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Just as it was getting back to normal, the car industry is in for more upheaval as automakers navigate new tariffs and big changes to how Washington subsidizes vehicle purchases. Here’s what car shoppers can expect this year.
Sticker prices up, discounts down
Prices aren’t up yet. But they will be soon. Automakers have mostly been standing pat, not passing along tariff costs as they sell inventory that was imported or assembled before the tariffs hit. Most have tried to retain market share, eating costs and hoping the levies on cars, parts and metals get negotiated down.
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Assuming that doesn’t happen, look for sticker prices to rise by 4%-8%. Discounts, which had been nearing pre-COVID levels, are becoming less generous. Expect that to continue as automakers figure out which models they are able to raise prices on, which ones to hold the line on, etc.
Some cheaper models may fall by the wayside since they tend to be imported and have lower margins. That’s bad news for budget-minded consumers. Cars in the $30,000 range were already becoming scarce as automakers focus on pricier, more lucrative models.
Expect overall sales to slow in the second half of this year, after surging in the spring because of shoppers rushing to buy before auto tariffs took effect. For the year as a whole, look for about 15.7 million sales, similar to last year’s level.
Demand for used, electric and hybrid cars
With prices of new cars rising, used cars will be in higher demand. That is pushing up their prices, which are running 3% above a year ago for similar used models. That’s also a switch: Early this year, used car prices were off by about 1% from a year earlier. If you’re open to buying a used electric vehicle, note that their supplies will pick up rapidly next year because of the jump in leasing that took place starting in 2022. 100,000 additional EVs will be coming off lease soon.
The just-passed tax law will spur significant shifts in the mix of car sales. Expect EV sales to fall notably after the $7,500 federal tax credit expires on September 30. They had already cooled off, despite a proliferation of new electric models, with about 75 on sale (about five times as many as automakers offered five years ago). Manufacturers will have little choice but to offer juicy discounts to move electric cars.
Hybrids, by contrast, will remain popular, accounting for 12% of total sales. Consumers continue to gravitate to them for their fuel economy and simplicity vs EVs. That bodes well for Toyota, which accounts for half of hybrid sales, and Honda (20%).
Tax break on car loans
Even more consumers are likely to finance new cars now, given the provision in the tax law making interest on car loans tax-deductible. That won’t save most buyers a great deal on the cost of their loan, but with affordability foremost on buyers’ minds, even a modest tax break should sway more folks to finance vs leasing or paying cash.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
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