I’ve got some good news for all of the “big cars are evil and must be destroyed” circle jerkers out there: High car prices and elevated interest rates are pushing shoppers back to smaller cars. For years, U.S. car buyers have passed up smaller cars in favor of larger, roomier vehicles, but the tides seem to be turning as affordability issues hurt sales of big cars.
Overall car prices have gotten higher and higher, and it’s forced some buyers to make tradeoffs when it comes to space and features. People are once again looking at smaller, cheaper cars to fill their transportation needs. Here’s more from the Wall Street Journal:
Sales of some smaller, entry-level models, such as the Honda Civic and Nissan Sentra, have taken off this year, rising 23% or more through November, according to research firm Motor Intelligence. Those increases have far outpaced the industry’s growth, which has been in the low single digits this year.
Meanwhile, large pickup truck sales, long a highly profitable corner of the market for the Detroit car companies, slid 1.9%, data from car-shopping website Edmunds shows. Sales of midsize SUVs, the type of vehicle typically favored by families, have also declined, falling 2.3% over 2023.
This rising interest in smaller offerings comes as owning a car has become increasingly unaffordable. The average selling price of a new car is still at historically high levels, exceeding $45,000 in November, according to J.D. Power. Insurance premiums, financing rates and repair costs have also climbed in recent years, further stretching household budgets.
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“They need the functionality that the vehicle has, but they just need to buy the smaller size,” said Charles Chesbrough, a senior economist at Cox Automotive. “It fits into their wallet.”
Whether the trend continues might depend on interest rates and fuel prices in the coming years. President-elect Donald Trump’s pledge to slap 25% import tariffs on goods made in Mexico and Canada could further dent affordability, as many automakers build their lower-priced cars in Mexico to take advantage of reduced labor costs.
It’s hard to say whether or not this trend will continue into the future, especially when President-elect Donald Trump and his sweetheart Elon Musk take power in January. Trump has pledged to hit goods imported from Mexico and Canada with a 25 percent tariff, and that would severely hurt affordability for cheaper cars since many automakers build their cheapest offerings in Mexico, according to the Wall Street Journal:
The price differential between a large and small model can be significant. The average price paid for a small SUV this year was about $29,000, according to Edmunds. For midsize and large SUVs, consumers paid on average $48,000 and $76,000, respectively.
Toyota, Honda and other Asian brands are some of the biggest beneficiaries from this shift, having long led the market for compact sedans and SUVs, some with starting prices under $25,000. Many of these companies stood by their small-car options as rivals abandoned the category.
Some nameplates, such as the Mazda3 and Honda HR-V, have posted double-digit sales increases this year.
In the compact-car category alone, sales rose 16% through November, and U.S. market share for these types of models has bounced back, after sliding in recent years, data from Edmunds shows.
Sales of compact and subcompact SUVs have also gotten a lift, up 11.5% over the same period, as car companies have expanded the range of options for buyers looking for utility and a higher-riding position in a smaller package. These models now account for about 27% of all U.S. sales this year, up from 22% before the pandemic.
Large SUV sales also remain a growth spot, but that is largely because the families who tend to buy them need the extra space or hauling capability and can’t easily downsize, analysts say.
With lower price points and better fuel economy, compact cars were once seen as a way of attracting younger buyers into a brand. The strategy was to get customers hooked earlier in their life and then sell them pricier models of the same brand as they grew older and increased their spending power.
But car shoppers began waiting until later in life to purchase new cars and trucks. Years of cheap gasoline helped cement the dominance of larger SUVs in America’s driveways and parking lots.
This transition in buying dynamics has led to many automakers changing up their lineups by dropping cheaper sedans and hatchbacks. That means that most of the options that are left for consumers tend to be pricier. Apparently, the number of cars that cost less than $25,000 new dropped from 45 models in 2019 to just 11 this year. The Wall Street Journal reports. That is a wild drop in just 5 years.
To fill the gap, automakers have rolled out tiny crossovers at cheaper price points for folks with lighter wallets. Those efforts still don’t really fill the gap of the cheapest cars automakers used to offer.
