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A half-decade after plunging to its lowest levels in a half-century, the U.S. new car market is in the midst of a major boom. All told, U.S. buyers spent $52 billion for their new vehicles in May, as the price of the typical vehicle surged to $32,452, up 4 percent from May 2014, according to TrueCar.com.
May’s sales numbers, if averaged out over the course of a full year, would come in at around 17.7 million, up roughly a million from 2014’s total. And, in his annual “Car Wars” study, John Murphy, the senior auto analyst at Bank of America Merrill Lynch, predicted sales could reach 20 million by 2018.
“If anything, we might be a little on the low side,” Murphy added during an appearance at the Detroit Automotive Press Association.
One major reason for booming sales is so-calle
d pent-up demand. During the Great Recession, car sales slipped below 10 million, a good 40 percent below the normal trend. In turn, the age of the average vehicle reached record levels, and has continued to rise to more than 11 years. According to Murphy, motorists simply have to replace some of them as they fail by the side of the road.
With demand strong, automakers have been pushing up prices. But it’s not just industry greed at work. Shoppers are loading up with more features than ever, from leather seats to 750-watt, 20-speaker audio systems.
Another trend is the shift from small, more affordable cars to costlier SUVs and pickups. Buyers also are migrating, in large numbers, from mainstream brands to luxury marques. And those high-line makers seem less reluctant to raise prices. According to TrueCar, the average transaction price of a BMW rose 6.5% in May, year-over-year, compared to just 2.3% for the typical Toyota.
The steady climb in new car prices might come as a surprise to those worried about relatively stagnant middle-class earnings. In reality, most new car buyers today register on the upper end of the middle-class spectrum. Even for relatively “affordable” models, industry research often shows household income levels approaching six figures.
Take the new 2016 Mitsubishi Outlander, the lowest-priced midsize utility vehicle on the market right now. The typical buyer of a base, $22,995 model is expected to have a household income of $79,400. For the $31,000, 6-cylinder Outlander GT, that will jump to $94,000.
One way to cope with high costs is by stretching out financing. Borrowers extended their terms during the previous quarter to 67 months on average, longer than ever for new cars, according to Experian Automotive.
“While longer term loans are growing, they do not necessarily represent an ominous sign for the market,” said Melinda Zabritski, Experian’s senior director of automotive finance.
Another trend is the emergence of the so-called Certified Pre-Owned, or CPO, vehicle. These typically are off-lease products with low mileage that have gone through extensive inspections and, if necessary, repairs. Paired with like-new loans, they’ve become the option of choice for many long-time new-car buyers.
But analysts like David Sullivan, of AutoPacific, Inc., suggest there could be another gap opening up. In decades past, as car prices rose, Americans turned by the millions to then-cheap Japanese and Korean products. Gone are the fire sale-priced Toyotas. Hyundai and Kia now offer luxury models and fewer low-end bargains.
Could China come next? Makers from the Mainland have been promising to cross the Pacific for close to a decade. They’ve delayed their U.S. entries, in part, due to technical and safety concerns – and the fact that the Chinese market has sucked up everything they can build. But with that market cooling, there’s growing talk about finally targeting America’s buyers.
We’ll see the first Chinese-made vehicle go on sale in the U.S. in the coming weeks, a limited-volume, stretch version of the Volvo S60. But Sullivan and others are betting that more affordable offerings could reach here soon – and help keep the U.S. new car boom from going bust.