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Car buyers are always in favor of lower prices, so here’s some good news. We have a buyer’s market for cars. New vehicle pricing fell in 2023 and is likely to fall this year as well. In particular, electric vehicles – EVs – are seeing huge price drops.
Costs soared during the pandemic, with sale values well above the manufacturer’s suggested retail prices (MSRPs). The higher prices were a by-product of inflation, chip shortages, and supply-chain disruptions.
The demand was out there, but manufacturers could not produce enough vehicles. Now times have changed. Inflation has fallen significantly, chip deliveries are back on schedule, and unloaded ships are no longer backed up near West-coast ports.
Michelle Krebs, executive analyst for Cox Automotive, said that “market is all but gone now, as higher inventory has led to higher incentives and discounts – lower margins for dealers – and vehicles are now typically selling for under MSRP. The shift from a seller’s market to a buyer’s market is well underway.”
Manufacturer prices in general fell 3.5% between January 2023 and January 2024, according to Cox. For example, Ford dropped prices by 5.3%, Honda was down by 1.5%, and Volkswagen saw prices fall by 1.2%.
Tesla Prices Down Almost 21%
The biggest drop came from Tesla, with prices down 20.6%. And – no surprise – lower prices led to higher sales. In January the company reported that 2023 deliveries had increased 38%.
The lower prices offered by many manufacturers are not the whole story. In addition, interest rates have been falling. The result is that new vehicles are often very much more affordable.
For example, a typical Tesla was priced at $62,350 in January 2023, an expense that fell to $49,518 in January 2024 according to Cox. With 10% down and 7% interest over 60 months, the monthly cost for principal and interest fell from $1,111 to $882.
That’s a difference of $229 a month or $13,740 over 60 months.
Tesla can offer such discounts for several reasons.
First, Tesla is a newer company, formed originally in 2003. That means it started as an electric vehicle manufacturer and not as a producer of gas-powered cars.
It doesn’t have old production equipment, debts from prior years, or an independent dealer network.
Second, pricing is a way to get a competitive edge – something Tesla needs because it’s facing more rivals. As The New York Times reported in January, “During the last year, Tesla has lost market share to rivals like General Motors, Hyundai, Ford Motor and Volkswagen as they introduced more electric vehicles. Tesla accounts for half the electric cars sold in the United States. In 2022, Tesla accounted for two-thirds of the market.”
Third, China’s BYD’s annual electric vehicle sales now top three million units, more than Tesla. No less important, BYD has inexpensive models priced well below US competitors, and it’s expanding outside China. Tesla and all manufacturers will have to deal with new and lower prices to be competitive.
Are Electric Vehicles The Right Choice?
Tesla and other EV manufacturers face many barriers. For instance, range is an issue. A quick and convenient national recharging network needs to be built out.
Better batteries may emerge in the future. And, most importantly, all-electric vehicles may not be the most attractive new technology.
In February, the Toyota Prius Prime – a hybrid vehicle that can use both electric and gas power – was the top scorer among the “most environmentally friendly cars,” according to the American Council for an Energy-Efficient Economy (ACEEE), The Prius was followed by the Lexus RZ 300e, Mini Cooper SE, Nissan Leaf, Toyota bZ4X, and Toyota RAV4 Prime.
The New Competition
EV competition is good for consumers. When Tesla lowers costs, it not only forces other EV producers to re-think their pricing structure, it also impacts auto producers in general.
This happens because EV manufacturers not only compete among themselves, they also compete with all manufacturers no matter how a vehicle is powered. The result is that it’s hard for legacy manufacturers to raise prices when EV producers are offering new technologies with lower costs.
And what about the rest of 2024? Reduced loan rates may emerge later this year if the Fed begins to ease interest rates. That would make new and used vehicles even more attractive, push more vehicles onto used car lots as older cars are traded in, and cause the buyer’s market to continue.