In recent years, vehicle affordability has become a core issue in the automotive industry. As 2025 approaches, this issue is becoming increasingly urgent. Production volumes, incentives, rising Manufacturer's Suggested Retail Prices (MSRP), and shifts in market strategy continue to shape the financial landscape for manufacturers, dealers, and consumers. By reviewing the trends of 2024, we can make predictions about vehicle affordability in 2025, gaining insight into the challenges the industry may face and potential solutions.

Key Lessons from 2024: Production and Sales Disconnect

One major lesson from 2024 was the persistent disconnect between production plans and actual sales. Automakers produced far more vehicles than the market could absorb, leading to bloated inventories. In 2024, production exceeded sales by approximately 600,000 units, causing a backlog of vehicles on dealer lots.

This imbalance triggered a series of adverse consequences. To clear excess inventory, incentives became necessary, which in turn eroded manufacturer profits. Dealers were also forced to cut prices, narrowing their profit margins. Furthermore, the reliance on incentives hurt vehicle residual values—a critical factor in leasing and trade-in transactions—making overproduction a cascading problem affecting the entire industry.

Although incentive spending remains below pre-pandemic levels, it has rebounded from the extremely low values during the supply chain crisis of the pandemic era to approximately $3,000 per vehicle. While such spending helps sustain sales, it also exposes deeper systemic issues, with overproduction being the most prominent.

2025 Sales Forecast: Modest Growth

Initial expectations for 2025 sales indicate a modest increase of a few hundred thousand units from the projected 15.8 million vehicles in 2024. The following factors are expected to drive this growth: lower interest rates may make auto financing slightly more affordable for consumers; continued increases in dealer and manufacturer incentives will boost consumer confidence and encourage purchases; and a stable overall economic environment, including inflation, may also improve purchasing power and stimulate buying intent.

Despite these improvements, from the buyer's perspective, rising vehicle prices and declining trade-in values are expected to offset most of the benefits. These dynamics will limit the overall effect of the anticipated improvement in affordability.

Rising Costs and Monthly Payments

Consumers primarily perceive affordability through monthly payments. According to J.D. Power data, despite favorable trends in certain areas such as interest rates and increased incentives, monthly payments have reached record highs. The November payment amount was $740, an increase of $15 from November 2023 and $158 higher than November 2019.

Although new vehicle transaction prices (after manufacturer incentives and dealer discounts) have declined, monthly payments are still rising. Why? Other economic pressures have offset these gains. The continued rise in MSRP is a significant factor contributing to financial strain, while declining used vehicle trade-in values have also weakened consumer purchasing power. The result is that the affordability crisis continues to plague consumers and the industry as a whole.

Implications for 2025

In 2025, new car dealers may continue to face significant pressure as manufacturers shift more financial burdens onto them. Dealers are already on the front lines of discounting strategies, causing their profit margins to shrink. As inventory levels rise and pricing pressures intensify, dealers may struggle to maintain profitability. Meanwhile, manufacturers have been slow to adjust their pricing strategies, further squeezing dealer profit margins. These dynamics are expected to create a challenging environment for dealers in the coming year.

The 2025 market landscape will test manufacturers' ability to adapt to a highly competitive and evolving market. Manufacturers that fail to address affordability challenges may lose market share to more adaptable competitors. To succeed, automakers must control production, reintroduce and prioritize lower-trim models, and employ targeted incentives rather than blanket discounts. These approaches not only enhance profitability but also ensure consumers have access to more affordable options.

As we move into the second half of the 2020s, vehicle affordability will remain a complex issue for the automotive industry. Rising MSRPs, declining trade-in values, and the absence of entry-level models present significant challenges for consumers, dealers, and manufacturers. However, by better aligning product portfolios with consumer demand, manufacturers can strike a balance between profitability and accessibility. A commitment to affordability not only benefits consumers but will also ensure the long-term sustainability of the automotive market.

About the Author

Tyson Jominy, Vice President of Data and Analytics at J.D. Power.