Today, up to 1 million Americans are effectively shut out of the market for new cars and light trucks. Vehicles have simply become too expensive for many lower-income households. The average cost of a new vehicle is around $50,000, up roughly 20% from just four years ago. To compound things, used car prices are also near record highs, averaging about $32,000 for a three-year-old vehicle. What’s going on?
The long-term decline in vehicle affordability is the result of poor government policy, costly union contracts, macroeconomic pressures, and changing consumer preferences.
Detroit automakers have intentionally phased out many smaller, affordable cars and light trucks. These entry-level vehicles generate very thin profit margins. The Big Three automakers simply cannot justify building large numbers of small cars, given high labor costs, increasingly complex regulatory requirements, and uncertainty surrounding government policy from one presidential administration to the next. Expensive union contracts and policy uncertainty have pushed vehicle manufacturers to focus on large SUVs and pickup trucks. Although these vehicles cost more to produce, automakers can charge substantially higher prices and earn profit margins that often exceed 20%. Dealership lots are filled with large vehicles, which now account for roughly 80% of the new vehicle market.
Federal Corporate Average Fuel Economy standards and emissions regulations also encourage the production of larger vehicles. Fuel-economy targets are scaled according to a vehicle’s physical footprint, meaning larger trucks and SUVs face less stringent requirements than smaller cars. As a result, manufacturers have a regulatory incentive to build larger vehicles. The federal government’s shifting policies on electric vehicles have also contributed to higher vehicle costs. Automakers were pressured by the administration of former President Joe Biden to invest billions of dollars in electric vehicle production, even though consumer demand for EVs was weak. Those investments destroyed capital. Building larger, more profitable vehicles has become one way for automakers to recover some of those costs.
Modern vehicles must also comply with rigorous federal safety standards that require advanced engineering and expensive materials. Features such as reinforced crumple zones, sophisticated airbag systems, radar sensors, and backup cameras add significant manufacturing costs to every vehicle. Cars are safer, but they are also more expensive. Consumers ultimately pay the bill.
But automakers are in business to make money. Detroit manufacturers understand that profits increase when vehicles are equipped with premium features such as advanced driver assistance systems, heated steering wheels, and LED lighting packages. While many consumers value these features, they also inflate transaction prices. More importantly, in the United States, we must also remember that most vehicles are generally not sold directly to consumers. Instead, automakers are required to sell through independent franchised dealer networks. This system adds dealer markups, delivery charges, and dealer-installed options that increase the final purchase price.
A substantial share of domestic automotive production is performed by unionized labor. Union contracts often include higher wages, extensive healthcare benefits, and generous pension plans. These costs are ultimately reflected in vehicle prices.
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Finally, because of tariffs imposed by President Donald Trump, consumers have limited access to many inexpensive small vehicles produced overseas. Reduced competition in the U.S. market contributes to higher prices. At the same time, the widespread availability of 72-month and 84-month auto loans allows dealers to focus buyers on monthly payments rather than total vehicle cost. This financing structure enables automakers and dealers to raise prices without immediately reducing demand.
The bottom line is that American vehicles are expensive largely because of government policies, high labor costs, and a market structure that rewards manufacturers for producing larger, more expensive vehicles.
James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. He writes a daily email note on markets, economics, politics, and social issues.