Why Are Cars Suddenly So Expensive?

In recent years, car prices have skyrocketed, leaving many consumers struggling to afford both new and used vehicles. Between 2021 and 2023, used car prices soared by 52%, while new cars rose by nearly 28%. These increases far outpaced the 13% rise in median household income during the same period, significantly reducing affordability. But what caused this drastic change in the automotive market?

Pandemic Disruptions and Supply Chain Issues

The COVID-19 pandemic marked a turning point for the car industry. Lockdowns in 2020 led to plummeting demand, halting car production worldwide. When economies reopened, manufacturers faced shortages of crucial components like semiconductors. This led to long waiting lists for new cars and pushed many buyers toward the used car market. However, a lack of one-to-two-year-old vehicles further strained supply, driving up prices for older models.

Car exports by units and manufacturing country

Rising Interest Rates and Delayed Purchases

In an effort to curb inflation, central banks increased interest rates, pushing the average rate for car loans to nearly 9% by mid-2023. This made car financing more expensive, leading many consumers to hold on to their vehicles longer. The result? A surge in demand for repair services and higher costs for maintenance and car parts.

Shifts in Manufacturing and Dealer Practices

Manufacturers adapted to supply shortages by prioritizing high-margin vehicles like SUVs and luxury models over budget-friendly options. This shift left fewer affordable cars in the market. Simultaneously, dealers capitalized on high demand by marking up prices, with dealer markups accounting for 35% to 62% of new vehicle inflation from 2019 to 2022.

The Insurance Dilemma

Auto insurance costs have also climbed sharply, increasing by 20% since December 2021 and 70% over the past decade. This rise isn’t due to more accidents but rather the higher costs of repairs and replacements for modern vehicles. Additionally, litigation expenses have grown as more claims involve attorney representation.

What Lies Ahead?

There are signs that the car market may be stabilizing. Wholesale car prices are beginning to drop, and some manufacturers are offering incentives to buyers. Electric vehicle (EV) inventories are growing, with manufacturers producing more than the market currently demands. These factors could lead to discounts, particularly for high-end models that have been sitting unsold on dealer lots.

However, affordability remains a challenge. The pent-up demand for affordable cars persists, and until manufacturers shift focus back to budget-friendly models, middle-class consumers may continue to face limited options.

In the meantime, consumers are holding out hope for more reasonable prices, lower interest rates, and increased availability of entry-level vehicles. Whether these changes will happen soon remains uncertain, but one thing is clear: the car market has undergone a seismic shift.