The Great Affordability Shift: How Car Buyers Are Changing the Auto Industry
In a significant departure from recent trends, car buyers are increasingly opting for smaller, more affordable vehicles. This shift towards thriftiness is forcing automakers to reassess their sales and production strategies.
A New Era of Frugality
Michelle Chumley, a 56-year-old nurse from Ohio, is a prime example of this trend. Despite being able to afford a pricier SUV, she chose to downsize to a Chevrolet Trax compact SUV. “I just don’t need that big vehicle and to be paying all of that gas money,” she said. Chumley is not alone in her decision. Many buyers are now prioritizing affordability over luxury, with sales of new U.S. autos rising only 1% through September.
The Numbers Tell the Story
According to Edmunds.com, an auto research and pricing site, the average selling price of a new vehicle has jumped over 20% from the pre-pandemic average to more than $47,000. This means that an average buyer would have to spend $737 a month, if financed at today’s average loan rate of 7.1%, for just under six years before the vehicle would be paid off. For many, this is financially out of reach.
A Shift Towards Lower-Priced Vehicles
Sales data reveals that the fastest-growing segment of the nation’s new-auto market is vehicles in the below-average $20,000-to-$30,000 range. In fact, 43% of new-vehicle sales growth came from this price category, the largest share in at least four years. Compact and subcompact cars and SUVs from mainstream auto brands are growing faster than in any year since 2018.
Automakers Scramble to Adapt
Under pressure to unload their more expensive models, automakers have been lowering sales prices on many such vehicles, largely by offering steeper discounts. The average incentive per auto has nearly doubled to $1,812, according to Edmunds. General Motors, for example, has kept discounts in check and average vehicle prices steady around $49,000, resulting in a $900 million pretax earnings gain from a year ago.
How Long Will This Trend Last?
While it’s unclear how long the preference for lower-priced vehicles will last, experts predict that expected interest rates cuts by the Federal Reserve should eventually lead to lower auto loan rates, making larger vehicles more affordable. However, for now, the great affordability shift continues to reshape the auto industry.
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