Today, owning a car costs an average American more than $12,000/year. In the last 4 years, average car prices have increased by more than 30%, and higher interest rates have made monthly payments much more expensive. You are not alone if you feel like cars are becoming too expensive. It has become almost impossible for millions of Americans to afford a car.
How Fast Are Car Prices Rising, Really?
In December 2023, an average new car had a sticker price of $48,700. While this is a 30% increase from 2019, the price has actually gone down compared to December 2022, when it hit its all-time high of $50,000. The price drop is even more severe for used cars which has dropped by 5%. Does this mean cars are finally getting more affordable? Unfortunately not.
Monthly Car Payments Are At A Record High Despite Selling Lower Prices
While the average car prices have come down, more than 80% of Americans use some financing to buy a car and interest rates are at their highest since 2008. This has made the monthly car payments much more expensive. So, while the sales price decreased somewhat, the average monthly payment has increased by 3.7% to $726 compared to December 2022 and by 32% compared to 2020.
The Overall Cost Of Owning A Car Has Increased Significantly
It’s not just the selling price of cars that’s increasing. Cars are getting increasingly expensive to maintain. For instance, the average cost of owning a car was $10,794 in 2022. This has shot up to $12182 or $1015/month in 2023, a 12% increase. This estimate includes a depreciation expense of $4,500/year.
You Need To Make At Least $100,000 To Afford A Car In 2024
Such high ownership costs mean most average Americans can’t afford an average car. Usually, it is recommended that you don’t spend more than 10% of your income on transportation. So, you must make more than $100,000 to afford the $12,000/ year ownership costs. In the US, only 18% of individuals make over $100,000/ year. So, an average car is unaffordable for more than 80% of Americans.
Americans Now Owe $1.595 Trillion In Auto Loan Debt
The rising ownership costs mean more Americans are financing their cars, and auto loans have hit a record high of $1.595 trillion in Q3 2023. This is up 88% from just 10 years ago in 2013. With this, the number of Americans unable to make their monthly payments has also increased by 19% compared to Q3 of 2022.
Why Have Cars Become So Unaffordable?
There are some obvious reasons, like high interest rates and gas prices, but this is just a small and temporary part of the problem which will resolve itself. There are some much more fundamental and worrying reasons contributing to this trend. Here are the 4 main reasons why cars have become so unaffordable.
Higher Financing Costs
This is the most obvious reason for increasing car prices. In December 2023, the average interest was 7.4% for new cars and 11.6% for used cars. This has caused interest expenses to increase by almost 90% compared to December 2022. Although the Federal Reserve has halted the interest rate hikes, there are no signs of interest rate cuts in the near future. So, this isn’t likely to improve in the near future.
Supply Chain Disruptions
The COVID-19 pandemic caused one of the biggest supply disruptions in history. While the situation has become much better than in 2021, the disruption affects car prices even today. Because of such a long halt in production, the supply still can’t keep up with demand in 2024, and car inventory has not reached pre-pandemic levels yet.
Sales Of Expensive Cars Have Increased Much Faster Than Affordable Cars
According to Cox Automotive Industry, the number of cars sold for less than $25,000 has decreased from 200,000 in 2017 to less than 50,000 in 2022. On the contrary, the sales of cars costing $60,000 have soared from 120,000 to 320,000 at the same time. While the pandemic accelerated this trend, it has continued for a while.
Why Is Everyone Buying Expensive Cars?
Cars are becoming so expensive partly because of consumer preference towards expensive cars with more features. But it is also because of higher margins on these cars. Cheaper cars are loss leaders for most car manufacturers. They use it to increase brand awareness and upsell later. However, due to supply chain disruptions, they have focused on producing the most profitable cars. This has further reduced the supply of lower-end cars, pushing their prices higher.
Will Cars Remain Equally Unaffordable In 2024?
With the global supply chain issues resolving slowly, car manufacturing is set to reach pre-pandemic levels in 2024. The inventory holding period for car dealerships has also reached 70 days, very close to the historical average. Car prices have already come down from their peak in December 2022, so we might see the market getting better for buyers. But the trend of manufacturers focusing on expensive cars is continuing, and it doesn’t look like it will slow down anytime soon.
