What Happened to the Affordable Car?

0:00Music

0:10My truck's name is Chachi, and it's a very simple truck. It's a Toyota from the 90s. That's Josiah Johnson. He drives a 1993 Toyota T100. Our producer Pierce interviewed him. And what are the types of things that you use your truck for at work? I have a trailer that I pull with all my tools in it, and then I use it to move materials, going to lumberyards, picking up whatever I need, and driving it to the job site. Josiah lives in Southern California, and he's a carpenter. So his truck is more than just transportation. It's one of his tools. The truck itself is red, and it has an eight-foot bed, which is useful for hauling wood.

0:54I do a lot of cabinet making, And this is the first year that Toyota made a full-size truck that could fit a sheet of plywood between the wheel wells. Chachi is an old truck, over 30 years old. It has manual locks and crank windows. One thing I hate is the roll-down windows. That's a bummer. If someone comes up to your passenger side window and is like, hey, can I talk to you quick? And then you have to lean over and roll down a window. That's a downside. And by modern truck standards, it's pretty small. It's a small truck compared to a lot of American trucks. Now people would look at it and say, oh my gosh, that's so much smaller than some massive F-150, F-250.

1:35But it is big enough to move around everything I need to. Have you ever thought about buying a new truck? But I could never really convince myself to consider in a serious way buying a new truck. That's because new trucks are pretty expensive. Today, the average price of a new vehicle is around$50 ,000. And trucks tend to cost even more. Yeah, I would never want to spend the better part of a year's salary on a vehicle that's only going to last me a decade. And throughout that decade, it's going to need a lot of maintenance. That would feel unwise.

2:13Many people in the U.S. are like Josiah and holding on to old cars. That includes me. I drive a 2014 Subaru Forester. It's a far cry from Josiah's 93 model, but my car is about the average age of cars on the road right now, which is about 13 years old. People are holding on to their cars longer, and fewer people are buying new cars. That's our colleague Sharon Turlip. She covers the automotive industry. There are a lot of market factors that are preventing people from buying new cars. New cars are increasingly expensive. And it's not just the car, it's the insurance, the loans, the repairs. It's tougher for people to swing these payments now than it used to be.

2:57The affordable new car has, I would say it's harder to find. They're harder and harder to find and fewer and far between.

3:07Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, September 10th.

3:19Coming up on the show, what happened to the affordable car?

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4:08When Sharon says new cars have gotten pretty expensive, she means that the average price for them has doubled in the past 25 years. The average car is selling for around$50 ,000 now. You know, back at the beginning of 2000, that was closer to$25 ,000. Now, of course, there's been inflation and, you know, everything's gotten more expensive. But the idea that you can spend$50 ,000 on average on a car, I think, is a big deal and pretty impactful. You know, and part of what compounds it is that there are so many things you have to spend money on in order to own your car. You have to fix it. You have to finance it.

4:47You have to insure it. And all those costs have gotten expensive as well. So, you know, it kind of combines to make this a much more expensive proposition than it was a decade ago. A lot has changed for car companies over the years. For one, they used to offer more models in a range of prices.

5:09For example, Ford has long offered the F-150, a full-sized, full-priced pickup truck. Ford F-150, built with innovation, built Ford tough. But starting in the 90s, it also used to offer cars like the Ford Focus, an affordable little car available as either a sedan or a hatchback. The new Ford Focus, smooth ride, smooth price, only at your local Ford dealer. That wide range of models and prices started to shrink after the financial crisis in 2008. I mean, it used to be that when you said automobile, that was synonymous with sedan. And I think in our psyche, that may kind of be the case. But sedans are not the, you know, they long ago stopped being the dominant type of vehicle that was in the market.

5:55Many car companies realized that cheap cars like sedans weren't very profitable. And they could make more money selling higher-priced cars like trucks or SUVs, even if they ultimately sold fewer vehicles. There was a reckoning for the auto industry where they realized that they really had to reduce the number of slow-selling, unprofitable models. Their lineups were very cluttered. Over time, some car companies phased out many of their sedans and hatchbacks and focused on selling those bigger vehicles. I mean, definitely the shift toward more expensive, bigger cars is an industry-wide phenomenon.

6:33So even though Honda still sells the Accord and Toyota still sells the Camry, they've also doubled down in their own lines of trucks and big SUVs. Toyota now advertises 16 different models of SUVs. SUVs, pickup trucks are the best-selling vehicles in America. And then there's also this model of vehicle, you know, we call it a crossover, or a crossover SUV. Introducing the new Corolla Cross Hybrid. Love is out there. Find it in the all-new 2024 Subaru Crosstrek. Okay, what is actually the difference between a compact SUV and a crossover SUV? I am lost in these terms, Sharon. Yeah, sure. So a crossover essentially means it's an SUV, but it doesn't have the architecture of a big truck.

7:26So it's more like it has the architecture of a sedan, but the body of an SUV. So that's what a crossover is technically. The real difference is, and this is something that, you know, the auto companies learned long ago, you can charge a lot more, significantly more, for a crossover or an SUV than you can for a sedan. People will pay thousands of dollars more for that kind of vehicle, and it doesn't cost that much more to produce. So the margins are much better on these vehicles generally than on a sedan, even if they aren't that different. And it's not just that these car companies are selling kind of more SUV type cars, whatever you want to call them, right?

8:07But these bigger cars are also getting bigger. I feel like when I watch, every time I watch a Ford commercial, the truck size has just gotten yet another size bigger somehow. Yeah. I mean, they're definitely, they're bigger. If you take a, you know, F-150 or a Silverado from 15 years ago and today, it looks like it's been kind of blown up. And, you know, we focus a lot on the trucks and the SUVs. This really is happening everywhere. I mean, that's happening across the entire line of vehicles. Bigger cars mean more features, which can in turn make those cars more expensive. So the size and type of vehicles have been two contributing factors to higher prices for new cars.

8:51But another was COVID. During the pandemic, there were supply shortages. That also drove prices up. There were shortages all over the place, and people just couldn't get their hands on cars. And so in this time, you know, companies, you don't have to put discounts on things that are in short supply. So discounts ended, prices went up. There was this kind of mad rush. And there was this escalation in price that once we came out of the pandemic, it never went down. That's so interesting because, yeah, I remember, I feel like everybody suddenly was talking about the supply chain in 2020, 2021. Suddenly everybody was very aware of where all their parts came from.

9:35And it wasn't just the price of the cars themselves. Before the pandemic, interest rates for car loans were around 5%, which meant that even if a car was out of a buyer's price range, maybe they could swing the monthly payment. Today, the average auto loan rate is 7 % for five years. That makes a big difference to a monthly payment. As consumers buy fewer new cars, the auto industry has had to adapt. That's next.

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10:50We started this conversation saying, you know, there are more older cars on the road. So it sounds like there are a lot of consumers who aren't necessarily looking to buy a more expensive new car. And yet at the same time, it also sounds like there are consumers who are purchasing these newer, bigger cars. Sure. It's a combination of both. The market has slowed down this year. Fewer people are buying new cars this year. But the market isn't, it's not sinking. It's not, you know, it's not tanking. And so companies largely are able to make more money selling fewer vehicles because these vehicles are so much more profitable than they used to be.

11:29And there's plenty of people out there who will pay for these vehicles. And, you know, it's yet one more sign of this K-shaped economy where cars are more expensive than they've been. And some of those very expensive cars are more popular than they've ever been. Yet you have more people just dropping out of the market because they can't afford even the budget models. The K-shaped economy. That's the term some economists have used to describe this current moment. It's when two parts of the economy are shifting in different directions. The wealthy or the upper middle class are moving up. But those in lower income households are continuing to struggle.

12:07So it's a case where the market's slowing down, you know, but it's not collapsing. There's plenty of people out there who will pay for these vehicles. And so companies largely are able to make more money selling fewer vehicles because these vehicles are so much more profitable than they used to be. And that's a shift for car companies? Yeah, I mean, that's changed in many ways the focus. I mean, certainly car companies, their main business is building new cars. But things that used to be an afterthought or more ancillary are becoming more important. This includes things like prioritizing certified used cars, where a car dealer sells a used car that's still under warranty.

12:50It also means focusing on other streams of revenue, like subscription services, where you pay a recurring fee to keep different features in your car working. They're now rolling out these subscriptions for everything from perhaps heated seats, which is something not a lot of people want to pay for, to self-driving technology. So if you want to keep your self-driving technology, you have to pay a subscription for that. And so that is something that has, you know, become increasingly a profit center for car companies. I'm sorry, how do heated seats, how do you do a subscription for heated seats?

13:25Like if you don't pay for your monthly subscription, your seat just doesn't get warm? Yeah, I mean, there's not, you know, it is. And it's a product of these vehicles being more and more connected and software-based. There are also subscriptions for things like access to dash cam footage or being able to use your phone as a remote control to start or unlock your car. But many analysts and even auto industry executives worry that pricing so many buyers out of the market may be unsustainable long term. I think there's no car company that would say we don't want to make any affordable cars. I think they all acknowledge that they need something.

14:05It's just a matter of what they will do to be in that market. So we have some of the, you know, whether it's Hyundai or Nissan and the, you know, Toyota and Honda have vehicles that are less than$30 ,000. General Motors actually sends, they have four very, you know, I call them kind of pint size. They're very small SUVs that they build in Korea where labor is much cheaper and sell hundreds of thousands of those vehicles here. So certainly they plan to stick with that. And then Ford has said it's going to come out with some more affordable models. Stellantis has said the same. So you certainly know car companies saying, we just are done with affordable vehicles.

14:43And then you have this new startup company called Slate Auto. This is a Slate. This Slate seats two and can carry sheets of plywood. The Slate truck is an EV. It costs about$25 ,000. At base price, it's a very bare bones truck. It's unpainted, has only two seats, and comes with crank windows. There's also no radio. We took out everything that was in a car. That means no fancy screen, colored lighting, cooled seats, self-driving, self-parking. You can add on more features if you want. You just have to pay for them. So you can make the truck a five-seater SUV or get it in whatever color you want.

15:22And yes, you can add a radio and power windows too. The truck is only available for pre-order right now. But some enthusiasts are really excited about it. It certainly struck a chord. I mean, because there are a lot of people who not only don't want to pay for extra features, but really, really do not like all the bells and whistles and the fact that their vehicle is connected. And there's a significant number of people who don't want those things and especially don't want to have to pay for them. I think there's people who are nostalgic. There are certainly fans out there. I think the question is, does that enthusiasm then translate into enough people to purchase the vehicle?

16:02because you can't, you know, if you're going to sell a budget car, you have to sell a lot of them or it's not going to be profitable. So, Sharon, what does the price of cars right now tell you about the auto industry broadly? Are we likely to see the average age of cars go up out on the roads, even higher than 13 years old, which is basically a junior high student at this point? Yeah, I mean, it certainly doesn't appear to be reversing. Cars can only live so long. Like at some point, people will have to get new cars. But I mean, then do they, when they get rid of their old, old car, do they buy a new car or do they just buy a slightly younger used car?

16:44You know, in some ways, it's an auto industry where a new car is increasingly a luxury purchase. Like a new car isn't something everybody can just get. You know, it doesn't mean you have to be wealthy to have a new car, But increasingly, a new car is the realm of, you know, people who are more affluent. So that's the shift.

17:15That's all for today, Thursday, September 10th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

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