VEHICLE AFFORDABILITY: Are Vehicles Really Getting More Expensive?
February 7, 2020 | Jacob Pardue
Let’s go ahead and state the obvious: inflation is real and car prices aren’t immune to inflation. That being said, we’re on the fun end of the dealership world seeing how stores of all types and sizes are performing, and we’d be lying if we said this past decade wasn’t prosperous for the overwhelming majority of our clients. Sure, there were some exceptions, but by and large our clients have experienced sustained profits and both organic and non-organic growth for the past 10 years. In layman’s terms, dealers sold some cars in the 2010s… a lot of cars. So, when we see an article with the headline “For Middle-Class Shoppers, New Vehicles are Moving Out of Reach,” we take a closer look.
It’s no secret that cars are getting more expensive. With the average new vehicle price on its way to and past the $35,000 mark, we’ve begun to see the average payment inflate to over $500. Even with historically-low interest rates, this had led to the advent of products such as the recently-popular 84-month car note as well as subscription-type services, among other things. But when we read this headline, we couldn’t help but think how much better cars have gotten over the past decade. Is it really fair to complain about incremental price increases when the products have exponentially improved?
This got us thinking: “Let’s do some research on the inflation of popular car models throughout the last decade and see if consumers really have a bone to pick with their favorite auto manufacturers.” Are automakers really taking advantage of their customer bases and up-charging based on the economically prosperous past decade, or are they simply responding to increasingly complicated customer (and, in some cases, government) demands?
We began our research by asking: “What is the main function that our cars provide?” If you didn’t answer “transportation,” then you’re well on your way into the 2020s. However, the main purpose of our cars (or trucks) is typically to get us from Point A to Point B. A vehicle’s purpose isn’t necessarily to read our texts, direct us to the cheapest gas station, or keep us warm or cold via the leather-wrapped thrones we call car seats. While these are all niceties that modern technology affords, we wanted to analyze what basic transportation has cost us over the past 10 years. To do this, we decided to graph the price changes of the cheapest versions of popular vehicles sold during the past decade: the Ford F-150, Toyota Camry, and Toyota RAV4, respectively. These vehicles represent the best-selling truck, car, and SUV, last year and have been frequent contenders for these titles during the entire decade. The following excerpts detail our results.
The Ford F-150 has been labeled as the best-selling pickup truck in America ever since they started counting that sort of thing. Its popularity in the truck market makes it perfect for analyzing inflation for light-duty pickups and small trucks. The cheapest F-150 you could buy in 2010 – an XL trim with a regular cab – would cost you, including destination, $23,035 before taxes and fees. That same truck in 2019 would cost you $29,750 – a total increase of $6,715, or 29.2%, spanning across a decade. This equates to a 2.6% compounded annual growth rate over the 10-year period, which, while reasonable, is the highest rate of our three examples.
The Toyota Camry is a super-popular, economical and practical choice for your daily commute, and has crested the bestselling cars list in the United States several times in the past decade. Part of the Camry’s lure is its affordable entry price. Over the past ten years, the base Camry has increased a mere $4,895 from its $20,155 starting price in 2010, reaching $25,050 in 2019. This represents a 24.3% total change over the decade, or 2.2% compounded annually.
The Toyota RAV4, especially in the latter half of the decade, has consistently been a top-3 selling SUV in the United States, including taking the crown in 2017, 2018, and 2019. And as the popularity of the SUV/CUV has risen this decade, so have RAV4 sales. The base RAV4 proved the most inflation-proof of our trio of vehicles, increasing only $4,285 since 2010. A base RAV4 in that year would run you $22,485, while in 2019 they were just $26,770. This represents a comparatively-microscopic increase of 19.1% over the 10 year period, or just 1.8% compounded annually.
Overall, across our three popular vehicle models, the last decade produced an average total price increase of approximately $5,300, or 24.2%, which resulted in a compounded annual growth rate just shy of 2.2%. According to the Bureau of Labor Statistics (BLS), which tracks monthly and annual inflation based on its Consumer Price Index, or CPI, inflation during the 2010s grew at approximately 1.8% per year, or about 19% in total for the 10 years. This means that these popular, sparsely-equipped commuters grew in price approximately .4% a year greater than inflation, which results in today’s vehicles being around $1,000 more expensive than if their price increases mirrored the CPI. We’d likely chalk this variance up as academic, but we felt that we could provide some reasoning behind this (albeit, minimal) price increase above inflation.
But first, why are there so many publications complaining about increasing car prices, and why are consumers resorting to longer-term loans, renting/leasing services, and purchasing more used vehicles? Simply put, cars are consumption items, and consumers view their vehicles as more than just basic forms of transportation. The previously-mentioned heated and cooled seats, radar guided cruise control, panoramic glass roofs and other Star Wars like features are luxuries that, while not necessary to transport you from one location to the next, are desirable. They’re also not cheap. Additionally, to some (actually, many), cars are a status symbol, an accessory that shows off prosperity, well-being, and taste. Why buy the base model when I can get the one covered in chrome with a bigger engine under the hood? It also doesn’t hurt that the past decade has treated consumers well. With the stock market frequenting highs as well as generally positive wage growth, coupled with low unemployment, consumers are directing a potentially large portion of this discretionary spending toward their vehicles.
It’s also no secret that dealers would prefer to sell the higher-level trims to their customers. It’s typically not the base models that fly off the lot, but rather the mid-level and premium trims. After all, these models are both more profitable and desirable. This is no coincidence. And while it isn’t inherently bad that consumers want the biggest and best vehicle their money can buy, this can lead to some individuals over-extending their budget and biting off more than they can chew. Herein could be the media’s issue with car prices. But, this made us curious: how have prices changed for the highest priced versions of our three popular models…the ones that come with the most options, biggest engines and heftiest price tags? Maybe here we can put a number on the issue.
Unsurprisingly, the total dollar change of each of the top trims of our three vehicles were greater than their respective base model counterparts. The trio was once again led by the Ford F-150, which has increased nearly $25,000 in price over the decade thanks to uber-luxurious Platinum trim that sits atop the model range. The Toyota RAV4 also inflated at a greater rate than its base model counterpart, though to a lesser extent than the top F-150, while the most luxurious Camry actually grew at a lesser rate than the base car, but still within a reasonable margin. We found it interesting to note that Toyota price increases were stymied when compared to the F-150 because both vehicles are offered in Lexus variants, while the F-150 has no luxury twin. For companies that share platforms with both their luxury and traditional domestic/import lineups (i.e. Ford/ Lincoln, Toyota/Lexus, Volkswagen/ Audi, etc.), the Original Equiped Manufacturers (OEMs) ideally try to keep the prices of their highest-trim standard models below the entry price of the comparable luxury model. If these prices get too close, cannibalization within the brand can occur (why drive a loaded Toyota when you could say you drive a Lexus?). To compensate for this, we have observed that luxury models’ prices typically inflate at a greater rate to maintain this gap. The same can be said for models like the F-150 that aren’t capped by a luxury “glass ceiling” preventing them from raising prices at a higher rate. In short, the more expensive trims and models are the ones that the media is commenting about.
So, we know that, in their most basic form, some of the most popular modes of transportation in the United States are more or less mirroring inflation. Their prices are not ballooning out of control where only celebrities or Silicon Valley executives can afford them. It’s only when we observe higher trims, or those loaded up with options, that we see significant price hikes when compared to prior years. The simple truth is that those boxes don’t have to be checked, and even when they are, new vehicles can still be wildly affordable. As such, we have no reason to believe that there is an industry problem (as some journalists may portray), but rather individual personal finance issues that should be solved at the household level. After all, it is the demands of consumers that ultimately drive vehicle prices, and with our current economic environment, consumers are leaning towards the more expensive offerings. That said, we still haven’t addressed the elephant in the room. As we alluded to earlier, comparing vehicle price increases to overall inflation is an unfair comparison. This is because cars are so much better than they were a decade ago. While a loaf of bread from 2010 is (hopefully) identical to a loaf of bread in 2019, we could write a book on how cars have improved in the last 10 years.
For example, each of our three examples is more efficient than 10 years ago while also benefiting from more powerful engines. Achieving more power and more efficiency is no small task. The cars are also safer, benefiting from added airbags and updated standard technologies like Anti-Locking Braking Systems (ABS) and stability control. A base Camry in 2010 came with a manual transmission, the 2019 comes standard with an 8-speed automatic. Each car now comes equipped with Bluetooth and backup cameras, technologies that were reserved for the highest trims a mere decade ago (if they were even offered at all). The Toyotas even come with touch screen infotainment systems, while the base F-150 benefits from Ford’s cutting-edge Sync software. The cheapest versions of these vehicles are so well-equipped today, that, like flat screen TVs and personal computers, there’s an argument to be made that cars are actually cheaper than they were a decade ago when comparably equipped. Moreover, we’d reckon that, if given the option, most consumers would prefer a base model vehicle from today over a fully loaded option from 10 years ago. But we’ll save that debate for another day. We’ve written all of this to say while the big news stations are complaining about rising car prices, the simple truth is this: the “basic” offerings are staying very close to the prices of everything else, and the higher trims are selling just fine, too.