With all the recent buzz about Tesla breaking into the mass market with the highly anticipated Model 3, a number of debates have been sparked about the $35,000 price point of the car and whether that’s truly a level most families can afford.  Many people have pointed to the Kelly Blue Book statistic showing that the average transaction price for a new car in the US is $33,666 [1].  But is that really the price most people are paying?  And if not, what are most Americans paying to buy a car?

Short Answer

The typical car buyer doesn’t buy a new car at all; they buy a used car for under $20,000.  Of the minority of car buyers who opt for a new car, over 88% buy a true mass market car, with an average total transaction price (including all upgrades) of about $31,500.

Long Answer

Accurate data on vehicle transaction prices is surprisingly hard to come by for two reasons:

1. The commonly cited “average price of a new car” includes all cars – both luxury and mass market, without breaking out the average price point of each individually.
2. No one reports on the true median price of a car sale.  This is important because average prices are easily skewed by a minority of buyers choosing expensive options.

However, with a little bit of digging it is still possible to calculate some more accurate statistics to paint a more complete picture of car buying in America.

Used or New?

With all the numbers touted showing how many new cars are sold and how expensive they are, it’s easy to forget that used car sales are an important consideration.  In fact, the vast majority of car buyers either can’t afford or don’t want to buy a new car at all: In 2015 there were 38.3 million used car sales [2], compared to just 17.5 million new car sales [3].  So if we’re looking at the typical car buyer, we’re really looking at someone who is buying a used car, not a new one.  And how much is a typical used car going for?  About $18,500 according to Edmunds [2].  That’s a rather long way from the average new car price.

Luxury or Mass Market?

Within the new car market, it is also important to distinguish between luxury and mass market offerings.  The $33,666 average price of a new car includes luxury cars, but luxury cars only account for about 11.7% of all new car sales [3].  And as you would expect, the price difference between a luxury car and a mass market one is quite steep.  US News reports that in 2013 average Luxury car new sale transaction price was above $47,000 [4].  We can estimate that based on historical increases, it was about $50,000 for 2015 (it may actually have been higher).

What about the mass market?  We have to do some math since that statistic isn’t reported.  We know that luxury car sales account for 11.7% of total sales at an average price of about $50,000, and the total average price of a new car is $33,666.  With this information we can use some weighted average formulas to find the average price of a mass market car: $31,502.  Not tremendously below the overall average, but a $2,000 difference is nothing to scoff at when wallets are already thin.

So if we’re talking about the typical new car buyer specifically, on average they are paying about $31,500 for a true mass market car.  Unfortunately this number still suffers from being an average rather than a median, but without raw data it’s the best we can do.

MSRP or Transaction Price?

It’s important to remember that MSRP and transaction price are very different since the latter includes all of the upgrades (like leather seats, a navigation system, better speakers, etc.) buyers end up purchasing.  So comparing the base cost of a car like the Model 3 with the all-in transaction price of new cars is comparing apples and oranges.  Let’s take a look at how big the difference can be.  The below table shows the 20 best selling vehicles in the US so far this year, according to WSJ [5], and their MSRP.

These vehicles alone represent over 40% of total new vehicle sales, and their average MSRP is only $23,289.  A true mass-market car is around this price, and then upgrades and add-ons account for several thousand dollars more.  So when we talk about vehicle prices, remember to compare all-in transaction costs against each other, not against base prices.

Conclusion

With all the press events, commercials, and news articles around new vehicle launches, it’s easy to assume that most car buyers are shelling out $35,000 or more to take a new car home, but the reality is quite different.  Most buyers stick with used cars, and those that do buy a new car buy one with an MSRP of around $25,000 and a total take-home price of around $31,000.  That’s where the mass market actually is.

Sources

[1] http://mediaroom.kbb.com/new-car-transaction-prices-up-2-percent-march-2016

[2] http://static.ed.edmunds-media.com/unversioned/img/industry-center/analysis/2015-used-market-report-new.pdf

[3] http://www.motorauthority.com/news/1101710_bmw-holds-on-to-u-s-luxury-car-sales-crown-in-2015-lexus-moves-into-second

[4] http://usnews.rankingsandreviews.com/cars-trucks/best-cars-blog/2013/04/Luxury_Car_Market_Hits_Six-Year_High/

[5] http://online.wsj.com/mdc/public/page/2_3022-autosales.html