Cars and why they cost so much.
Have you seen the prices of new cars lately? They’re downright expensive and that fact means fewer Americans can afford them. The average transaction price for vehicles sold reached $46,329 in November 2021, the highest ever.
Supply and demand play an important factor in pricing, especially when it comes to discounting. Indeed, in the same period, discounts averaged a paltry 4.1 percent, which is well below what buyers were seeing before the COVID-19 pandemic arrived. A resultant semiconductor chip shortage limited production, putting further pressure on supply.
Aside from seasonal and outlier causes, there are several reasons why cars are pricey. We’ll examine them one by one.
Automotive manufacturers must meet certain regulatory criteria when building new vehicles. From emissions controls to safety features, there are numerous considerations manufacturers must keep. In the 1980s, it was third brake lights, followed by mandatory airbags. Starting in 1995, all cars must include an Onboard Diagnostics computer (OBD-II). More recently, anti-lock brakes were added. These are just a sampling of the requirements.
The federal government isn’t the only entity making requirements. The state of California has regulations that are the toughest of all. The cost of these and other regulations are passed on to consumers who pay more for their vehicles as a result.
Fuel Economy Improvements
Consumers want efficient vehicles, while the federal government mandates higher corporate average fleet economy (CAFE) numbers. To achieve the higher numbers, manufacturers invest in lightweight materials that often cost much more than steel. New engines and transmissions, hybrid powertrains, and electric vehicles are investments that require enormous outlays of capital.
Even as manufacturers make improvements in one area, they follow through with changes in other areas. Model life cycles are typically five or six years with interim changes made. During the interim, new features are added, styling tweaks accomplished, and whatever compliance requirements kick in, those changes are also realized.
Trims and Packages
Almost every vehicle available is offered in multiple trims and with various packages. The base price of a car may come in at a reasonable $21,000, but a fully loaded version of that vehicle may push $35,000. Dealers rarely stock base models. When they do, only a few will appear on their property.
Trims serve as steps in the buying process. Typically, a model will have at least three, with the middle trims the most popular. Extra-cost options include tire and wheel upgrades, advanced lighting, leather seats, high-end infotainment systems, audio groups, and drivetrain differences. A larger or more efficient engine, comfort features, and paint schemes add to the cost.
Certain enthusiasts laud the great cars of yesteryear, noting the beautiful designs and engineering offered. If they own a classic car that’s at least 50 years old, you might think that the vehicles of that era were simply better.
While designs have changed, so have quality standards. In days gone by, for a vehicle to reach 100,000 miles was quite an accomplishment. In more recent years, a vehicle with that number of miles on the odometer seems hardly broken in. Cars simply last longer. Period. With these points in mind, manufacturers support what they build with increasingly better warranty plans. New Vehicle Limited, powertrain, rust, hybrid, emissions, and electric vehicle warranties accompany them. You’re paying for the warranties whether you realize that or not.
Manufacturers also spend hundreds to thousands of dollars on average marketing their vehicles. It is the cost of doing business and that expenditure is passed onto the consumer.
Why advertise when you have a solid product? Because consumers expect to be reached through this medium. Further, brand loyalty is not what it once was. Thus, to retain customers means to reach them and in a variety of ways. Direct mail, internet ads, broadcast pitches, and dealer marketing are some of the costs involved. Other expenses include hosting journalists who report on cars, supporting local charities and running expensive Super Bowl ads.
What consumers earn also aligns with new-car values. As your income rises, so does the price of a new vehicle. Or at least what you’re willing to pay for one. Manufacturers also must pay their staff, assembly line workers, and everyone else tied in with the company. Wages and benefits rise or at least keep with the industry averages. Those costs align with higher prices.
On the flip side, your income may be rising, but is it keeping up? For not a few Americans, it simply isn’t. Instead, for some, wages are stagnating or other expenses such as housing are consuming a larger share of their budget. Even affording a modestly priced model isn’t possible without securing a longer-term auto loan.
Speaking of new car loans, the days of 36-month loans is long past. Few 48-month loans are taken, and consumers routinely choose loans of at least 60 months with 72-month loans quite common. Some lenders offer 84- and 96-month auto loans, but these loans come at quite some risk to consumers who may find themselves upside down or owning a ride that needs numerous repairs while still making their payments.
Shopping for Your Next Ride
Why are cars so pricey? For all the reasons mentioned. But we talked exclusively about new cars, which means that there are far more used vehicles that are on the market at any time. Indeed, while approximately 17 million new vehicles are sold each year, another 27 million or so used cars, trucks, vans, and utility vehicles change hands each year.
You might prefer a new ride, but if your budget says otherwise, consider a late-model used car, particularly one that is about two or three years old. The advantages of a newer used car include still-active warranties, significant depreciation already taken, and modern equipment. Further, if you purchase a Certified Pre-Owned (CPO) vehicle through a dealership, the manufacturer often will extend the warranty to sweeten the deal.
Certainly, you’ll pay more for a CPO than a private party sale, but you’ll also have the backing from the manufacturer. Finally, in numerous instances, you’ll find that special financing deals are in place, perhaps giving you a competitive rate that does not exist elsewhere.
All in all, buying a new car is quite an investment. Beyond the car payments, you’ll pay taxes, registration, and insurance. Those expenditures add to the cost of doing business, which is why car ownership is an increasingly difficult proposition for a segment of the populace.