• Jul 30th 2010 at 4:32PM
  • 29
Have you've been watching car prices lately? They seem to go up every month. Forget everything you've been reading about sales incentives, bargain leases or low-cost financing. They just mask the fact that automakers are quietly bumping up MSRP's every chance they get.
In other words, they quietly raise the price of a car and then loudly announce the deals they're offering. Sure, you get a discount. But that discount comes off an ever-higher price.

I've said it before and I'll say again. By 2015, the average new car in the American market is going to cost about $35,000. I'm not talking about the MSRP, which is already at an average of $33,000. I'm talking about the transaction price, what people actually pay for a car.

There are a variety of reasons why this is happening. But it basically comes down to this: even though car sales are very weak, we're actually in a seller's market. The planets are in alignment for automakers to raise their prices, especially for General Motors, Ford and Chrysler. And it's only going to get worse.

John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as a Detroit insider to Autoblog readers.

For most of the last decade the Detroit Three were caught in a death spiral where their legacy costs were choking them to death. Their business model had become so convoluted that it was actually cheaper for them to build a car than to not build it. That was largely thanks to the Jobs Bank that the UAW had put in place, where workers were paid even if there was no work for them to do. So the car companies made sure they put them to work making cars, despite the fact the sales orders weren't there. Then, to entice enough customers to buy that excess production, the Detroit Three offered blow-out deals.

Now the Detroit Three are only building cars based on actual customer demand
All this came to a crashing end when the Obama Administration finally pushed near-terminal GM and Chrysler into bankruptcy, while Ford managed to restructure itself on its own. In short order most of those legacy costs disappeared. And for all practical purposes, so did the Jobs Bank. Now the Detroit Three are only building cars based on actual customer demand. That means their dealerships are running on far lower levels of inventory, and that means they don't need those blow-out deals anymore.

Speaking of dealers, GM's and Chrysler's restructuring got rid of roughly 2,000 of them. Any time you get rid of so many stores it reduces competition, and that makes it easier for the surviving dealers to charge higher prices.

On top of that, the new car market collapsed, dropping from over 16 million units a year to just over 10 million. That's creating a 6 million-a-year shortage in the used car market, which has sent used-car prices skyrocketing. It's gotten so bad in some cases that certain used models are now more expensive than new ones. With used car prices up so much, it makes it much easier for car companies to raise the prices of new ones.

Right now the average transaction price in the industry is above $29,000
And then there are the new fuel economy and CO2 regulations. The technology needed to meet those standards doesn't come cheap. It's going to add a grand or two to the cost of each car. And that's just for cars with conventional gasoline internal combustion engines. Plug-ins, EV's, diesels and fuel cells are going to add a lot more cost than that.

We can already see the results. Right now, the average transaction price in the industry is above $29,000, which I'm sure will come as a shock to most people. But not nearly as close to the shock they'll get when that average climbs to $35,000 in about five years' time.

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    • 1 Second Ago
      • 5 Years Ago
      This article ignores the possibility of inexpensive imports from China or India lowering the average transaction cost of a new car.
      • 5 Years Ago
      Excalty why I never buy brand new, first few years of depreciation is eye-pooping, I don't mind a used car, I'm no millionaire.
      • 5 Years Ago
      New vehicles are incredibly expensive. If you walk through the lots of mainstream automakers like Ford today you will be in for some sticker shock. I have talked about this before over the last two years.

      Do you want a new Fiesta with Sync and the toys they advertise you can get it with? Over $20k. How about a Mustang GT nicely equipped? Remember when it was $25k-$30k in 2005 when the current model debuted? Now the same car with tweaks is $35k-$40k with the stuff you want.

      It's not just Ford either, it's that way all over the automotive landscape. Well optioned fullsize trucks and SUVs are $50k. Normal midsize to large cars with options are $35k.

      New car prices are a bit eye-watering these days. The best time to buy was when the economic debacle and automarket collapse happened putting manufacturers and dealers on the ropes.

      Otherwise used might be the way most to go, or skip on all the fancy options you think you want but don't really need - like in-dash navigation, your smart phone does the same thing better.

        • 5 Years Ago
        Ford has gotten much better, but they've just really caught up to Toyota/Honda/Nissan standards on quality and available options. OK, Ford has Sync, but it's just a gimmick to divert attention from areas where they aren't besting the competition.
        • 5 Years Ago
        Base prices are still reasonable though. And you get a lot as base equipment. Remember when power windows, a radio, and AC weren't standard, for example? and sedans were rollin' on 13's, 14's, 15's.. hehe.

        Ford has definitely moved upmarket. It's almost like you're buyin' a Mercury.. they're getting pricey.. but IMHO, more worth it than ever now that they actually have decent engines in their vehicles.
        • 5 Years Ago
        Tri, the thing is people want to buy cars loaded with everything, if a buyer can control himself a get a car without sun roof and nav he can still come out of the dealership with something in his pockets.
        • 5 Years Ago
        And 15" wheels on a Civic has made a big difference to the average buyer?

        Also, radio still isn't standard on a Civic.
      • 5 Years Ago

      We're gonna have to drive mid-sized cars now! the terror! ;)
      • 5 Years Ago
      Average Price? What is that? What is the average car?or average truck? do you put truck prices in with car prices to arrive at a average transaction price for new vehicles?the average price of vehicles by region?I say red herring. The use of the keys on your keyboard are free to use here and until you you break the transaction average price out by category and trim level I an not believing you, sorry but that is just the way facts work.
      • 5 Years Ago
      this is why we have choices, John. They'll always be that compact car that costs about $21,000, and by 2015, it'll probably come with 300 horsepower and get 50 mpg.
      • 5 Years Ago
      Like I said before, I guess I'll be keeping the Mirage. Paid off, awesome mpg, fun to drive.

      Economy cars should be priced like economy car....10K or less. That should never change. Prices are set by greed. Till society figures that out we will continue to have inflation, which is by the way, an illusion. If Washington would quit bailing out people and rich CEOs then we can reach a stability. But we'll continue to ride this artificial wave of an "improving economy".
        • 5 Years Ago

        I said 10k OR LESS. Read next time.
        • 5 Years Ago
        So if an economy car should always be priced $10,000 or less and that should never change, you think that in 2030 it will be possible to sell an economy car for $10,000 and stay in business? Also, by definition, that means back in 1962 an economy car should have still been $10,000 since you claim that price should never change.

        Not sure I agree with your thought process here.
        • 5 Years Ago
        Yeah, they should never go above $10,000. Just like the Hershey Nickle Bar.

        Oh wait, the Nickle bar remained the same price, yet shrank in size.

        So basically, as inflation rises, they just have to strip things off the car. Like the versa for example, if the cost of making that car goes any higher, they can just remove options, like.....the windshield wipers? Maybe they could start making the steering wheel out of cardboard? Then as manufacturing prices increase even more they can remove the government required safety features. In 2060 for $10,000 you'll be able to get the Nissan Versa bicycle.
      • 5 Years Ago
      John, you are wrong. In a recent issue of Motor Trend or Automobile there was a comparison of nicely equipped Accords and i think Camrys cars form 70s, 80s, 90s, early 00's and today.

      The dollar amount is obviously higher for todays cars, but adjusted for inflation today a car is actually cheaper than it was ever before.
        • 5 Years Ago
        @Middle Way - look at the new 2011 VW Jetta as a prime example of what you are saying - bang on.
        • 5 Years Ago
        @Sea Urchin, If you consider actual wages of the American public after inflation you will find that salaries slightly decreased or are almost flat since the 70s.
        • 5 Years Ago
        Cars also have a billion more features standard. If automakers were hurting for sales, they could start to release stripped down models again.

        Nissan's tried this recently, i wonder how their base model Versa is doing. I'm stunned that you can sell a car for $10k in 2010 with full emissions equipment, a fairly high tech engine, full safety equipment, etc etc.. it seems like an absolute steal when you account for inflation.

        Meanwhile, other cars are getting super bloated with features. I think we'll see the return of smaller and simpler cars, like in the 90's..
      • 5 Years Ago
      So here's the dirt -

      Car Prices going up, Wages Going down. As prices increase total sales will continue to drop.

      Have fun with that.
      • 5 Years Ago
      John, did you account for the changes in the value of the US dollar compared to other currencies, combined with the runaway inflation of the past several years, especially the past couple of years?

      In addition, cars now are better than ever, with more refinement, quality, and performance than we've ever had over such a large assortment of vehicles.

      Given all of these facts, the MSRP going up isn't a huge surprise.
      • 5 Years Ago
      Cars are slowly climbing up in price but are basically a necessity so its hard to resist.

      If you would rather hire a car check out - http://www.whipcar.com/hire-cars-in-newark/
      • 5 Years Ago

      I haven't bought new in years because after doing that enough times I woke up and realized what a money waster it is. The alternatives? Duh!!!

      Learn about machines, study how they work, and what an auto is made with. Then by a brand that you like that lasts a long time like 200K with average care. All the companies are trying to out-tech each other or build fancier, faster, impossible to repair machines. Clean is important, but high-tech, overstuffed gadget laden is not.

      Here's a prediction: if cars cost 35K in 5 years, there won't be a whole bunch sold.
        • 5 Years Ago
        saw a typo:

        ...And when buying - USED -, APRs start at 5.5% or higher. ...
        • 5 Years Ago
        The HUGE perk when buying new is possibly getting an APR of 0% or some other low rate like 2.5% - 4%. In today's market it's harder to get the lowest rate available. And when buying new, APRs start at 5.5% or higher. So depending on what you're buying, how old it is, and how long your loan term is; your APR may end up being 8% or 9% ---- making paying off a used car more expensive than a new car purchase.

        Beware of the mathematics. If any car dealer isn't willing to sit & walk you through all of the pricing, APR, and loan calculations --- they may be gouging you --- it pays to know about how much a vehicle will cost before you walk on the lot. Do the math, write it down, bring it with you. Be prepared.
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