New cars are expensive, but you don’t have to

A Low Base Price Strategy to Attract Customers who aren’t Ready to Buy a New Car, or What Will They Do When You Get Your Options?

Two decades of historic data from auto website Edmunds.com indicates that options are the biggest driver in rising vehicle prices — and that it’s been happening over many years.

Steve Reed, an economist with Bureau of Labor Statistics, a government agency that measures inflation, concurred with what Edmunds’ historic pricing data indicated.

That’s good news for drivers willing to go no-frills: If you don’t want to pay lots of a new car, you don’t have to. Don’t dip heavily into the options list, and cars are actually relatively cheap.

It has a base price of $15,730. Adjusted for inflation, that’s barely different from the base price of a Hyundai Accent in 2002, the cheapest new car available that year. This is despite the fact the 2023 Versa is loaded with standard features — including push-button start, blind spot monitoring and a touchscreen — of which many weren’t even available two decades ago.

The base price models may not make much money for the automakers. But they can attract shoppers who can then be up-sold to more expensive versions in what’s known as a “loss leader” pricing strategy, said Michael Brisson, director of economic strategy at Moodys.

According to Matt Jones, a spokesman for the auto pricing site TrueCar who worked at auto dealerships, customers are more than willing to play along.

Offering increasingly luxurious option packages is a way for automakers to take advantage of greater income disparity in the United States, said University of Michigan economist Justin Wolfers. Wealthy buyers can pay more than those who don’t have as much to spend.

Surprisingly, the gap has been growing fastest in GMC’s heavy-duty trucks, usually thought of as serious work vehicles. The average price of a GMC Sierra 2500 HD, as sold, is now double the base price.

Finnegan said that a heavy-duty truck customer could not be in the market for that kind of thing. “But it’s some of those features that they’re actually most excited about, like Bose Premium Series speakers.”

Industry strategy also plays into it. Car shoppers rarely pick their own options. Instead, they have to buy packages of features together or pay more for more luxurious level of features they want, according to Tyson Jominy.

“A classic example is a ‘Wheels and Tunes’ package,” Jominy wrote in an email. “There’s no inherent link between music and wheels, but if you’re an audiophile you have to get the upgraded wheels to get the branded radio, and vice versa.”

The Rise and Fall of Used Car Prices in the U.S. After CPI 2012, and the Long-Term Impact of Rate Increases

Car shoppers can avoid getting caught in the vortex pulling them toward ever more expensive new vehicles, said Jeff Bartlett, managing editor at Consumer Reports. He worries that car shoppers seeing these rising prices for the “average new car” will use that as a guide to what their next car should cost.

I can’t imagine a person in this economic climate shopping for a $30,000 car, even though it would be better than using a $50,000 car. He said so.

Wholesale prices for used cars being sold at auction have risen sharply in the last few weeks, according to industry data. The used car dealer lots are likely to have higher retail prices.

“We did not anticipate that prices would jump as much as they have,” said Chris Frey, senior industry insights manager at Cox Automotive, which owns Manheim. My eyes leaped out at it.

Dealers started pulling back on their inventory of used cars as prices were declining late last year and into January. A larger supply of cars became available for purchase late last year, leading to much of the decline.

Ivan says that if you want to point at something that drives demand for cars, it is jobs. “If you’ve got a job, you’ve got a car.”

In the spring of 2020, many car dealers and auto plants were closed due to stay at home orders. Demand for cars fell off a cliff after record job losses and millions of additional workers switched to working from home rather than commute.

A sustained rise in used car prices could make it harder for the Fed to pull back on rate hikes, because the drop in used car prices is a major factor in slowing inflation.

Overall prices are up 6.4% over the last 12 months, according to CPI, but that reading has fallen for seven straight months. If used car prices were to decline at such an alarming rate, prices would have risen over the course of a year.

Predicting future used car prices can be very difficult because of the broader economic conditions in the US.

This latest increase is not a blip. I think prices could fall after the tax refunds land, said Frey. But he added that forecasts are tough to make in the current market.