Why Toyota Thinks The Average New Car Will Soon Cost Over $50,000

Toyota’s head of sales for North America thinks we’re in a recession, just a weird one that doesn’t conform to traditional data. He also thinks, fairly, that new car prices are going to rise above $50,000 on average. What, exactly, is going on here?

More mixed news this morning as Ferrari gets excited about combustion engines, Tesla has to face another NHTSA investigation, and the U.S. and Japan come together on mineral extraction.

Why Should New Cars Cost More?

On a call with reporters yesterday, Toyota Motor North America’s head of sales, Jack Hollis, said four things that are important to understanding the current state of the new car market in the United States:

1. The average new car transaction price will push above $50,000 at some point this year.
2. Ongoing shortages will keep about 2 million cars from being sold in the United States.
3. Used-vehicle demand will keep used car prices up, along with most residual values
4. We’re in a recession, albeit a weird one.

I wasn’t on this call, but Automotive News was and filed this report, which has a fuller quote:

Hollis said he believes that the nation is probably already in a recession, but it is an unusual one that doesn’t fit standard economic models. Average transaction prices across the industry “will continue to grow” above $50,000, he said.

Used-vehicle demand — buttressed by would-be new-vehicle shoppers priced out of the market — will continue to keep residual values high. He said, “The only thing holding us back [as an industry] is the totality of the supply chain and the fragility of it, because we’re not back to normal anywhere globally.”

Let’s take these in the order I proposed, just because it makes more sense to think of it that way.

1.  It’s not particularly a stretch to think the average new car transaction price is going to be above $50,000 this year. According to KBB (via ArsTechnica), the average transaction price rose 4.9% in 2022 to a high of $49,075 in December. All it takes is another 2% increase and we’re at $50,000. Why should it still go up, even as the feds raise interest rates?
2. There aren’t enough cars. There’s no debate here. Automakers from across the globe have complained about production woes and, while it’s improving, it’s not improving fast enough. Quick numbers from Automotive News and Cox Automotive show U.S. inventories at 1.83 million cars, which is up 73% from 2022. That’s an improvement, but it’s still way down from what was available in 2021. Fewer cars and higher prices, means buyers who are priced out have to look at used cars.
3. According to Cox Automotive, used vehicle supplies are tight again. The average listing price is $26,068. If there’s good news, it’s that the average price has dropped from their 2022 highs to the lowest level since 2021, but they’re still high and the average mileage of a used vehicle sold is now over 70,000 miles. The golden days of the just-off-lease, good quality used certified-pre-owned car are largely behind us.
4. We’re in a… recession? This is where it gets weird. The seasonally adjusted unemployment rate stood at 3.6% in February (though layoffs are happening in tech). Technically, a recession requires two quarters of negative GDP and we sort of had that in the first two quarters of 2022, though the last two quarters have been strong. The Federal Reserve is still raising rates, which is a sign that they think the economy is still too hot and costs are too high. That’s not what a recession is, either, of course. It’s probably not stagflation (inflation + low economic activity). So what’s going on?

Here’s my Grand Unified Theory of the car world: There is no single normal, instead there are now multiple abnormals. No two automakers are going to be the same because supply constraints vary greatly across automakers. From quarter-to-quarter, month-to-month, automaker-to-automaker, expect to see a lot of divergence in pricing and customer experiences.

We will not see a normal again until we have a reset, which could come slowly or quickly. A slow reset will be at least six quarters of significant inventory increases. Prices will continue to probably climb, but over time incentives and other factors can bring average transaction prices down. For large automakers, ability to make cars is the ultimate determinant in whether or not you pick up or lose market share this year. A fast reset will be a large shift in macroeconomic conditions (bank runs, stock market implosions, massive increase in unemployment). That might drive enough people out of the market to let inventory catch up and force prices down, but it’ll suck for most people.

Confounding factors here include the fact that markets seem to be responding more to rates set by the Fed than economic production, automakers (like Tesla) are employing far more variable pricing strategies, and the government is heavily subsidizing electric car purchases.

The used car market will continue to slowly improve, but it can’t move fast enough to keep up with demand because there aren’t enough cars.

Ferrari Is Gonna Keep Making ‘Dem Gas Powered Cars

As we mentioned yesterday, the EU has taken the German’s e-fuel compromise. What’s good for Porsche, in this situation, is good Ferrari. The compromise basically says that low-volume manufacturers can keep making gas-powered cars after 2035 if they use carbon neutral e-fuels. This means that your Kuga ST probably isn’t going to go to the petrol station, but rich people can get Ferraris.

The CEO of Ferrari, Benedetto Vigna, was at a Reuters Newsmaker event (sounds like fun!) and had this to say:

“The good news for us as a company (…) is that on top of electric cars, we’ll also be able to go on with our internal combustion engines ones,” CEO Benedetto Vigna told a Reuters Newsmaker event.

“This decision is very interesting for us because it allows ICEs to go beyond 2036,” he added.

Rich people buy Ferraris and rich people seem to like options, so Ferrari is keeping the door open for everything:

“We don’t want to tell clients which car to use. We want to make three kinds of propulsion available for them – hybrid, electric and ICE – and they will chose”.

Oh to have those kinds of choices.

[Editor’s Note: I, for one, am glad sports car companies will be able to continue building ICE cars. At this point, the most fun ICE cars are simply more of a joy to drive than the most fun EVs (in my opinion). -DT]. 

Tesla Is Getting Investigated Over Seat Belts

Making cars is hard. Every little damn thing has to be right. Hundreds of independent systems have to work together to form one functioning vehicle. It’s hard! From the AP we have this story on an investigation into the Tesla Model X and its seat belts, which may or may not keep people in their seat during a crash (sort of the point of seat belts):

The agency says it has two complaints from Tesla owners that the front belts weren’t sufficiently connected at the factory.

Documents posted by the agency Tuesday say the belt linkage and pretensioners, which tighten the belts before a crash, are anchored to the seat frames.

Both complaints allege that the linkage and pretensioner separated from the frames when the vehicles were driving and force was exerted. Neither incident involved a crash.

Well, that’s not great. Maybe figure that one out.

Metals Processed In Japan Count For Inflation Reduction Act

If you walk up to someone and hand them a $5 bill, you cannot expect them to be overly grateful. It’s nice, but it’s just a fiver. Now imagine you walk up to someone and dump a gallon of  milk on their head. You reach into your pocket and they wince because they don’t know what’s going to happen next. And then you hand them $5. They’re likely to be a little more grateful.

This is the Inflation Reduction Act if you’re a country that isn’t Mexico or Canada (or a party to one of our free trade agreements). All of a sudden, with one bill, the United States made it way more expensive for all other countries to sell cars here by effectively raising the prices of electric cars not made here (the milk). How to make it up to those countries if you wanna stay friends?

Here comes the Abe Lincoln, again from the AP, via The Detroit News:

The Inflation Reduction Act, enacted in August, requires a portion of the critical minerals used in EV batteries to be mined in or processed domestically or from countries with which the U.S. has free trade agreements. Japan and the U.S. have no such FTA, but the deal will grant Japan the same treatment as an FTA partner regarding such minerals, Japanese officials said.

As a result, the two sides said they agreed to not impose export duties on trade in lithium, cobalt, manganese, nickel and graphite — all strategically important minerals.

Good news for Japan. Probably good news for U.S. consumers. Probably good news for other countries looking to avoid being hosed by the law. It’s only bad news for China, which is seeing itself pushed out of more markets as the world divides itself in China/Russia/Iran and Everyone Else.

The Big Question

How long will it take for new car prices to go down?