing the actual monthly cost of the loan to nearer $1,000.
This will inevitably reduce new car sales even more as there are fewer and fewer people who can manage the payments on a $50,000 car.
But this hasn’t prevented the car companies from “committing” to building even more $50,000-plus electric cars, for the same reason that back in the early 2000s, home builders built as many 3,500 square-foot “estate” homes as they thought the market would bear, which it could – for awhile – because low interest rates made it temporarily feasible for lots of people to take out loans on homes beyond their means.
In both cases there is a built-in lag effect that is a function of the artificiality of the forces driving it. Easy money makes it easy for people to believe they are more prosperous than they actually are – and live as if they were able to afford what they really cannot.
In the case of EVs, there is the addition force of . . . force.
Back in the early 2000s, no one was forced to buy an “estate” home – or take out an irresponsible equity loan on their home.
But EVs are being forced onto the market by mandates all-but-requiring nothing other than EVs be manufactured. The latest slew of these are to be announced today and will probably take the form of new mandates requiring that all new cars average at least 50 miles per gallon (and maybe more) which is a really clever way of outlawing almost everything that isn’t an electric car without actually outlawing everything that isn’t.