In the U.S. new car market over the past decade, prices have been all over the proverbial map. In 2017 for example, 11 car models could be purchased at a base price of less than $20,000. In March 2023, only 2 models matched that price point. Instead, the average price of a new car in that month was $48,008. So consumers with little to spend on a car arguably should turn to the used car market. But prices in this sector have risen notably as well, due to many of the same factors that have led to price increases in the new car sector. Accordingly, the average price of a used car also surpassed the previous baseline, reaching $27,125.

Those influential factors are numerous. Supply chain issues during the pandemic made it difficult for car manufacturers to access necessary parts, especially computer chips. Even as those supply chain bottlenecks began to resolve, the carmakers prioritized devoting resources to luxury vehicles, on which they earn higher margins. Thus, there are simply fewer affordable cars being built.

The supply chain issues coincided with pandemic-era consumer buying trends. For people stuck at home, especially if they received stimulus payments, a new car seemed like an excellent investment. Bored and ready to buy, many people splurged on higher end models than they normally would have bought. Thus, consumer behavior signaled to manufacturers that the cars most in demand were large, luxury SUVs, rather than economical sedans or coupes.

In more recent months, in efforts to stabilize the economy and combat rampant inflation, the Federal Reserve also has raised interest rates multiple times. If a consumer needs a loan to purchase a car, these high rates can make the purchase more expensive. That is, a middle class consumer might be able to afford a $40,000 car at a 5 percent interest rate, but if they are borrowing at 11 percent, the monthly payment jumps out of reasonable reach.

None of these trends appear to be reversing any time soon. Manufacturers still have strong incentives to focus their attention on the luxury car market, where wealthy consumers display continued willingness to pay for expensive options. Interest rates continue to rise, and the chip supply still has not returned to pre-pandemic levels.

The problem can be devastating for low income consumers who need reliable transportation to work, but it also challenges dealerships. They note imbalanced inventory: a glut of expensive but not luxury models that none of their customers can afford, and massive demand for affordable cars that simply are not being supplied. In this way, the automotive market appears unsustainable at the moment, but thus far, no solution has been mapped either.

Discussion Questions:

1. Do you have any ideas of solutions that could resolve these supply, demand, and pricing challenges?
2. Visit the website of a local car dealership of your choice and survey the new and used inventory. Do the cars available reflect the trends outlined in this abstract?

Sources: Rachel Siegel and Jeanne Whalen, “New Cars, Once a Part of the American Dream, Now Out of Reach for Many,” Washington Post, May 7, 2023; Lydia DePillis and Jeanna Smialek, “Why Is Inflation So Stubborn? Cars Are Part of the Answer,” The New York Times, May 20, 2023; Tom Krishner, “Why Experts Say Now Is a Good Time to Buy a Used Car Before Prices Surge,” PBS News Hour, March 30, 2023; Sean Tucker, “Why the Used Car Market Is So Bad, and Won’t Get Better Soon,” Kelley Blue Book, May 3, 2023