The high cost of new cars has been a concern among buyers and investors in the automotive sector for several years since Covid-19 ravaged the global economy.
But now a change is happening. New cars are becoming more affordable — and that’s a good thing for car buyers.
This is good even for car investors who tend to worry too much about the absolute level of pricing.
The average price of a new car in the U.S. is roughly $47,000, up about $10,000 from pre-pandemic levels.
That higher cost, combined with higher interest rates, means the typical car payment has increased by about 33% since before the pandemic.
Advertisement – Scroll to continue
But interest rates are just above peak levels and the average price of a new car has fallen nearly $3,000 from peaks reached in December 2022.
This is improved accessibility.
And wages have increased. Average U.S. wages have risen about 4% over the past year, while new car prices have fallen about 5%. Since the end of 2019, before Covid, wages have increased by around 21%, while the price of a new car has increased by around 29%.
Advertisement – Scroll to continue
Barron’s looked at wages, interest rates and new car prices to calculate a new car affordability index. Our index averaged around 56 in the second half of 2019. It reached almost 66 in December 2022. Today the index is 61 — right in the middle of that range.
Buyers can expect more improvements in the coming months, said Rebecca Lindland, senior director of industry data, insights and auto merchandising at Cars.com.
,
while also offering some goodies for new car buyers.
“Nearly half of all buyers plan to spend under $30,000 on a new car,” she said, adding that only 13 percent of new cars are priced under $30,000. “There is still a significant shortage, but [low-price availability] is 63% better than last year at this time.”
Advertisement – Scroll to continue
As dealer inventory and new car production continue to recover, Lindland sees the new car market shifting from a seller’s market over the past few years to a “buyer’s market.”
That should comfort those looking for a new ride. That should even comfort investors. Another 3%, or $1,500 off the price of a new car – with a 3% wage increase and a percentage point drop in interest rates – would restore new car affordability to 2019 average levels.
That would leave new car prices at roughly $46,000, about $8,500 above pre-pandemic levels.
There is no reason to expect a collapse in new car prices, and there is nothing to fear another price drop of around 3%.
Most automakers have targeted lower prices for this year while forecasting strong profitability for the full year.
Advertisement – Scroll to continue
General Motors assumes headwinds of 2% to 2.5%. It also expects to generate about $13 billion in operating profit for the full year, up from $12.4 billion generated in 2023.
Fears of declining earnings are one reason GM shares are trading at 4.6 times projected 2024 earnings, down from an average of nearly 6 times over the past few years.
Advertisement – Scroll to continue
The improvement in affordability is another sign that the industry is continuing to recover from the volatility caused by Covid. However, there are things that are not normal.
Used car inventory remains a problem. Fewer lease vehicles come off lease because there were fewer cars sold in 2020, 2021 and 2022 compared to a typical year.
There are about 10 million “missing” cars, Lindland said, adding that time is the answer to this problem.
Less used inventory is one reason used car prices are holding up better than investors expect. Used car pricing is always tied to new car prices – buyers always have the choice of new or used.
About 36 million used cars were sold in the U.S. in 2023, slightly less than the amount sold in 2022, according to Cox Automotive. About 15.5 million new cars were sold in 2023, up from 13.9 million in 2022. Before Covid, Americans bought roughly 17 million new cars a year.
Email Al Root at [email protected]
