For yet another month, the new car market has been booming. J.D. Power and LMC Automotive are forecasting August new car sales to hit the highest level of the year.
Light-vehicle sales are projected to hit 1.3 million units and total light-vehicle sales are expected to reach nearly 1.5 million in August. That would be a 3% increase over August 2013.
But other recent trends are giving some industry analysts pause. Just this week the American Customer Satisfaction Index showed that overall consumer satisfaction with their new cars has fallen for the second straight year.
Before you write that off as fallout from GM's high-profile recall issues this year, consider this. The only brands that actually improved customer satisfaction were GM nameplates – Chevrolet and Buick.
Claes Fornell, ACSI Chairman and founder, says it's notable that imports from Asia and Europe have begun to lose the allegiance of American consumers.
“The other notable finding is that several of the luxury brands do poorly,” he said. “That didn’t use to be the case, and suggests that consumers now expect more for their money when they pay a premium price.”
Less bang for the buck
Could declining satisfaction be linked to the fact that consumers who buy a luxury car must pay more than what their parents once paid for a house?
In July, Kelley Blue Book reported the average transaction price (ATP) for light cars and trucks in June was $32,343. That's average, not just luxury models. New car prices were up by $454 since June 2013.
It seems odd that car sales keep going up, and prices keep going up, while consumer's incomes have been mostly stagnant over the last 5 years. How are we affording these increasingly expensive cars?
Expanding payment terms
In years past people took out a new car loan for 3 to 4 years. Today, trying to pay off a car in that length of time might give you a monthly payment the size of a mortgage.
Increasingly, consumers are opting for a 5-year loan and, in some cases, automakers are offering terms as long as 7 years. Longer loans carry higher interest rates and the consumer pays down the principal at a slower rate.
With a minimal down payment and a 7-year term, the value of the car can easily fall below what the consumer still owes before the loan is paid off. Sound familiar?
That's what happened during the housing bubble, when creative financing was the only way some consumers could afford an increasingly expensive home. If the loan was in the subprime category, the odds against the consumer were even greater.
Subprime auto loans are most often used to finance used cars but have been used to purchase new vehicles as well. The Center for Responsible Lending (CRL) notes that investigations into the subprime underwriting standards and securitization at large lenders have raised concerns that the subprime credit bubble is repeating itself, only this time with car loans.
Probably not, says Dennis Carlson, deputy chief economist at Equifax.
"The lending landscape today is not the same as it was in 2007, both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased," Carlson said. “We believe that while the subprime lending segment needs to be monitored carefully, the evidence at this time does not suggest there is a bubble forming."
Still, consumers considering an auto purchase would be advised to keep affordability in mind when shopping for a car. If the monthly payment is only affordable if it is stretched over 7 years, the car probably costs too much.