Pandemic lockdowns have cost millions of low-income Americans their jobs, while white-collar types who work from home are flush with cash they can’t spend on dining or travel. Instead, many of them are buying expensive cars.
High-end trucks and sport utility vehicles are flying off dealer lots, but sales of entry-level compact cars and crossovers remain depressed. General Motors Co.’s premium people haulers like the Chevrolet Tahoe and GMC Yukon SUVs saw deliveries rise more than 30% in the fourth quarter, but sales of the more affordable Chevy Equinox crossover sank 22%.
Ford Motor Co. reported Wednesday bigger and more expensive SUVs, such as the Explorer, saw sales soar, while smaller and more affordable models, including the Escape and EcoSport, declined. The company said deliveries of the lower-priced Fiesta and Fusion models continue to “wind down” as it exits sedans, but new Chief Executive Officer Jim Farley has promised budget-minded replacements.
Toyota Motor Corp.’s Lexus GX midsize SUV, which starts at $53,000 but hasn’t had a full upgrade in a decade, posted big gains in the final months of 2020, and Volkswagen AG luxury brand Porsche had its second best year in the U.S.
“Those who have money are spending big on loaded SUVs and pickup trucks,” said Michelle Krebs, executive analyst for Autotrader, a unit of Cox Automotive. “Those at the other end of the spectrum — many of them younger — have been increasingly frozen out of the new-vehicle market because they have less-than-stellar credit and, with the pandemic, are more apt to have lost their jobs or had their income reduced.”
New-car prices have been climbing for years, as automakers kitted out vehicles with expensive new technology and demand shifted to pricier SUVs and trucks. But plant shutdowns last spring constrained supply, pushing prices to record highs and making discounts scarce. That’s been great for manufacturer and dealer profits, but it’s shutting more Americans out of the market for new vehicles.
Low-paying work in services, where there’s more face-to-face contact with customers, tended to disappear first as economies locked down. And financial markets, where assets are mostly owned by the rich, came roaring back much faster than employment rates. The upshot has been labeled a “K-shaped recovery” as the virus has widened income and wealth gaps across fault lines of class, race and gender.
A similar phenomenon is playing out in the auto market. The average list price of a new car hit $40,000 for the first time in December, according to researcher Cox Automotive. Consumers took on more debt to swallow that: The average amount financed climbed to $35,373 in the fourth quarter, compared with $33,525 a year ago, according to market researcher Edmunds.
“A lot of people are looking for the bells and whistles” in a luxury vehicle, so they want the higher trim, said Andrew Gilleland, group vice president and general manager for Toyota’s Lexus division. “We’ve definitely seen an elevation and I think that’s true across the industry” in luxury cars.
Rock-bottom interest rates also are encouraging consumers to spend more — helping those with better credit scores the most. “There’s been a low-interest-rate environment that’s really supporting spending,” said Arun Kumar, managing director for the automotive and industrial practice at consultant AlixPartners. “Credit availability has been pretty strong as well.”
At the other end of the spectrum, budget-car buyers squeezed out of the market for new vehicles are bidding up prices for used cars. Cox data shows the average used-vehicle listing price hit a record $20,000 this summer and has been climbing ever since.
Carlos Hidalgo, who owns a Chrysler, Dodge, Jeep Ram dealership across the bay from San Francisco, says he can feel the economic disparity in the cars he’s moving. He’s sold plenty of the electrified Chrysler Pacifica minivan, which starts at $39,995, and Dodge Hellcat muscle cars retailing for $78,695.
“This is the capital of technology so a lot of these people are working but from home, and they still have money,” he said.
The dealership is moving fewer vehicles geared toward blue-collar buyers, Hidalgo said, including the Jeep Renegade subcompact and Compass compact SUVs — both of which have sticker prices above $20,000. Even before the pandemic, it was getting harder to find budget-priced cars with lower profit margins.
The entry-level Nissan Versa sedan bucked the trend. Sales of the subcompact car — which starts at less than $15,000 — were up 90% in the fourth quarter but down 28% in 2020. It benefited from a shortage of used cars, which nudged some consumers back into the new-car market, said Judy Wheeler, vice-president of sales and regional operations for Nissan’s U.S. unit.
“There’s not a huge amount of used-car inventory out there,” she said. “So customers are coming in that are looking for a vehicle that’s affordable.”