The new car market in 2025 is characterized by modest price increases, fluctuating inventory levels, and a significant shift in consumer preferences towards more expensive vehicles and electrified powertrains, all while navigating the complexities of new tariffs and economic uncertainties.[1] [2] [3]

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Current Market Overview

As of September 8, 2025, the new car market is experiencing a period of relative stability in transaction prices, despite initial concerns about significant price hikes due to tariffs. The average American new car buyer paid $48,841 in July, a mere 1.5% increase year-over-year.[1] This stability is largely attributed to automakers and dealers absorbing tariff costs and offering aggressive discounts to maintain sales volume.[1] [3] However, this trend may not continue indefinitely, as automakers have begun warning that they cannot absorb these costs much longer, especially with new 2026 models arriving at dealerships.[1] [2]

Impact of Tariffs and Trade Deals

Tariffs have been a major factor influencing the automotive market. In April 2025, the United States imposed 25% tariffs on imported cars and car parts, a substantial increase from the previous 2.5%.[1] While automakers initially absorbed these costs, recent long-term trade deals with countries like the U.K. (10% tariffs) and the European Union, Japan, and South Korea (15% tariffs) have locked in higher rates.[1] Cars from Mexico and Canada still face a 25% levy.[1] These sustained tariffs are expected to lead to price adjustments as automakers seek to compensate for their increased expenses.[1] [2] Cox Automotive's Chief Economist, Jonathan Smoke, notes that these tariffs contribute to inflation and pose a challenge for the industry.[2] [5]

Pricing Trends and Affordability

New car prices remain approximately $10,000 higher than five years ago, with the average transaction price in July 2020 being around $38,563.[1] [3] Cox Automotive analysts anticipate that the average transaction price of a new automobile could exceed $50,000 later in 2025.[2] [3] This increase is partly due to automakers focusing on building more expensive vehicles; sales of cars priced at $25,000 or less have fallen by 78% in five years, while those priced at $60,000 or higher have grown by 163% in the same period.[1] This trend makes affordability a significant concern for many buyers, pushing some towards the used car market.[1] [5]

Inventory and Incentives

New car inventory levels have fluctuated. Dealerships began August with a 73-day supply of vehicles, a slight drop from the previous year but only 1% less than the prior month.[3] While some brands like Land Rover, Ram, Lincoln, Audi, and Mitsubishi have ample stock, popular models from Toyota, Lexus, and Honda remain harder to find.[3] To stimulate sales, manufacturer incentives have increased, comprising about 7.3% of the average deal in July, or approximately $3,550.[1] [3] These incentives, including cash back and lower interest rates, are crucial for attracting buyers, especially as 2026 models begin to arrive, prompting dealers to clear out 2025 inventory.[1] [3]

Financing and Interest Rates

Most car buyers rely on financing, and the Federal Reserve's interest rate policies play a significant role. While the Fed has kept rates steady in recent months due to economic uncertainty, lenders have started dropping rates for borrowers with strong credit, suggesting potential rate cuts in the fall.[1] This could make car loans more accessible and affordable for qualified buyers.[1]

Electric Vehicle (EV) Market

The EV market is experiencing notable shifts. Battery-electric cars accounted for 15.6% of the EU market share in the first half of 2025, an increase from 12.5% in H1 2024.[6] However, the growth rate for battery-electric vehicles in June 2025 was 7.8% year-over-year, while plug-in hybrids saw a 41.6% increase.[6] In the US, EV sales saw a surge in July, with S&P Global Mobility expecting BEV share to reach 10% or greater in August, partly driven by buyers looking to utilize federal EV incentives before their September 30 expiration.[4] [5] Despite this, the long-term demand for BEVs remains uncertain due to evolving policies and affordability pressures.[4] Used EV prices have also seen a notable drop, making them a potential opportunity for buyers seeking deals.[5]

Outlook and Recommendations

The remainder of 2025 is expected to be a period of significant disruption in the car market, with potential for further price increases on new vehicles and continued impact on used cars as buyers seek more affordable options.[1] Experts advise that if a new car is needed soon, acting now while prices are relatively stable might be beneficial.[1] For buyers, strategies include expanding search areas, being patient for high-demand vehicles, considering less expensive models, and actively seeking deals and incentives.[1] It is also crucial to shop around for financing and insurance rates independently, and to be wary of dealer markups and unsolicited add-ons.[1]

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