Small cars are selling faster than SUVs and trucks. Here's what's driving more buyers to settle for less.

By Claudia Assis

'There's interest, there's volume - hard to say if there's profitability'

U.S. drivers long have favored a "more is more" mentality when it comes to choosing their next set of wheels - but high interest rates and rising prices for new vehicles are leading some to take a look at smaller cars.

Sales of smaller vehicles have risen faster than sales of large and midsize SUVs and pickup trucks in recent months, signaling that downsizing is increasingly in favor for those wanting to buy a new car.

Some first-time buyers and families, in particular, are looking for such entry-level vehicles, said Ivan Drury, an analyst with Edmunds.com. "They are gravitating toward cheaper options," he said.

For the "vast majority" of car buyers, "it's not about the price, it is about the payment," said Dan Hearsch, a managing director in AlixPartners' automotive and industrial practice. The macroeconomic environment is pushing people to cars they can afford at the moment, he noted.

Automakers are recognizing that there's a market now for smaller vehicles, and that they can attract new or younger buyers to get them to their brand.

"There's interest, there's volume - hard to say if there's profitability," Hearsch said.

Historically, feature-rich larger vehicles are more profitable for car makers, with profit margins thinning as one goes down the price ladder.

The downshift, however, is unlikely to be long lasting.

Edmunds.com's Drury recalled that during the 2008 Great Recession, amid rising gas prices, many people traded in their Chevy Tahoes for subcompacts - but added that within a year, the market was flooded with those smaller vehicles.

"Without the financial handcuffs that people have on right now, they will naturally default to larger vehicles," Drury said.

"It's very difficult for consumers to go back, to downsize," he added, and people want the options they've grown accustomed to - such as the remote starting, larger touchscreens and ventilated seats usually found on larger vehicles.

To be sure, some buyers might end up in the used-car market, but not everyone. "Buying a used car is a completely different animal," Drury said.

See also: Used cars are a lot cheaper now - and this is the big reason why

Many people are busy and can't dedicate the time to do the research and legwork needed to buy used vehicles. And for some, the security of knowing that your vehicle is new is more important than the savings.

Another aspect to contend with is that new cars for less than $30,000 are becoming rarer and rarer, with several car makers in recent years ending production of their cheaper, and less profitable, cars.

Automotive marketplace Cars.com (CARS) recently reported that there were just 333,000 new vehicles priced under $30,000 on its platform, compared with 1.1 million in July 2019.

Average new-car prices have steadied at around $49,000 and supply continues to increase, "with the most significant inventory rise in mid- to high-priced vehicles," Cars.com said.

The used-car market has its own challenges, especially around the relative dearth of low-mileage, lightly used vehicles, Cars.com said.

The availability of vehicles priced between $30,000 and $49,000 dropped by 15% year over year, reflecting the scarcity of 1-to-3-year-old vehicles typically found in that price range, the company said.

Used vehicles priced under $20,000 are now averaging 93,000 odometer miles as of July, up 33% in the last five years, Cars.com added.

Related: GM confirms it will cut more than 1,000 software and services jobs

-Claudia Assis

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08-19-24 1506ET

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