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Industry Voices | With Supply Up and Demand Down, Why Are Vehicles So Expensive?Industry Voices | With Supply Up and Demand Down, Why Are Vehicles So Expensive?
Vehicle prices are shockingly high for a wide swath of the customer base. The difference between success and struggle will be how dealers manage customer expectations in this high-priced vehicle era.
3 Min Read
Kia Soul among dwindling number of new cars priced below $30,000.
Anyone who’s taken an introductory economics class can recite one of its most basic tenets: If supply is high and demand is low, prices should drop.
But, in today’s automotive market, this seemingly immutable law isn’t holding. Despite growing supply and somewhat tepid demand, average new-vehicle prices remain over $50,000, creating a challenging environment for automotive retailers.
Here’s a look at some key supply and demand numbers:
New-vehicle inventory bottomed out in 2021 at just more than 800,000 units. Since then, new-vehicle inventory has grown steadily, reaching 3.25 million in December 2024, closing in on pre-COVID levels of 3.3 million-3.5 million.
At the same time, vehicle movement – while up throughout 2024 – has not kept pace with the growth trajectory on the supply side.
And yet, the average new-vehicle price in December 2024 remained more than $50,000.
Multiple factors are driving this phenomenon. Inflation is certainly part of the equation. From December 2019 to December 2024, inflation jumped 22.84%, according to the Bureau of Labor Statistics. This has negatively impacted OEM supply chains and production costs.
In addition, automakers discontinued many lower-end models; in 2019, OEMs had 72 models priced under $30,000. This fell to 22 models in 2024. Instead, OEMs emphasized higher-end pickup trucks and SUVs with expensive trim packages to maximize profits.
Additionally, consumers are facing interest rates significantly higher than they were pre-COVID. According to Experian, the average interest rate for a new-car loan rose to 6.84% in the second quarter of 2024. A consumer who bought a $19,550 Ford Focus SE in 2019 would have had loan payments of $367 per month (using reasonable down payment and fee assumptions). If they looked to replace that car with a similar model (since the Focus is no longer available), the monthly payment would jump to $555, an increase of 51%. Overall, the average monthly payment for a new vehicle in 2024 now sits at $760, up from $535 five years prior.
Any customers jumping back into the market this year are certainly in for a significant dose of sticker shock. For dealers to succeed in 2025, they will have to manage this consumer reaction through a variety of transparent communications on their vehicle data pages:
Transparent pricing, including available discounts. For a consumer searching for a workable financial situation, a dealer showing reduced pricing will almost always have an advantage over ones that do not. Car shoppers want as much information up front as possible, and with vehicle prices so high, accurate pricing data and available discounts that can help reduce monthly payments are more important than ever.
Available incentives. Car shoppers are always looking for a perceived deal as well. One of the best ways to communicate good deals is to prominently list cash back, APR and lease offers on dealer vehicle detail pages. In a high-supply, high-price selling environment, this can be a key advantage for dealers looking to move vehicles off the lot.
Extended loan periods. High vehicle prices combined with high interest rates yield record-level monthly payments. One of the ways dealers are working around this trend is to extend loan periods and communicate this to consumers. Given that many customers shop primarily on monthly payments, extending to 72- or even 84-month financing periods can help provide a monthly payment more people can afford.
Product enhancements. Of course, product still matters – no matter what is happening relative to pricing, interest rates, deals and incentives. Showing car shoppers vehicle features and capabilities of new models showcases value and will help to support higher prices.
The industry’s return to high inventory levels certainly has an upside. Choice and product availability are good for the consumer. But for a wide swath of the customer base, vehicle prices are shockingly high. How dealers manage customer expectations in this high-priced vehicle era will be the difference between success and struggle. Transparency of pricing, clear communication about deals and incentives, creative financing and focus on compelling vehicle features are paramount to success.
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