Understanding Today’s Auto Market: Affordability, EVs, and Shifting Consumer Demand

Highlights: 

• The auto market is characterized by a "K-shaped" economic divergence, leading to a split in demand: strong activity in high-end vehicles versus a consumer shift towards lower-priced used vehicles due to widespread affordability issues.

• To stay competitive, businesses (lenders and dealers) must prioritize real-time adaptability, shift to shorter planning cycles, and leverage advanced analytics and AI for better risk management, customer understanding, and inventory management.

The auto market is evolving rapidly, shaped by economic pressure, changing consumer behavior, and new technology. In episode 76 of the Market Pulse podcast, we talk with Jeremy Robb, Chief Economist at Cox Automotive, about the key forces driving the industry right now—and what they mean for dealers, lenders, and consumers alike.

Here are some key insights from our conversation:

What are the biggest forces shaping today’s auto market?

Several macroeconomic factors are converging at once. Inflation remains elevated compared to historical norms, interest rates are still relatively high, and rise in the costs to import goods have added pressure to vehicle pricing. At the same time, the market is experiencing ongoing ripple effects from the pandemic, particularly in vehicle production and supply.

These forces are not operating in isolation. They are influencing consumer behavior, lender strategies, and dealer operations simultaneously. The result is a market that is more complex—and more dynamic—than it has been in years.

What does a “K-shaped” economy mean for auto buyers?

A K-shaped economy refers to a divergence in financial outcomes across different income groups. Higher-income consumers are generally benefiting from wage growth and asset appreciation, while lower-income consumers are facing increased financial strain.

In the auto market, this creates a split in demand. On one end, there is strong activity in higher-priced vehicles, including luxury models. On the other, affordability challenges are pushing many consumers toward lower-priced used vehicles—or out of the market entirely.

This divide is one of the defining characteristics of today’s auto landscape.

Why is affordability such a major issue right now?

Affordability has become the central challenge for many consumers. Vehicle prices have risen significantly over the past several years, and those increases are compounded by higher interest rates. In addition, costs like insurance, maintenance, and repairs have also climbed.

When these factors are combined, the total cost of vehicle ownership has increased substantially. For many households, this means stretching budgets, delaying purchases, or seeking alternative options such as used vehicles.

Affordability is not just a consumer issue—it is shaping the entire structure of the market.

How is credit availability increasing despite financial pressure?

Interestingly, credit availability has expanded in certain areas. Lenders are showing greater willingness to work with a broader range of borrowers by offering longer loan terms, financing lower down payments, and accommodating more complex financial profiles, says Robb.

While this can help more consumers access vehicles, it also introduces trade-offs. Longer loan terms may reduce monthly payments but often come with higher interest costs over time. This creates a balancing act between access and long-term financial sustainability.

For lenders, this environment requires careful risk management and a deeper understanding of borrower behavior.

Why is the used car market so strong?

The strength of the used car market is largely tied to new vehicle affordability. As new car prices rise, more consumers shift their focus to used vehicles, increasing demand in that segment.

At the same time, supply constraints continue to play a role. During the pandemic, fewer vehicles were produced and leased, which means fewer vehicles are now returning to the market as used inventory. This reduced supply, combined with strong demand, has kept prices relatively elevated.

In many ways, the used car market has become the pressure valve for affordability challenges across the industry.

What role will electric vehicles play in the used market?

Electric vehicles are expected to become a much larger part of the used car ecosystem over the next few years. A growing number of EVs that were leased during recent years are beginning to return to the market, and that trend will accelerate.

This influx will increase supply and may improve affordability for buyers interested in EVs. However, it also presents challenges for dealers, who must adapt to selling vehicles with different maintenance needs, pricing dynamics, and consumer education requirements.

For the industry, this represents both a disruption and an opportunity.

How are dealers adapting to these changes?

Dealers are becoming more data-driven and technology-focused in response to the complexity of the market. Many are leveraging advanced analytics and AI tools to better understand customer profiles, structure deals, and manage inventory.

The relationship between dealers and lenders is also becoming more critical. Each transaction requires a tailored approach, as no two customers have the same financial situation or preferences.

In this environment, success depends on flexibility, speed, and the ability to interpret large amounts of data effectively.

What impact do tax refunds have on the auto market?

Tax refund season remains an important driver of demand, particularly in the spring. For many consumers, refunds provide the liquidity needed for a down payment, a vehicle purchase, or major repairs.

This seasonal boost can have a noticeable impact on both new and used vehicle sales, according to Robb. However, consumers often have competing priorities for their refunds, which can influence how much of that money ultimately flows into the auto market.

Understanding these seasonal patterns is key for dealers planning inventory and promotions.

What should the industry watch for in the months ahead?

Several leading indicators will be critical to monitor. Interest rate movements, particularly any changes from the Federal Reserve, will influence financing costs and consumer demand, says Robb. The recent trend of rising prices will also play a role in shaping affordability.

Additionally, housing market activity can provide insight into future vehicle demand, as home purchases and relocations often coincide with vehicle purchases.

Finally, the continued evolution of EV supply and adoption will be a major factor in determining how the market develops over the next few years, Robb predicts.

How can businesses stay competitive in such a rapidly changing environment?

The key is adaptability. Long-term planning is still important, but success increasingly depends on the ability to adjust strategies in real time. Many industry leaders are shifting toward shorter planning cycles, focusing on quarterly or even monthly adjustments.

Equally important is the ability to leverage data effectively. Businesses that can synthesize insights from multiple sources—and act on them quickly—will be better positioned to navigate uncertainty.

In today’s auto market, there is no single playbook. The organizations that succeed will be those that remain agile, informed, and responsive to change.

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