Skyrocketing Car Prices Are Even Worse When You Factor in Wages
With vehicles becoming more expensive, the demographics of new-car buyers are changing.
The automotive industry has weathered huge changes in the last ten years—and even bigger ones since the onset of the financial crisis in 2008. Electric vehicles (EVs) are a big deal. There’s a new major American automaker, and people talk seriously about a world in which owning a car and driving one are not necessarily related experiences. And alongside those amorphous, qualitative changes, there’s this: in 2012, the average transaction price of a new car was $31,228. In December 2021, that price was $47,077.
American incomes have risen in that time, too, from a median household income of $57,623 in 2012 to $67,521 in 2020. Incomes went up again in 2021 after a dip in 2020, but the government hasn’t released the final numbers yet, and inflation rose fast in 2021, too. That makes for a 17% increase in incomes since 2012, while new cars now go for 27% more than they did a decade ago. That mismatch has meant changes in the demographics of the average new car buyer and the profile of the average new car.
New Car Buyers Are Wealthier and Older
New car prices have been rising faster than household incomes throughout the last decade, but 2021 was an extreme example. New car prices rose almost 14% between December 2020 and December 2021, the only double-digit percentage gain in recent memory. Household income information for 2021 isn’t final yet, but estimates suggest an annual increase of around 8%. But historically high inflation, an affliction of the pandemic, means that a lot of that extra cash is being eaten up by price increases. So even though workers are cashing larger paychecks, the real gains aren’t big enough to put purchasing a $47,000 car in reach for the average buyer.
That means that new car buyers are trending older and wealthier—the average age of a new car buyer was 53 in 2020, up from 48.9 in 2012, and 70% of new cars went to people making more than $75,000 in 2020. Even those wealthy buyers are taking out larger new car loans to make up for rising prices. Edmunds says borrowers financed an average of $39,017 in December 2021, more than the average price of a new car in December 2019. New car loans are stretching slightly longer too, at an average of 69.9 months or nearly six years, though buyers have had an appetite for lengthy new-car loans for years: The average loan was 69.6 months in 2019 and 65 months in 2012.
Used car prices are rising even faster than new car prices. In December 2021, the average transaction price for a used vehicle was $28,205, 28% higher than December 2020 and 42% higher than December 2019. To keep up, the average used buyer is taking out a 70-month loan and signing up for a monthly payment of $520.
Blame the Virus
New car transaction prices rose relatively steadily between 2012 and 2019 before skyrocketing in 2020 (up 6% from 2019) and 2021 (up almost 14% from 2020). That spike can be attributed, no surprise, to the knock-on effects of the coronavirus pandemic. When carmakers thought the pandemic would spell a collapse in demand for new cars, many canceled standing orders with semiconductor manufacturers. There can be dozens of semiconductors, or computer chips, in a single car, performing both essential and non-essential functions (General Motors has sold some of its V-8 trucks and SUVs without the chips that enable a cylinder-shutoff system designed to improve fuel economy).
That slack in the supply chain was quickly gobbled up by electronics manufacturers facing increased demand in a work-from-home era, and carmakers have been struggling to reappropriate their share of the market ever since. The chip supply issues have forced production cuts at virtually every major automaker, while coronavirus-related plant shutdowns have caused further shortages and uncertainty.
Faced with short supply, dealers began charging markups on the cars they did have. Automakers stopped offering aggressive incentives—why bother when there’s no extra inventory—and focused the manufacturing capacity they did have on vehicles they would earn the most back on, namely trucks, crossovers, and SUVs loaded with luxury features.
Other longer-term features of the market have contributed to higher transaction prices, too. Hybrid and EVs were still novelties in 2012. They’re much more common now, and in many cases, those cars are more expensive than comparable non-hybrid, non-EV cars. Driver-assistance technologies such as adaptive cruise control and automated emergency braking are increasingly offered as standard equipment on new cars. Still, the sensors that enable the tech are pricey, and carmakers pass that price along to consumers. The trend away from small cars and sedans towards trucks and SUVs, which are typically more expensive and return a higher profit margin to the manufacturer, is also part of the price boom.
Signs of Change
Some of the trends that have driven new and used car prices higher in the last decade are here to stay. Americans are as excited about trucks and SUVs as they’ve ever been and more excited about hybrid and EVs than ever before. Some automakers are even making structural changes that could bake in a price increase. Ford and Volkswagen are encouraging buyers to custom-order their cars rather than picking from existing stock on the lot, a shift aimed at reducing overhead costs and the need for price-shrinking incentives to move unpopular builds off dealer lots.
Some inflation-related price increases are probably here to stay, too, though the rate of change in prices should decrease as and when inflation returns to normal levels. But there’s good news on the horizon for car shoppers. Some of the increases in new vehicle prices during the pandemic have been the result of dealer markups facilitated by scant supply. As supplies increase, perhaps towards the end of this year, those markups may shrink or disappear. And after more than a year of consecutive monthly increases, the average transaction price of a new car fell this January, from $47,077 to $46,404.