With the pandemic came a surge in purchase prices for new vehicles. Since the end of 2019, car prices have been tumultuous at best – a combination of recession and shortages affecting the supply chain have made prices go up for the end user as designers, manufacturers, and dealers have had to cover their costs.
What we are seeing at the moment is that the price of new vehicles is high, but it looks like they could drop, even as far down to pre-pandemic levels, which is excellent news both for car buyers and for the economy in general.
At the beginning of January 2025, the average cost of a new car was $48.978. While this does include luxury vehicles, it is worth noting that the luxury vehicle segment is the only area that has seen notable price reductions, and not only because American’s can no longer afford them. New players have entered the luxury car market over the last couple of years, most notably Tesla. The Musk superpower is now among the top 10 luxury car manufacturers in the US, not just the EV market.
Compare this year’s prices to January 2020, when the average price of a new car was less than $40,000.
Why Did Prices Rise?
There are several reasons why the cost of a car increased so quickly in the last five years. Some of them include:
- Supply Chain Issues: Stay at home orders saw factories that manufactured parts for new vehicles having to close. Vehicle assembly plants couldn’t open, so there were fewer new cars being built.
- Semiconductor Shortages: Not just for EVs, but the problems getting semiconductors affected the computer systems in almost every sector of the vehicle industry, from manufacturers to logistics.
- Inflation: Again, related to the pandemic, the Federal Reserve increased interest rates, making the cost-of-living increase and access to credit more limited for consumers
- Higher costs in production: Similarly, higher costs of things like crude oil, utilities like electricity and water, freight, and shipping, and even labor have all been passed through the supply chain, meaning that maintaining profit margins means increasing cost prices.
- Big car preferences: Car manufacturing companies noticed that more people were buying bigger cars, so the focus became about making these SUVs and crossovers instead of the cars that might be cheaper to buy new, inflating the forecourt price for consumers.
What’s Happening Now?
The steadying of the previously rising tide of a new vehicle cost is pointing towards the hope that consumers could see a decrease in the cost of buying a car – even if the cost of running it is still increasing.
In fact, the cost of buying a car has risen only slightly from last year, while the cost of running a vehicle for the average American has increased by almost 10%. Fluctuating fuel, insurance, and registration costs are as much to blame for this as purchase cost, and consumers are looking for ways to save here – from getting wheel payment plans to only buying used cars with cash.
The positive news is that reserves of new cars have been steadily increasing to nearly 2020 levels, reducing the scarcity factor, and allowing producers to cut prices again.
Cheaper purchase prices for dealers allow savings to be passed on to consumers – and this is already being seen, as sticker prices are being reduced because dealers are starting to offer discounts and incentives that can save 6-8% of new car values.
Finally, inflation is reducing, and interest rates are going down, so dealerships are more likely to offer low or even zero interest financing terms as well as discounting lease payments. Consumers are being given more buying power, so that they can bolster an industry that has had a really tough time with it over the last five years.
This has meant that car sales for 2025 are already up by about 3% from last year.
Photo at top by Luke Miller via Pexels
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