September 6, 2013

Car prices hit record as buyers load up on options

It's a buying pattern that began around two years ago with low interest rates that let buyers choose pricier cars.

By Tom Krisher / The Associated Press

DETROIT — Americans are paying record prices for new cars and trucks, and they have only themselves to blame.

click image to enlarge

This undated photo provided by Ford shows the 2014 Ford F-150 STX SuperCrew truck. Ford will try to woo more potential buyers this fall by adding a pricier four-door cab to its STX line.

AP

The average sale price of a vehicle in the U.S. hit $31,252 last month, up almost $1,000 over the same time last year. The sharp increase has been driven by consumers loading cars up with high-end stereos, navigation systems, leather seats and safety gadgets.

It's a buying pattern that began around two years ago with low interest rates that let buyers choose pricier cars while keeping monthly payments in check. And automakers have also offered cheap lease deals that include fancy options.

Add in booming sales of expensive pickup trucks, and you get record high prices.

But those conditions could soon change. Although sales are expected to keep rising, automakers say the next wave of buyers who replace older cars will be more cost-conscious, shunning expensive radios and cushy seats to reduce payments. Ford is starting to see that trend in pickup trucks, and is adding a lower-priced model to its top-selling F-Series line.

Most car buyers shop based on expectations for a monthly payment, with the average running around $450, said Jesse Toprak, senior analyst with the TrueCar.com auto pricing website. Since bank interest rates run as low as 2 percent and automakers offer no-interest financing, buyers now have a choice between a lower payment or a nicer car. Unlike rising mortgage rates, shorter-term auto interest rates have remained fairly stable.

"If you can keep your payment the same and get more car, most consumers in the U.S. just get more car," said Toprak, who calculated the record average price.

The average price, he said, went up about $1,400, or 4.5 percent, in the past two years, far faster than normal.

The result is a dream scenario for automakers and car dealers: People are paying record high prices just as demand returns to levels not seen since the Great Recession.

It's also a dream for people like Zachary Bier, a 26-year-old engineer and sales representative in New York City who just leased a $52,000 BMW 335i to replace a 3-Series with an expiring lease. He set out to match his old $650-per-month payment with hopes of getting more features.

For the same payment, he got metallic black paint, upgraded leather seats with red trim and stitching, Bluetooth technology to link his phone to the car, a heads-up display that projects his navigation system and other data onto the windshield, and electronic blind-spot detectors, he said.

"I guess I was surprised based on the sticker price that this car has so much more," he said. "For everything that comes on this, I feel like it's a better car."

The reason car companies can offer cheap leases is because used car values are expected to remain high for the next several years. A company will offer an attractive lease rate now if it feels confident that when the lease is over, it can then sell the returned vehicle for a healthy price on the used-car market.

Those who buy instead of lease also get more for their money because low interest rates can bring lower payments. On average, four-year new-car loan rates are just over 4 percent this year, according to Bankrate.com. Back in 2007, before the Great Recession, that figure was 7.68 percent.

That's a big difference for someone buying a loaded-out $31,000 Ford Fusion with a package that includes heated leather seats, premium audio system and 18-inch polished aluminum wheels. Say the buyer trades in a car worth $10,000 and borrows $21,000. At 4 percent interest for four years, the monthly payment would be $474. But if interest rates return to pre-recession levels, the payment jumps to $510, raising total costs by $1,728. That could cause a buyer to cut features to keep the price down.

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