Why Car Prices—Both New and Used—Keep Going Up
Last updated April 25, 2023
New-car buyers are still feeling the effects of production problems caused by the pandemic, and that continues to spill over to the used car market.
With inventory abnormally low, prices historically high, and interest rates continuing to go up, it’s become harder for many Americans to afford a new set of wheels.
Listen to audio highlights of the story below:
“New vehicle purchases are growing increasingly out of reach for consumers as interest rates continue to skyrocket,” said Jessica Caldwell, executive director of insights at Edmunds in a recent blogpost. “In fact, it’s shocking how few vehicles are purchased at ‘affordable’ prices.”
The average transaction price (the price you pay after dealer discounts or markups) for a new vehicle sold in March was $47,713, according to a new study by Edmunds. In 2018, the average transaction price was $35,794. That’s an increase of 33 percent in just five years.
At the same time, buyers have few options at the lower end of the price spectrum. The $20,000 new vehicle “is nearly extinct, and the $25,000 new vehicle is next in line,” Caldwell noted. Five years ago, almost a quarter of all cars sold went for under $25,000, she told Checkbook. Now it’s just four percent.
Faced with a shortage of computer chips, the world’s automakers have focused production on their high-end models, which generate the most profit.
“In the past, automakers would offer affordable models to snag new buyers in order to build brand loyalty, moving them up to more expensive and profitable cars as their income increased,” said Tom Voelk, an automotive journalist who produces the Driven Car Reviews video podcasts. “Not anymore. Nowadays, they don’t want to build ‘cheap and cheerful’ cars and SUVs. These are for-profit companies that answer to shareholders, so it makes sense that under the circumstances they would build the vehicles that make them the most money.”
Manufacturers are also responding to market demand: A growing number of buyers in the U.S. want larger vehicles with more features and sophisticated technology. And they’re willing to pay more to get what they want. Sales figures from March show:
- Half the full-size trucks and 70 percent of all luxury midsize SUVs are selling for more than $60,000, according to Edmunds.
- The average transaction price was $44,182 for non-luxury vehicles and an average of $65,202 for luxury models, according to Kelly Blue Book.
Used Car Prices
Buying a used car also remains a challenge. Used car dealers are struggling to find inventory. Those who can’t afford new cars are holding onto their current vehicles longer. And since the pandemic, more people buy their leased vehicles (rather than trade them in) at the end of the contract.
“The supply of used vehicles at dealerships is at its lowest point in our data, which go back to 2019,” said Charlie Chesbrough, a senior economist with Cox Automotive, parent company of Kelly Blue Book, in a blog post. “Finding the right product at the right price is more challenging for buyers today.”
As a new car becomes unaffordable to many Americans, demand for used vehicles is expected to stay strong, which will keep prices up. The average used car for sale by a dealer in March had a list price of $26,213, up $145 from February, according to Cox Automotive.
Will Things Ever Get Better?
The predicted economic slowdown later this year could bring some relief, but for now, higher interest rates and supply shortages continue to drive up the cost of owning a new car.
“The supply chain issue is going to be a problem for the near future,” Driven Car Reviews’ Voelk said. “But it’s more than that. The pandemic forced automakers to shift gears. The buzzword in the industry right now is value—making cars with desirable features, not necessarily affordable transportation.”
In other words, even when the chip shortage ends, sticker shock will not. But there is some encouraging news.
Kelly Blue Book data show that the average transaction price in March fell $515 from February—$171 less than the average MSRP—the first time in 20 months sale prices dipped below the MSRP. Last year, the average buyer paid $1,000 more than the MSRP.
Realty check: Even so, the average transaction price in March—$48,008—was nearly 30 percent higher than it was in March 2020.
“More vehicles on dealer lots—and on their competitors’ lots—means dealers simply don’t have the pricing power they did six months ago,” said Rebecca Rydzewski, research manager of economic and industry insights at Cox Automotive in a blog post.
Kelly Blue Book data show that it’s fairly easy to find a new Ram, Buick, Jeep, or Chrysler, but not necessarily a Toyota, Kia, Lexus, or Honda.
Vehicle incentives, while still historically low, are making a comeback; another sign that dealers need a little help to move the growing supply on their lots. The average incentive in March was about three percent of the average transaction price—for a savings of about $1,500—according to Kelly Blue Book. Incentives on luxury vehicles approached seven percent.
“Right now, in-market consumers are finding more inventory, more choice, and dealers more willing to deal, at least with some brands,” Rydzewski said. “Yet, even as deals improve, unfortunately, auto loan rates remain very high, ultimately making new-vehicle affordability an issue for many households.”
Ready to Roll?
Are you thinking about buying a new or used car in the near future? Try to plan ahead. If you’re in a rush, you’ll pay more for the vehicle and the financing—and have fewer models to choose from.
Expand your search: Dealerships that are a little farther away might offer a better deal on the car or truck you're hoping to buy.
Shop around for your auto loan: Credit unions typically offer lower rates than banks or car dealers.
Get the most for your trade-in: A new car dealer may not offer the best price. Check with several dealers to see how much you can get for your old car. Or sell it yourself if you feel comfortable doing that.
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Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.