Recessionomics: Why Aren’t New Cars Cheaper?


Despite the most severe economic downturn since the Great Depression, and the subsequent decline and demise of auto-giants like GM (Stock Quote: GM) and Chrysler, new car prices really aren’t in decline, either. Why is that? The answer lies in “firm pricing” – and some auto industry gurus are saying that it’s time to change the firm pricing formula, before it’s too late.

First, the facts. Back in 2003 – when the economy was really picking up steam and TARP meant a cover for your new Cadillac, and not a government bailout program – the average monthly payment for a new car was $445.95, according to Today, in what many politicians and economists call the worst economy since the Great Depression, the average monthly payment is actually higher, at $471.73 per month.

That begs the question: why are new cars more expensive when automakers' balance sheets are dripping with red ink?

That’s where firm pricing comes in. In a word, auto companies intentionally overprice new cars and trucks during tough times, figuring that there’s always going to be a decent amount of consumers who need a new vehicle, no matter what. With low volume, firm pricing guarantees a higher per-car price tag, and a higher per-car profit for automakers.

It’s also worth mentioning that car companies are beginning to add in the cost of higher environmental regulations that are coming down the pike from Washington, and passing those higher regulatory costs along to customers in the form of higher prices. The analytical firm CMW Worldwide says that by 2016, the cost of building environmentally-friendly vehicles will add at least $2,000 to the price of a new car or truck (the U.S. Government expects that number to be even higher, according to a report from the U.S. Department of Transportation). In addition, automakers are also making fewer vehicles and making do with leaner workforces after hundreds of thousands of layoffs. These factors have helped push the price of new vehicles up, as well.

But stubbornness on the part of automakers may be the dominant factor. And firm pricing is a big manifestation of such a mindset. After all, firm pricing might make some sense if car sales are off by a little – but how can it work if auto sales are down by a lot? That’s the case right now. The Wall Street Journal (Stock Quote: DJ) reports that in the mid-2000s, the U.S. auto industry sold 16 million vehicles. Today, that number had tumbled all the way down to 10 million.

So while consumers are seeing lower interest rates and some impressive incentive deals, the average overall costs of a new car are either the same or higher than before the recession started.

Don’t expect prices to improve, either. "Cars and trucks are likely to be less affordable over the next year," Dana Johnson, chief economist at Comerica,” told The Journal. "The Fed is likely to be tightening interest rates; it's going to become more expensive to get a loan. There'll be fewer car dealers, though there will still be intense competition."

“Intense” may also be the appropriate term to describe new car consumers who find that they’re actually paying more for a new car than they would have a year or two ago.

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