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Why new cars and trucks cost more than they have in a decade

Motoramic

Why new cars and trucks cost more than they have in a decade

If you're walking into a new-car showroom on a shopping trip, you should brace yourself for a little sticker shock. Not only have prices reached a new high, they're outpacing inflation -- and reversing the deals Americans grew accustomed to over the past decade.

Thanks to a renewed demand for new wheels and a brace of new models replacing aging products, the average price for a new car or truck rose to $28,341 in 2011, up 11% from 2008, according to data from J.D. Power. Those increases weren't just limited to luxury sedans and big SUVs; as of today, there are no new cars for sale in the United States for less than $10,000. Many new models forgo stripped-down versions for ones with far more expensive options; the previous generation Ford Focus could be had for $15,000 with generous incentives, but the newer version comes in a "Titanium" edition that can carry a sticker price of more than $30,000.

But dollar figures alone don't tell the whole story. Thanks to inflation, all dollar amounts rise over time, and only by adjusting new vehicle prices for inflation can we tell whether cars and trucks just seem more expensive or are truly taking a larger bite from our wallets. Doing so reveals that you're right in thinking these numbers seem high:

This chart shows inflation-adjusted new car and truck prices dating back to 1998, with December 1997 set as the baseline. Starting in 1999, the real prices of new vehicles began to fall, and kept falling for an entire decade, until the financial meltdowns of 2008 and 2009.

The reason? Detroit's lack of self-control. Following the SUV booms of the 1990s, Detroit automakers built far more capacity for vehicles than they could sell to retail customers. Automakers only make a profit when a vehicle leaves a factory, and after the boom eased around 2001, keeping those factories running became the top concern of General Motors, Ford and Chrysler. If that meant dumping cars into rental fleets, or giving some shoppers no interest loans for six years or rebates that touched $6,000 per vehicle, so be it.

By fighting on price, Detroit forced foreign automakers to follow suit, further pushing prices down. That glut of new vehicles eventually became a glut of used vehicles — also depressing demand and prices. Only when the U.S. economy faltered and Detroit's three automakers were forced to close nearly a dozen assembly plants did supply shrink enough to match demand.

Last year's disasters in Japan also cut supply, just as Americans began replacing cars they had held onto through the recession. As a result, inflation-adjusted prices quickly soared — clawing back the declines of a decade in less than two years. J.D. Power's data shows that while prices rose over the past four years, incentives fell 11% to $2,680 in 2011.

While prices eased a bit at the end of 2011, they traditionally rise at the beginning of the year. Given that Detroit, Japanese and Korean automakers have all vowed to avoid incentive wars and trim production rather than prices when sales inevitably dip, it's likely new vehicles will soon cost more after adjusting for inflation than they have at any point in the past 14 years. It may be about as long before an automaker decides again it needs to make deals rather than profits.

Photo: emilio labrador via Flickr