Why Are Cars So Damned Expensive?

The average new car price was up 2% from the same time last year.

This follows a similar increase of 2.6% from April 2014 to April 2015, according to a report by USA Today from last year that was based on Kelley Blue Book's official numbers for that year. The report is quick to point out that there are a number of reasons for this, from new and refurbished models being brought to market to replace older models and new customers being inclined to purchase more options, but is that really all there is to it? Surely people opting for XM Radio and on-board wifi can't account for a significant, consistent increase over the last two years.

Well, as it turns out, that same report points out a couple of significant reasons as to why this is the case: increasingly stringent fuel-efficiency regulations and new regulations concerning increased safety. As the federal government here in the good ol' US of A has continued to press on auto manufacturers to make their vehicles more fuel efficient to satisfy arbitrary miles-per-gallon numbers, manufacturers have had to invest more in researching and developing novel ways to meet these goals. Before anyone gets the idea to be happy about this, it should go without saying that this cost is passed on to the consumer. Same thing goes with airbags; since the federal government has a monopoly on safety standard ratings for motor vehicles, car makers have to build their cars to what amount to additional non-regulatory government regulations. Why do this? Well, would you buy a car with a really poor safety rating from the NHTSA?

With many safety options and drive train options essentially becoming industry standards, this necessarily drives prices up. It also reduces choice for the consumer, which is the flip side to this; more on that in just a minute. With just about every car coming standard with a dozen airbags, a fuel-efficient drive train, and various emissions control technologies from the factory, consumers now have to buy all of these features. Whereas it was possible to not jump for the car with the most bells and whistles if you were on a budget even as recently as ten years ago, now you don't have a choice. The bells and whistles are drilled and riveted on, and there's no getting rid of them. Only thing you, as a consumer, can do is sign on the dotted line to finance it.

Which brings me to that point I was going to tell you about earlier: more people than ever are financing their cars. This shouldn't be any surprise, since the average cost of a motor vehicle in the US has continued to increase. What is surprising is the staggering volume of debt now held for cars: as of August 2015, auto loans accounted for $1 trillion. As the price of a new car continues to rise, so will the total amount of debt held by American consumers purchasing new autos. Couple that with the hideous monstrosity that was Cash for Clunkers, and now you have more Americans than ever that have to buy new autos.

It's a vicious cycle. At least in the housing crisis that came to a head in 2008, the government wasn't cutting off people's options and funneling them into new homes. Market distortions are a real bitch when they're coupled with reducing consumer options.