Crazy, weird, and unprecedented are all apt descriptors of the automotive market during the past couple of years. As sales sank because of a shortage of new vehicles, prices soared. Which raises the question: Is the affordable new car doomed?
By December 2021, the average price of a new vehicle had skyrocketed to more than $47,000, a 14% year-over-year increase. As examples of price increases, car-valuation service Kelley Blue Book figured the average price of new Toyotas was nearly 15% higher last September compared with a year earlier; prices of new Mercedes climbed nearly 26%.
Why car prices have increased
Much of the blame goes to the pandemic, though some automakers began dropping inexpensive and less profitable models from their product lines before COVID-19. Then, early in the pandemic, auto factories shut down.
Since they reopened, auto production has been constrained by a shortage of computer chips vital to all the electronic gizmos that fill modern vehicles. Automakers have used what chips they have in their more profitable models, usually pickups and SUVs, which accounted for nearly 80% of all new vehicles sold last year.
When demand outstrips the supply of vehicles, dealers can charge more. The dreaded “added dealer markup” or “market adjustment fee”—a bonus for dealers on top of the manufacturer’s suggested retail price (MSRP) on sought-after new vehicles—became common last year.
The market for used cars
As for used cars, fewer new-car sales have meant fewer trade-ins, so the same low-supply/increasing-price syndrome affects late-model used cars.
“We’re talking massive price increases,” says Kelley Blue Book editor Matt Degen. The average used-car price late last year was about $27,000, a 35% increase over pre-pandemic 2019. Forty-seven grand for a new vehicle, or even 27 grand for a used one, is a hefty sum for many first-time car buyers, for folks needing a thrifty commuter car, or for retirees wanting to downsize their vehicles.
The National Automobile Dealers Association’s chief economist, Patrick Manzi, expects dealer inventories to slowly increase as the year progresses, which may stabilize prices. But it’s a safe bet that the sub-$15,000 new car is essentially gone forever; only the 2022 Chevrolet Spark with a manual transmission is priced less, at $14,595, including the nonnegotiable destination fee.
Cars under $20,000
The good news is that a few other new 2022 cars carry MSRPs under $20,000. To be sure, these bargain-basement cars are small, like the Spark. But they may be equipped with such niceties as an automatic transmission, a rearview camera (required by law since 2018), air-conditioning, and a decent infotainment system. The list includes the Hyundai Accent ($17,670), Kia Rio ($17,145), Mitsubishi Mirage ($15,925), and Nissan Versa ($15,995).
Step up the budget just a bit and the vehicle types are more varied and more sophisticated. Some examples: the Mini Cooper Hardtop ($23,750), the newly introduced Ford Maverick pickup ($21,490), the Subaru Impreza sedan ($19,755), and Honda’s small SUV, the HR-V ($22,645).
The bad news? Good luck finding any of these affordable cars on dealer lots.
“Even inexpensive vehicles have been impacted by supply-chain issues,” says Brian Liberman, manager of AAA’s Car Buying Service. For instance, the hybrid version of the 2022 Ford Maverick sold out last fall, before 2022 even began.
As Kelley Blue Book’s Degen says, “Shoppers face high prices and dealers haven’t had cars to sell. It’s been no picnic for anyone.”
And it’s not likely to be anytime soon.