Rising New Car Prices Shift U.S. Auto Market Toward Luxury and Used Vehicles

The average price of new cars in the U.S. reached nearly $50,000 in October 2024, a significant increase driven by automakers shifting focus from the lower-priced market segment to luxury models. In 2017, there were 36 new car models priced at $25,000 or less, compared to only five such models currently. This rising cost trend has pushed many consumers to consider downsizing their vehicles, buying used cars, or extending auto loan terms to manage affordability. Automakers have notably expanded their offerings in the luxury segment. Models priced at $60,000 or more have nearly doubled since 2017, from 61 to 114 available options. Even traditionally utilitarian brands, such as Jeep, are seeing high average selling prices, with models like the Wrangler averaging over $52,000. This premium pricing strategy initially supported strong sales but is now encountering headwinds as rising prices coincide with broader economic pressures. Consumer behavior is shifting in response to increased prices and economic factors including inflation in housing and food costs. Car loans are seeing longer durations, often 72 months or more, as buyers aim to reduce monthly payments. Additionally, lower-income borrowers face increasing challenges, reflected in rising default rates. There is also a growing trend toward purchasing used vehicles and favoring more affordable compact SUVs, like the Toyota RAV4, which is gaining popularity over pricier full-size trucks. Automakers are beginning to acknowledge the risks of reliance on high-income consumers, but recent federal policies have complicated efforts to introduce more affordable vehicles. Import tariffs, such as those imposed on vehicles built in South Korea, increase costs on budget-friendly models like the Chevrolet Trax. The expiration of federal electric vehicle tax credits also raises prices, affecting startups like Slate, which had aimed to launch sub-$20,000 electric pickup trucks. Trade restrictions on low-cost electric vehicles manufactured in China limit market competition and affordability in the U.S. However, industry analysts speculate that pressure to introduce lower-priced vehicles may encourage innovative strategies to overcome these barriers. Proposed legislation, such as a New York bill targeting subscription fees on vehicle features, and automaker marketing tactics reflect ongoing adjustments to evolving consumer demand and regulatory environments. Overall, the continued escalation of new car prices alongside tightening credit conditions signals a turning point in the U.S. auto market. Insurers, lenders, and market participants should monitor these trends closely as they could impact risk profiles, loan default rates, and the overall viability of financing models tied to new car sales.