The mega decline of vehicle affordability

Hey, everyone. What a week it’s been. After two years of sharing my insights as Car Dealership Guy…I finally took off the mask and told you who the f*ck CDG really is. I’m grateful to all of my friends and followers who’ve supported me over the years—we’re just getting started with CDG. Here’s to uplifting the auto industry, one tweet, podcast, and newsletter at a time.

—CDG…or should I say Yossi? Lol

First time reading the CDG Newsletter? Subscribe here.

Today’s Biggest News

The Mega Decline of Vehicle Affordability

If the years from 2020 to 2022 were marked by supply chain chaos, and the years from 2022 to 2023 were all about an industry-wide rebound…what will 2024 bring for dealers, lenders, and auto buyers?

Welcome to a new era for the automotive industry: the affordability crisis.

Important stat: The average new car goes for about $49,000 these days, and used models sell for $26,000 on average. Those are increases of a whopping 31% for new cars and 40% for used since just 2020, per Cox.

And shrinking affordability means growing loan responsibilities.

• For reference: About 17% of consumers who financed a new car in Q2 of last year have monthly payments north of $1,000 per month—that’s an all-time high, and it’s almost triple the number of drivers who were paying that much just three years ago.

• The average household income in the US is about $70K a year…that means a considerable chunk of US drivers could be putting more than 17% of their monthly household income toward their car payment alone.

Makes sense, then, that Edmunds found that people with negative equity in their cars were underwater by an average of $6,054 in November, the most since April 2020 (and well above pre-pandemic averages).

That big chunk of negative equity creates a ripple effect: Being so underwater makes drivers less likely to get approved for another loan → drivers hold onto their cars with underwater equity for longer → used car inventory shrinks. And the cycle continues.

So what’s behind the sudden disappearance of anything resembling a good deal these days? There are three factors I want to talk about today.

First: the role of manufacturers. Automakers are doing pretty well, by most measures. Profits are generally rising, even if EV rollout has been a mixed bag and interest rates have been on the high side.

Why? Low inventory. As days supply bottomed out in the pandemic days, manufacturers were suddenly able to demand crazy high prices for the few cars hitting lots…and that meant record profits.

Inventory has bounced back some, but execs have good memories of those low-volume, high-margin days:

• Low inventory is an “opportunity to drive strong margins,” GM CEO Mary Barra told investors in 2022.

• “I want to make it extremely clear to everyone: We are going to run our business with a lower day supply than we have had in the recent past because that’s good for our company.” —Ford CEO Jim Farley in 2021

Manufacturers make more money per sale on luxury cars and SUVs than they do on small cars or base models. That’s why, for example, Kia called it quits on the very affordable Rio subcompact sedan heading into this model year and Ford discontinued the Fiesta last summer after 47 years.

Simply put, automakers are incentivized to manufacture high-margin models, and high-margin models are largely unaffordable for the everyday car buyer. So? Affordable models are disappearing from deliveries.

Second: the rising cost of auto insurance. I wrote about this recently—read the full piece here. The bottom line? Auto insurance premiums jumped 20% annually in December…marking the largest increase since the mid-1970s. 

Pair skyrocketing insurance premiums with those high monthly payments I mentioned before…and all the other elements of car ownership that have soared recently? It doesn’t look good for affordability.

Third: the lack of used car options. I’m seeing a serious problem with used car supply chains right now. Breaking it down →

• The supply chain disruptions from 2020 to 2021 meant fewer new vehicle sales and leases.

• Three years later, dealerships are preparing for fewer lease returns as a result of that downturn 36 months ago. Lease returns are expected to be 33% lower in 2025 vs. 2019.

• And as we know by now, fewer lease returns → fewer used cars to sell → higher prices across the board.

I’m preparing for a very competitive used car market over the next several years. That’ll remove a significant portion of the “affordable” options for anyone who needs a car.

So…where do we go from here? My prediction is that things will likely get worse before they get better. Think about it:

• In the US, where public transit options really aren’t options at all, having a car is a necessity for many people and their families to go about their lives.

• Keeping cars longer is tough with repair costs rising.

• It would be great to see a moment for mobility trends like shared cars or subscription-based ownership models…but that feels unlikely in the immediate future.

But it seems even less unlikely that manufacturers would forgo any of those record profits anytime soon. So the onus falls, in some part, on dealers. What can they do in the face of this affordability crunch? Get creative on used car sourcing. Explain all F&I options to buyers, including used car leasing.

It’s pretty much that…and wait on interest rates to come back down.

How are you dealing with the auto affordability crisis, whether you’re a dealer, finance expert, or car buyer? Hit reply and tell me how things are going.

This Week’s Episodes of the CDG Podcast

Redefining auto tech innovation. That’s what Steve Baucom, President of KEYper Systems, is all about. He told me all of the secrets to finding pockets of opportunity, staying creative, and safeguarding against double-digit increases in dealership auto theft. Check it out.

This one was full of hot topics: Building a $2 billion car auction app, the idea of “gambling for car dealers,” artificial intelligence vs. actual intelligence…what didn’t I cover with Joe Neiman, Co-Founder of ACV Auctions? You’re going to love this one.

Listen to the episodes here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Private Auto, Valvoline, CDK Global, and Stream Companies for making this content possible.

Together with Valvoline

Sure, you recognize the name. But did you know Valvoline is so much more than just a lubricant supplier?

For its dealership customers, Valvoline is an integral part of their business. Valvoline supplies world-class products…but also provides hands-on training and expertise, service lane technology, service advisor sales training, marketing support and promotions, and a full portfolio of lubricants and preventive maintenance chemicals.

This means Valvoline provides more value than a typical supplier, allowing dealers to consolidate their fixed-ops vendors and suppliers and focus on moving their business forward.

Click here to get in touch with Valvoline.

In Other News

Your January car market update is here. The big picture? The heat from the end of 2023 is starting to cool off a bit. Here are the sales stats worth paying attention to, c/o GlobalData’s preliminary findings →

• Sales rose a modest 0.1% to 1.06 million last month, falling short of estimates that called for volume to rise as much as 8%.

• The seasonally adjusted annualized rate of sales came in at 14.8 million, whiffing on expectations and falling considerably short of the 15.3 million annualized rate notched in January of last year.

• The daily selling rate came in at around 42,300 units/day in January. That’s a downturn from December, when the daily sales rate was 56,800.

Bottom line: January is typically one of the weaker months for new vehicle sales…but even with that reality check, the latest SAAR reading represents the lowest for the first month of the year since 2012.

The Backlot

• Lamborghini has sold out of super cars until 2026. 🤯 Guess that affordability crisis doesn’t really hit the ultra wealthy, huh?

• Dealers are concerned about affordability and new vehicle profit margins (among other things), according to Automotive News' 2024 Dealer Outlook Survey.

• What does the end of the Fed’s tightening strategy mean for the automotive industry?

• Collector car values have fallen back to pre-pandemic levels.

• Ford revenue grew 4% to $46 billion in Q4, even as its net loss totaled $526 million.

Thanks for reading. Have a great week, and I’ll see you next Thursday.

—Car Dealership Guy

Want to advertise with CDG? Click here.

Want to be considered as a guest on the CDG podcast? Right this way.

Want to pitch a story for the newsletter? Share it here.