American car buying preferences are experiencing a notable shift as rising prices and interest rates push consumers toward smaller vehicles. For years, U.S. car buyers have favored larger cars, but current affordability issues are driving many back to smaller, more economical options.
Automotive sales data indicate significant trends, with vehicles such as the Honda Civic and Nissan Sentra seeing sales rise by over 23% through November 2023, according to research firm Motor Intelligence. This surge starkly contrasts with the industry’s overall growth, which has remained static at low single digits. Meanwhile, sales of large pickup trucks—a staple of profitability for manufacturers—declined by 1.9%, and midsize SUVs experienced similar setbacks, dropping by 2.3% this year.
Fueling this transition is the alarming price of ownership. The average selling price of new cars has surpassed $45,000, marking the highest levels recorded, as reported by J.D. Power. The situation is aggravated by increasing insurance premiums, financing rates, and repair costs which are overwhelming many household budgets. Charles Chesbrough, Senior Economist at Cox Automotive, reflects on this trend: “They need the functionality of the vehicle, but they just need to buy the smaller size. It fits their wallet.”
While the growing enthusiasm for smaller cars is evident, it’s uncertain if this trend will persist. Factors such as future interest rates and fluctuated fuel costs will likely play significant roles. Economic policies, particularly recent tariff discussions by President-elect Donald Trump on imports from Mexico and Canada, could also impact car affordability. With many lower-priced vehicles manufactured predominantly south of the border, heightened tariffs might reshape the market significantly.
The ability of consumers to make affordable choices is delicately balanced. Edmunds reported notable price differentials between vehicle categories: the average cost for small SUVs this year was around $29,000, compared to $48,000 for midsize and $76,000 for large SUVs. These price disparities are steering buyers toward more compact solutions.
Asian manufacturers like Toyota and Honda have emerged as major beneficiaries of this buying trend, having long focused on compact models like sedans and SUVs with entry prices below $25,000. Their standing is strengthened as they continued to produce smaller cars, unlike several competitors who withdrew from the segment. For example, the compact car category saw impressive sales growth, rising by 16% through November, signaling renewed interest from consumers.
Sales of compact and subcompact SUVs have also seen increases, rising by 11.5% over the same period, as manufacturers broaden their offerings for consumers seeking utility without excessive size. These models have accounted for about 27% of total U.S. sales this year, elevated from 22% before the pandemic.
Interestingly, larger SUVs still hold market spaces, particularly for families requiring extra space for child transportation and cargo. “With lower price points and fuel-efficient designs, compact cars were previously viewed as gateways to attract younger buyers,” industry analysts note. The idea was to nurture early relationships with these customers and gradually guide them toward pricier models as their incomes grew. Yet, over the years, many potential car shoppers have postponed new car purchases until later in life.
The dominance of larger SUVs has materialized from years of inexpensive gasoline, fostering consumer preference for larger vehicles. This shift has compelled automakers to rethink their inventory strategies, leading to the discontinuation of various affordable sedans and hatchbacks from their lineups. Statistics indicate the troubling trend: the number of new cars available for under $25,000 has plummeted from 45 models just five years ago to only 11 available now, underscoring the constraints facing car buyers.
To counter this decline, manufacturers have introduced smaller crossovers at lower price points, appealing to consumers constrained by budget concerns. Despite these efforts, the overall inventory shifts still leave the market largely devoid of truly affordable options.
The changing dynamics of American car buying continue to evolve as consumers navigate the pressures of rising costs, adjusting their preferences accordingly and reflecting broader economic challenges.
