By The high cost of new cars has been a concern for buyers and automotive investors in recent years, particularly after the disruption caused by Covid-19 to the global economy.
Positive Shift in Affordability
However, a positive shift is underway. New cars are now becoming more affordable, which is great news for car buyers. Even automotive investors, who typically fret over pricing levels, can breathe a sigh of relief.
Current Pricing Trends
The average cost of a new car in the U.S. has risen to around $47,000, an increase of approximately $10,000 from pre-pandemic levels. This, coupled with higher interest rates, has led to a 33% rise in typical car payments since before the pandemic. Despite this, interest rates are slightly below peak levels, and the average price of new cars has dipped by almost $3,000 from the highs seen in December 2022, resulting in improved affordability.
Wage Growth vs. Car Prices
Wages in the U.S. have also seen a boost, with average wages rising by about 4% over the past year, while new car prices have decreased by around 5%. Since late 2019, before the pandemic struck, wages have gone up by approximately 21%, whereas new car prices have increased by roughly 29%.
Vehicle Affordability Index
‘s analysis factors in wages, interest rates, and new car prices to create a Vehicle Affordability Index. This index averaged around 56 in the second half of 2019, spiked to nearly 66 in December 2022, and presently stands at 61—sitting in the middle of that range.
Future Prospects
Rebecca Lindland, senior director of industry data, insights, and cars commerce at Cars.com, foresees further improvements for buyers in the months ahead. She notes that nearly half of all shoppers intend to spend under $30,000 on a new car. Interestingly, only 13% of new cars are currently priced under $30,000. Despite a significant shortage, low-price availability has seen a 63% increase compared to last year.
Moving Towards a Buyer’s Market
As dealer inventory and new-car production continue to rebound, Lindland anticipates a shift in the new-car market from the seller’s dominance of recent years towards a more favorable “buyer’s market.”
New Car Affordability and Industry Recovery
The automotive industry is showing promising signs of recovery following the fluctuations caused by the Covid-19 pandemic. With the prospect of a new car becoming more affordable, both consumers and investors can find reassurance in the market outlook.
Pricing Trends and Profitability Projections
Reducing the price of new cars by an additional 3% could bring new-car affordability back to average 2019 levels, offering a discount of $1,500 on each vehicle. While this adjustment would position new-car prices at approximately $46,000, a notable increase from pre-pandemic levels but still within reasonable bounds.
Many auto manufacturers have already indicated a downward trend in pricing for the year ahead while anticipating robust profitability for the full year. General Motors, for instance, foresees a pricing headwind of 2% to 2.5% yet projects a substantial increase in full-year operating profit from the previous year.
Market Outlook and Investor Sentiment
Contrary to concerns of declining profits, the industry’s positive outlook is reflected in GM’s stock valuation, trading at a multiple of 4.6 times estimated 2024 earnings. While this figure represents a decline from historical averages, it signals confidence in the company’s performance and market position.
Inventory Challenges and Promising Indicators
Despite market recovery, challenges persist in the form of low used-car inventory due to reduced sales during the pandemic years. However, industry experts suggest that time will alleviate this issue, gradually bridging the gap in available vehicles.
The shortage in used-car supply could affect pricing dynamics, potentially leading to more stable pricing trends than anticipated by investors. Moreover, the correlation between new and used-car prices offers consumers flexibility in their purchasing decisions.
Continual Recovery and Future Prospects
The automotive industry’s resilience is evident from the sales data, with an increase in new car sales during recent years signaling a positive trajectory. As the market adjusts to the post-pandemic landscape, efforts to address inventory challenges and stabilize pricing will be key factors in sustaining recovery.
While uncertainties remain, the industry’s overall trajectory points towards gradual normalization and improved market conditions.
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