Americans turn to cheaper cars to battle prices, loan rates

DETROIT, Michigan: Michelle Chumley could have splurged on a high-end SUV when it was time to replace her Chevrolet Blazer, which she had purchased for around US$40,000. Instead, in June, the 56-year-old nurse from Oxford, Ohio, opted for the more affordable Chevrolet Trax, a smaller compact SUV.

Like Chumley, a growing number of car buyers are turning to vehicles priced between $20,000 and $30,000, making this segment the fastest-growing in the U.S. auto market.

"I just don't need that big vehicle and to be paying all of that gas money," Chumley said, explaining her decision.

This shift, dubbed the "affordability shift" by auto analysts, is driven by rising car prices and high loan rates. These have pushed the average cost of a new vehicle in the U.S. above $47,000-an increase of over 20 percent since before the pandemic.

According to auto research site Edmunds.com, financing a vehicle at this price would require monthly payments of roughly $737 at current interest rates of 7.1 percent. For many buyers, that's simply unaffordable.

Even those who can afford pricier cars, like Chumley, are deciding that the financial burden is not worth it. As a result, automakers are rethinking their production strategies. Though new U.S. vehicle sales have risen just 1 percent through September compared to last year, lower-priced models are gaining traction, with more generous discounts potentially reducing average auto prices and trimming industry profits.

"Consumers are becoming more prudent as they face economic uncertainty, still-high interest rates, and vehicle prices that remain elevated," said Kevin Roberts, director of market intelligence at CarGurus, an automotive shopping site. "This year, all of the growth is happening in what we would consider the more affordable price buckets."

In response, automakers are cutting prices on more expensive models, often through increased discounts. Edmunds reported that the average incentive per vehicle has nearly doubled in the past year, reaching $1,812. General Motors, for example, kept discounts moderate in recent months, helping it maintain steady vehicle prices around $49,000. However, the company expects profitability to dip in the fourth quarter.

According to Roberts, the $20,000-to-$30,000 price range accounted for 43 percent of the growth in new-vehicle sales through September, a significant increase over the past four years. Sales of compact and subcompact cars and SUVs from mainstream brands are surging, with gains not seen since 2018. This category's market share, which had dropped below 30 percent in 2022, is now approaching 34 percent. In contrast, sales of large SUVs have barely risen this year.

Automakers like General Motors anticipated this shift. The redesigned Chevrolet Trax, released in spring 2023, has seen a 130 percent sales increase, making it the top-selling subcompact SUV in the U.S. so far this year. Mike MacPhee, Chevrolet's director of sales operations, noted, "We are basically doubling our Trax sales volume from last year."

However, the demand for lower-priced vehicles remains uncertain. Cox Automotive's chief economist, Charlie Chesbrough, predicted that if interest rates decline, larger and more expensive vehicles may regain popularity. "We'll see consumers start moving into these larger vehicles," he said.