Car Prices Will Climb For Years

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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