Home » Why Toyota Thinks The Average New Car Will Soon Cost Over $50,000

Why Toyota Thinks The Average New Car Will Soon Cost Over $50,000

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Toyota’s head of sales for North America thinks we’re in a recession, just a weird one that doesn’t conform to traditional data. He also thinks, fairly, that new car prices are going to rise above $50,000 on average. What, exactly, is going on here?

More mixed news this morning as Ferrari gets excited about combustion engines, Tesla has to face another NHTSA investigation, and the U.S. and Japan come together on mineral extraction.

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Why Should New Cars Cost More?

2024 Toyota Grand highlander Windchillpearl 005

On a call with reporters yesterday, Toyota Motor North America’s head of sales, Jack Hollis, said four things that are important to understanding the current state of the new car market in the United States:

  1. The average new car transaction price will push above $50,000 at some point this year.
  2. Ongoing shortages will keep about 2 million cars from being sold in the United States.
  3. Used-vehicle demand will keep used car prices up, along with most residual values
  4. We’re in a recession, albeit a weird one.

I wasn’t on this call, but Automotive News was and filed this report, which has a fuller quote:

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Hollis said he believes that the nation is probably already in a recession, but it is an unusual one that doesn’t fit standard economic models. Average transaction prices across the industry “will continue to grow” above $50,000, he said.

Used-vehicle demand — buttressed by would-be new-vehicle shoppers priced out of the market — will continue to keep residual values high. He said, “The only thing holding us back [as an industry] is the totality of the supply chain and the fragility of it, because we’re not back to normal anywhere globally.”

Let’s take these in the order I proposed, just because it makes more sense to think of it that way.

  1.  It’s not particularly a stretch to think the average new car transaction price is going to be above $50,000 this year. According to KBB (via ArsTechnica), the average transaction price rose 4.9% in 2022 to a high of $49,075 in December. All it takes is another 2% increase and we’re at $50,000. Why should it still go up, even as the feds raise interest rates?
  2. There aren’t enough cars. There’s no debate here. Automakers from across the globe have complained about production woes and, while it’s improving, it’s not improving fast enough. Quick numbers from Automotive News and Cox Automotive show U.S. inventories at 1.83 million cars, which is up 73% from 2022. That’s an improvement, but it’s still way down from what was available in 2021. Fewer cars and higher prices, means buyers who are priced out have to look at used cars.
  3. According to Cox Automotive, used vehicle supplies are tight again. The average listing price is $26,068. If there’s good news, it’s that the average price has dropped from their 2022 highs to the lowest level since 2021, but they’re still high and the average mileage of a used vehicle sold is now over 70,000 miles. The golden days of the just-off-lease, good quality used certified-pre-owned car are largely behind us.
  4. We’re in a… recession? This is where it gets weird. The seasonally adjusted unemployment rate stood at 3.6% in February (though layoffs are happening in tech). Technically, a recession requires two quarters of negative GDP and we sort of had that in the first two quarters of 2022, though the last two quarters have been strong. The Federal Reserve is still raising rates, which is a sign that they think the economy is still too hot and costs are too high. That’s not what a recession is, either, of course. It’s probably not stagflation (inflation + low economic activity). So what’s going on?

Here’s my Grand Unified Theory of the car world: There is no single normal, instead there are now multiple abnormals. No two automakers are going to be the same because supply constraints vary greatly across automakers. From quarter-to-quarter, month-to-month, automaker-to-automaker, expect to see a lot of divergence in pricing and customer experiences.

We will not see a normal again until we have a reset, which could come slowly or quickly. A slow reset will be at least six quarters of significant inventory increases. Prices will continue to probably climb, but over time incentives and other factors can bring average transaction prices down. For large automakers, ability to make cars is the ultimate determinant in whether or not you pick up or lose market share this year. A fast reset will be a large shift in macroeconomic conditions (bank runs, stock market implosions, massive increase in unemployment). That might drive enough people out of the market to let inventory catch up and force prices down, but it’ll suck for most people.

Confounding factors here include the fact that markets seem to be responding more to rates set by the Fed than economic production, automakers (like Tesla) are employing far more variable pricing strategies, and the government is heavily subsidizing electric car purchases.

The used car market will continue to slowly improve, but it can’t move fast enough to keep up with demand because there aren’t enough cars.

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Ferrari Is Gonna Keep Making ‘Dem Gas Powered Cars

Ferrari 296 Gtb
Photo credit: Ferrari

As we mentioned yesterday, the EU has taken the German’s e-fuel compromise. What’s good for Porsche, in this situation, is good Ferrari. The compromise basically says that low-volume manufacturers can keep making gas-powered cars after 2035 if they use carbon neutral e-fuels. This means that your Kuga ST probably isn’t going to go to the petrol station, but rich people can get Ferraris.

The CEO of Ferrari, Benedetto Vigna, was at a Reuters Newsmaker event (sounds like fun!) and had this to say:

“The good news for us as a company (…) is that on top of electric cars, we’ll also be able to go on with our internal combustion engines ones,” CEO Benedetto Vigna told a Reuters Newsmaker event.

“This decision is very interesting for us because it allows ICEs to go beyond 2036,” he added.

Rich people buy Ferraris and rich people seem to like options, so Ferrari is keeping the door open for everything:

“We don’t want to tell clients which car to use. We want to make three kinds of propulsion available for them – hybrid, electric and ICE – and they will chose”.

Oh to have those kinds of choices.

[Editor’s Note: I, for one, am glad sports car companies will be able to continue building ICE cars. At this point, the most fun ICE cars are simply more of a joy to drive than the most fun EVs (in my opinion). -DT]. 

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Tesla Is Getting Investigated Over Seat Belts

Tesla recall
Photo credit: Courtesy of Tesla, Inc.

Making cars is hard. Every little damn thing has to be right. Hundreds of independent systems have to work together to form one functioning vehicle. It’s hard! From the AP we have this story on an investigation into the Tesla Model X and its seat belts, which may or may not keep people in their seat during a crash (sort of the point of seat belts):

The agency says it has two complaints from Tesla owners that the front belts weren’t sufficiently connected at the factory.

Documents posted by the agency Tuesday say the belt linkage and pretensioners, which tighten the belts before a crash, are anchored to the seat frames.

Both complaints allege that the linkage and pretensioner separated from the frames when the vehicles were driving and force was exerted. Neither incident involved a crash.

Well, that’s not great. Maybe figure that one out.

Metals Processed In Japan Count For Inflation Reduction Act

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Photo: The White House

If you walk up to someone and hand them a $5 bill, you cannot expect them to be overly grateful. It’s nice, but it’s just a fiver. Now imagine you walk up to someone and dump a gallon of  milk on their head. You reach into your pocket and they wince because they don’t know what’s going to happen next. And then you hand them $5. They’re likely to be a little more grateful.

This is the Inflation Reduction Act if you’re a country that isn’t Mexico or Canada (or a party to one of our free trade agreements). All of a sudden, with one bill, the United States made it way more expensive for all other countries to sell cars here by effectively raising the prices of electric cars not made here (the milk). How to make it up to those countries if you wanna stay friends?

Here comes the Abe Lincoln, again from the AP, via The Detroit News:

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The Inflation Reduction Act, enacted in August, requires a portion of the critical minerals used in EV batteries to be mined in or processed domestically or from countries with which the U.S. has free trade agreements. Japan and the U.S. have no such FTA, but the deal will grant Japan the same treatment as an FTA partner regarding such minerals, Japanese officials said.

As a result, the two sides said they agreed to not impose export duties on trade in lithium, cobalt, manganese, nickel and graphite — all strategically important minerals.

Good news for Japan. Probably good news for U.S. consumers. Probably good news for other countries looking to avoid being hosed by the law. It’s only bad news for China, which is seeing itself pushed out of more markets as the world divides itself in China/Russia/Iran and Everyone Else.

The Big Question

How long will it take for new car prices to go down?

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GhosnInABox
GhosnInABox
11 months ago

If, in Fascist Italy, the “trains must run on time”, by the same token, in America the cars must come cheap.

It’s no secret that North America (well, US and Canada at least) is extremely car dependent by design. Literally. Most zoning laws render areas, particularly suburbs, only traversable by car. These areas are also dependent on growth to keep from growing bankrupt.

I grew up in an average east-coast American town. When I got my first job as a barista, I didn’t have a car and took the bus. However, getting to and from the bus stop still involved me having to walk along deadly stroads and highways. In most of the continent, the infrastructure really isn’t there for the people to commute practically.

So, in order to maintain the economy needed to keep towns afloat in the now and future, the majority of citizens need cars. If anything, I would argue that’s the one thing in America that REALLY does need to be cheap.

It’s not the supply chain or inflation causing the problem, it’s corporate greed and government enabling. Automakers have been circumventing CAFE standards and upselling us expensive vehicles. When the going gets tough (aka a global crisis), what do they do? Reduce production of cheap models and churn out crap that costs more than my dad’s first house. Instead of the government pouring good money after bad to make EVs a thing, why not put that money towards another “People’s car”.

It’s common sense as old as Henry Ford himself.

Seeing Biden driving that EV Hummer made me want to hurl.

Eva
Eva
11 months ago

I don’t understand this e-fuels thing. Once a Ferrari leaves the factory they have no say over what someone uses to fuel the thing, so how is this at all compatible with the supposed carbon neutrality of the compromise? Are they also banning gas in general other than e fuel?

Mr Sarcastic
Mr Sarcastic
1 year ago

Yeah inflation is through the roof. Requiring all batteries use the limited local resources sends prices soaring. But dont blame morons of the Dem party that caused it because the liberals can never be blamed for their actions

Harvey Park
Harvey Park
11 months ago
Reply to  Mr Sarcastic

This place has been refreshingly free of politics and it’d be nice to keep it that way

Austin Vail
Austin Vail
1 year ago

This means that your Kuga ST probably isn’t going to go to the petrol station, but rich people can get Ferraris.

Boooo! Once again, rich people get to have fun while us normal folks have to commute in boring computer pods. Down with the aristocrats! Let us all drive ICE cars if e-fuels are attainable and we want something fun to break up the monotony of the work week.

Leighzbohns
Leighzbohns
1 year ago

Vehicle scarcity can only be a good thing as we are becoming more aware of climate change. The problem is that we have 80 years of path dependence on single family houses, yards, and asphalt everywhere to facilitate car dependence. People don’t think there’s anyway to get somewhere besides driving and in some places that’s basically true. So, sure, new vehicle scarcity can be good, but only when paired with wise development, road removal and pedestrianization, and cultural acceptance of mass transit, cycling, and walking for quotidian tasks.

Austin Vail
Austin Vail
1 year ago
Reply to  Leighzbohns

Do you live in a bubble? In most of the U.S. a car is a basic necessity. If you don’t have a car, you can’t commute to work or go to the grocery store, and before you say “just walk or bike or ride the bus,” that’s not an option everywhere. There aren’t enough sidewalks and public transportation is a joke.

Lack of affordable, reliable, efficient transportation is a massive problem. It’s hard to get a good-paying job if you’re limited to places you can walk or bike to, and finding a cheap car that won’t become a maintenance nightmare to drive to a job further away is really fricking hard. If you’re struggling to make ends meet or trying to get out of a rut, needing a new car is a huge financial burden, and the current strain on the used car market plus lack of affordable new cars is only making things worse.

Vehicle scarcity is a freaking epidemic, who cares if it means lower emissions if it also means more people struggle to get by? Screw that. I want people to be healthy and have financial stability more than I want less traffic.

Andy Individual
Andy Individual
1 year ago

Average transaction prices are like this because people are overbuying all this crap. This is no different that switching from 8oz steaks to 16oz steaks and then complaining about how the cost doubled.

There was a time in the last decade where you could buy a decent $15K-$20K car. Factor in all the crazy inflation over the last, say, five years and you are nowhere near $50K. All that’s changed is people suddenly needing seven seats to get their single fat ass to yoga class. Well, if so, pay for it and shut up.

Austin Vail
Austin Vail
1 year ago

I think the reason there are no more $15-20k cars is because with restricted production capacity, automakers are prioritizing vehicles with higher profit margins and ignoring the lower end of the market. Never mind that people need cheap transportation, it doesn’t make enough money when you can only build so many cars…

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