The growing trend toward vehicles priced between $20,000 and $30,000 is reshaping the landscape of the US auto market.
According to auto analysts, an “affordability shift” is taking place as more buyers reconsider the necessity of paying the average $47,000 price tag for new cars—an increase of over 20% compared to pre-pandemic levels.
At current rates, purchasing a new car at that price would cost the average buyer around $737 per month, assuming a loan financed at 7.1% over nearly six years, per data from Edmunds.com.
For many, this is a financial stretch too far, prompting a movement towards smaller, more reasonably priced models.
Yet, it’s not just buyers who can’t afford a $47,000 vehicle that are seeking cheaper alternatives.
Many consumers could afford the higher price but simply don’t see the value in it.
This changing mindset is prompting US automakers to rethink their strategies, as new car sales rose by just 1% through September compared to last year.
Should this trend persist, it could force manufacturers to increase discounts and lower vehicle prices, putting pressure on profit margins across the industry.
Kevin Roberts, director of market intelligence at CarGurus, a popular automotive shopping site, attributes the shift to economic uncertainty and persistently high interest rates, which have kept vehicle prices elevated.
“Consumers are becoming more prudent as they face economic uncertainty, still-high interest rates and vehicle prices that remain elevated,” he told Associated Press..
The rise of budget-friendly vehicles
Manufacturers have responded by offering deeper discounts on many higher-priced models, with average incentives nearly doubling to $1,812 over the past year, according to Edmunds.
General Motors, for example, maintained steady vehicle prices at around $49,000 between July and September, helping the company achieve a $900 million increase in pretax earnings. However, the automaker does not anticipate sustaining those gains into the fourth quarter.
Interestingly, sales of vehicles priced between $20,000 and $30,000 accounted for 43% of new car sales growth through September, marking the largest share for this segment in four years.
Cox Automotive reports that compact and subcompact cars and SUVs are seeing their fastest growth since 2018, with affordable models gaining traction in the market.
In fact, the renewed demand for budget-friendly vehicles mirrors pre-pandemic trends.
Back in 2018, compact and subcompact vehicles comprised nearly 35% of all new car sales in the US.
However, the pandemic-era shortage of semiconductors forced automakers to prioritize production of higher-priced trucks and SUVs, resulting in a drop in the share of affordable vehicles to below 30% by 2022.
Now, with market conditions stabilizing, that share has rebounded to 34% this year.
Compact cars are making a comeback
The rebound in sales of smaller vehicles has been significant.
Sales of compact sedans, for instance, have jumped 16.7% year-over-year through September. In contrast, sales of larger pickups and SUVs have grown at a much slower pace, with big trucks seeing less than 6% growth and large SUVs barely rising at all, according to CarGurus.
Notably, the best-selling vehicle in the US remains Ford’s F-Series truck, continuing its reign as the top seller for nearly five decades.
However, Stellantis’ Ram pickup, traditionally the third-best seller, has dropped to sixth place, overtaken by more affordable models such as the Toyota RAV4, Honda CR-V, and Tesla’s Model Y, which benefits from a $7,500 US tax credit.
The shift toward affordability has taken automakers by surprise, as many found themselves with too much inventory of expensive trucks and SUVs.
Stellantis, which produces Chrysler, Jeep, and Ram vehicles, has even warned that the trend could negatively impact its profitability this year.
High interest rates are changing buyer behavior
Some companies, like Chevrolet, anticipated the move towards more budget-conscious vehicles.
The brand launched a redesigned version of the Trax compact SUV in spring 2023, positioning itself well to capitalize on the trend.
Trax sales are up 130% this year, making it the top-selling subcompact SUV in the US, according to Mike MacPhee, director of Chevrolet sales operations.
Despite this shift, the future of the market remains uncertain.
As Charlie Chesbrough, chief economist at Cox Automotive, notes, potential cuts in interest rates could eventually reduce auto loan costs, possibly driving consumers back to larger, more expensive vehicles.
“The trends will probably start to change if these interest rates start coming down,” Chesbrough told AP.
We’ll see consumers start moving into these larger vehicles.
For now, though, many buyers are opting for smaller, more affordable vehicles as they navigate rising loan rates, increasing insurance costs, and a cautious economic outlook.
Whether this trend endures or fades with changing market conditions remains to be seen.
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