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High Car Prices Are Locking Out Younger Shoppers

The Wall Street Journal. logo The Wall Street Journal. 2/18/2020 Nora Naughton
car dealer © Thinkstock  

LAS VEGAS—Auto dealers want to lure young buyers back to new-car lots.

Auto makers have in recent years turned away from cheaper models, such as hatchbacks and small sedans, to focus their lineups on the higher-priced SUVs and trucks that have surged in popularity with the drop in fuel prices.

The shift has helped lift new-vehicle prices to record levels and boost profitability for the auto sector.

But dealers, gathering at a conference in Las Vegas this past weekend, warned that the trend is also pricing many buyers out of the new-car market.

The main casualty, they said, are younger adults. “We really do need the younger buyers in these new vehicles,” said Charlie Gilchrist, the 2019 chairman of the National Automobile Dealers Association, in an interview.

Used-car shoppers typically aren’t loyal to one brand, and auto retailers count on drawing first-time buyers to build repeat business, he said.

“That first vehicle they have is an impression that they will keep the rest of their lives,” said Mr. Gilchrist, who is also a dealer in Texas.

The number of new vehicles purchased by buyers between the ages of 16 and 35 fell nearly 4.5% last year, according to J.D. Power. That is a more dramatic decrease than the overall U.S. market saw in 2019.

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By comparison, purchases by customers older than 56 increased nearly 1% in 2019, J.D. Power found.

“The financial challenges that young consumers face are multifaceted and well-documented,” said Tyson Jominy, vice president of data and analytics for J.D. Power, referring to high student-loan and rent payments already plaguing young consumers. “But we can’t discount the role that higher monthly new car payments and insurance play on lower sales.”

He also cited the availability of ride hailing as a factor delaying the purchase of a car for some young people.

U.S. auto sales are cooling, down roughly 1% last year, after more than a half-decade of growth and hitting a record of 17.6 million in 2016. In that time, new-vehicle prices have steadily increased, in part because of the industry’s shift to larger, more expensive vehicles, but also owing to more advanced technology and safety features and rising material prices, dealers and analysts said.

The average price paid for a new vehicle last year was $33,600, up $1,100 from 2018, according to J.D. Power. Prices are expected to keep rising this year, supported by expensive tech features and bolstered by steady demand, dealers and analysts said. Auto executives and industry experts are forecasting new vehicle sales of just under 17 million this year, which is still considered a healthy level.

To make vehicles more affordable, car companies are spending more on discounts while many lenders are stretching out repayment terms. Dealers said interest rates, while a concern in years past, have come back down again, giving customers some cost relief this year.

Fiat Chrysler Automobiles NV’s head of U.S. sales, Reid Bigland, who met with dealers in Las Vegas over the weekend, said he doesn’t see higher car prices affecting demand this year.

“It’s always a concern, affordability, but it doesn’t seem to be showing its face,” Mr. Bigland said.

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Still, the average monthly payment for a new vehicle was $566 last year, about $150 more than the average payment of a used vehicle, according to Cox Automotive. Analysts expect used-car sales to hit a record this year.

Cheaper sedans and hatchbacks have traditionally served as the affordable option for first-time car buyers. Companies such as Toyota Motor Corp. and Nissan Motor Co. have said they are sticking with these models, even as demand has dropped off significantly, in part to preserve that gateway into the brand.

The U.S. auto makers have taken a different tack. Ford Motor Co. no longer sells in the U.S. the Focus and Fiesta, two small-car models that have long served as a more affordable option for budget-minded buyers, to plow more resources into expanding its SUV lineup. General Motors Co. has stopped building the Chevy Cruze. Fiat Chrysler turned away from the sedan market in 2016, dropping the compact Dodge Dart and scaling back its Chrysler sedan offerings.

That has left fewer options for buyers on a budget. Sales of cars priced at $20,000 or less plummeted 20% last year, according to J.D. Power, while sales of more expensive cars—going for more than $40,000—increased 7%.

The migration to used vehicles for younger buyers is unavoidable as sticker prices on new cars keep rising, said Mike Maroone, a former president of AutoNation Inc. who owns dealerships in Colorado and Florida. But he is taking the change in stride, he said, leveraging new-car discounts when he can while looking for ways to build loyalty among used-car buyers.

“A lot of customers come in with a payment in mind, not a product,” Mr. Maroone said. “Affordability is a big issue, so we need to be building up our used-car business.”

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