Right now, there is only one new car available for a starting price of less than $20,000, the 2023 Mitsubishi Mirage. Given inflation and rising interest rates, it's getting harder and harder for Americans to be able to buy a new vehicle, according to a new report from the Wall Street Journal. The Wall Street Journal Financial Reporter Ben Foldy explains that buyers of both new and used vehicles are seeing higher prices, with the average monthly new car payment totaling about $750. With more people struggling to make that type of payment, Foldy tells Yahoo Finance Live, "what's interesting is that normally you see that struggling, those delinquencies and stuff, kind of tick up when you have problems in the job market, and obviously we don't have that yet." Foldy notes the issue could be worsened by the resumption of student loan payments in the fall. Watch the video above to find out what Foldy says about what this means for carmakers.
Video Transcript
SEANA SMITH: Cost of new vehicles in July was up 3 and 1/2% from a year ago. And this year, there's only one new vehicle model that's selling for less than $20,000. Those higher payments are starting to pinch drivers. So here with a closer look at this Wall Street Journal, reporter Ben Foldy. Ben, it's good to see you. You had a piece in the Journal last week, highlighting some of the troubles here that car buyers are facing. Given the higher costs of vehicles today, what are we seeing as a result?
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BEN FOLDY: Yeah. I think for those of us who can't afford $25 million Rolls-Royces, the payments are starting to pinch, I mean, both in used and new prices have kind of steadily gone up during the pandemic. And I guess, actually, they're kind of peaking now. I think your graphics showed that the month-on-month was actually down. So it seems like we're probably at the peak for new cars. But for everybody who bought a car at the peak, you know, a year ago or a year and a half ago, they're having to keep up with these payments. And the average the average monthly new car payment is $750 bucks or it's around in that ballpark.
And so as rates have gone up, even as prices have moderated a bit, now you're still paying a lot for your car. And, you know, people are struggling I think. And what's interesting is that normally, you see that struggling and kind of those delinquencies and stuff kind of tick up when you have problems in the job market. And obviously, we don't have that yet. So I guess one of the questions is, how narrow is that kind of landing strip for the soft landing if there does. If there is a recession and there are impacts on the job market like, is there going to be kind of a hockey stick of distress and auto lending?
DIANE KING HALL: And so Ben, I want to ask you, what did your reporting show you with regard to where the distress is kind of starting to pile up? I mean, we have-- you know, we have seen these prices go higher. I was surprised to see that there was only one car, like one vehicle, below that like. I looked at-- I was like, well, let me look up a Honda Civic and see what that's going for now. And you're right, it is higher than 20,000. So with that distress piling up, what is your reporting show you in terms of who you talk to about where it's affecting Americans?
BEN FOLDY: Yeah. I think it's definitely more noticeable in subprime, which I think people with below, I think, 660 is the cut for subprime, so people with kind of more subpar credit. And I think that makes sense for a number of reasons. I mean, a, those are kind of riskier borrowers to start. There's kind of higher expectations for loss. But then you also, you know, if you make some, you know, assumptions, let's say, but like, you know, so subprime buyers are probably more likely to rent than to buy.
So they aren't on refinanced mortgages paying a quarter-- you know, 1% or whatever. And rent, actually, has gone up quite a bit during the pandemic. So that's been a stress that doesn't necessarily show up in debt service coverage ratios. And one of the analysts I was speaking to was talking about that is that there's kind of a hidden rent impact there.
One of the other things that I think we should look for in the coming months is, you know-- and again, this goes back to subprime and younger borrowers-- is the resumption of student loan payments, which will, you know. There's been this holiday on student loan debt for, I guess, almost three years. And that's coming to an end at the end of the month.
And one of the factors that TransUnion, the credit scoring agency, pointed out in their seminar on this was that, of consumers that have outstanding student debt, they-- about, I think, more than 33%, 34% of them took on a new auto loan during the pandemic. And again, so they take on that new loan while their student payment is frozen.
But that loan is also-- they're basically buying in the peak of the market for either used or new. So their payments are going to, you know-- if the payment shock of the student loan comes back and they're already kind of struggling to keep up, which I think we can see in the delinquency data, there could be kind of more distress ahead.
SEANA SMITH: So, Ben, what do you think this ultimately means for the car makers? Because up until this point, they've been able to pass along higher prices. They've been able to focus on the higher end cars, the luxury cars, because people were buying them. Now that seems to have shifted, right? Consumers are under even more pressure than they had been in prior months. So do you think we'll ultimately see car makers being forced here to lower their prices?
BEN FOLDY: I think it's-- I think there's definitely an opening. I think there's openings for kind of the more budget manufacturers. And you've seen kind of foreign automakers tend to kind of fill that space, where it's basically impossible to get an American-made sedan at this point. And so I think there's an opportunity for that.
It's hard to say. I mean, without kind of-- without the distress of kind of a broader macroeconomic , slowdown it's possible that this could kind of be the new normal. But I have trouble seeing that as a long-term future. I think profitability will be compressed at some point.
DIANE KING HALL: And, Ben, I want to ask you what did your reporting show you in terms of trends with regard to used car tradings? Because you remember there was a period of time that we'd really never seen before, where you could get more for your used vehicle than what you bought it for. Has that trend decelerated from what you've seen in your reporting?
BEN FOLDY: Yeah. So if you-- the Manheim Index, which tracks used car value, has come back to Earth. I mean, it's still pretty-- it's still very elevated relative to what it was in 2019, you know, pre-pandemic. But if you-- I think you point to an interesting question. And, actually, it alludes to the last one, too, which is that where this is going to bite down the road is if you bought your used car in 2022, in the first half of 2022-- again, you bought at the peak of the market-- you're going to go underwater on that loan much quicker, because the depreciation of that used car is going to be steeper.
And that's going to, A, make it more obnoxious to pay your loan. But, B, It's also going to cut into your trade-in value. So that's actually one place where the automakers may get hit kind of down the line is that people are going to have less money to play with the next time they need a car, because whatever they bought, they bought at a much higher rate than-- a higher rate and higher price than whatever they're getting in the trade. And so that's going to bite back.
SEANA SMITH: And we are starting to see consumers under more and more pressure with their auto loans. All right, Ben Foldy of the Wall Street Journal, thanks.