After four years of tumult, the car market is finally starting to resemble normalcy – at least in terms of seasonal price fluctuations and dealership lot inventory. Yet, as any car shopper knows, new car prices remain high. Over the past five years, new car prices have surged by 27%, and remain just shy of the record highs we saw in late 2022. So, will car prices drop in 2025? To get a glimpse of what’s ahead, CarEdge co-founder Ray Shefska, who has four decades of industry experience, shares his 2025 car market predictions. Here’s where the new and used car markets are headed in the new year.

New Cars: Automakers Feel The Heat

A recent survey by Edmunds found that nearly half of all new car shoppers aim to spend $35,000 or less on their next vehicle. Considering that the average transaction price for a new car was $47,870 in mid-2024, there’s a mismatch between what consumers want, and the cars that automakers are trying to sell. 

However, there are signs the market may be tilting back in favor of consumers. After years of growth, new car sales have leveled off. In the second quarter of 2024, sales were up just 0.1% from the previous year.

At the same time that new car sales are beginning to stagnate, automakers are turning to incentives to bring buyers in. The most recent numbers from Cox Automotive show that manufacturer incentive spend as a percentage of selling price is at the highest level since 2021. Auto industry analysts largely expect incentives to continue to grow in 2025.

CarEdge’s Ray Shefska says that automakers will be pressured to lower prices one way or another. “They don’t like to lower MSRPs, it’s almost seen as a sign of defeat. But what automakers are more than willing to do is increase incentives. That’s exactly what I expect to see in 2025.”

Interest Rates Fall, Sending More Business To Captive Lenders

Another shocking finding from the Edmunds survey is the staggering number of new car shoppers who are expecting zero percent financing, even in today’s high interest rate environment. The survey found that more than a third of new car shoppers are targeting interest rates between 0 and 3%. Yet in reality, zero percent financing made up just 4% of all new cars financed in July 2024. You can see this month’s only 0% APR offers here.

Fortunately for buyers, interest rates have started to ease. This is indeed great news. But there’s still a wildcard: a potential recession. Some economists worry that the Fed has been slow to cut rates, which could negatively affect the broader economy. If a recession hits, the entire auto market could change with little advance notice.

Assuming all goes well with the ‘quantitative easing’, interest rate will continue a steady decline in 2025. As rates drop, captive lenders (those tied to automakers) are in a prime position to attract more business. In fact, it’s a trend that is already underway according to recent data from Experian. Captive lenders can offer low-APR or even zero percent financing deals because manufacturers reimburse them for the difference. This explains why car buyers often face a choice between a low-APR deal or a cash discount—the cost to the automaker is about the same. 

Looking ahead to 2025, we expect to see more of these financing and cash offers and even stronger lease deals, as automakers work to maintain sales momentum. MSRPs are unlikely to fall, but the average new car selling price will drop due to big incentives. This is highly likely for the new cars with the most inventory.

👉 Stay on top of the best new car incentives here

The EV Market Will Grow, Slow and Steady

In 2024, electric vehicle market share hovered between 7-9% of new car sales in America. In 2025, we expect the slow but steady growth in EV sales to continue.

With outstanding EV incentives and growing charging networks drawing the interest of more car buyers, an EV slowdown is unlikely. Adding to the interest are dozens of electric models joining legacy automaker lineups for 2025. As of today, there are 57 electric models on sale in the United States. By mid-2025, that figure will surpass 70.

Tesla’s EV market share has fallen below 50% for the first time ever. As Tesla CEO Elon Musk continues to create a polarizing image around the company, all signs point towards a continued gradual decline in Tesla’s market share. Car buyers have plenty to choose from these days, and the opening of the Tesla Supercharger network accelerates this trend.

In 2025, we expect battery electric vehicles (full EVs) to make up 9.5% of new car sales in the United States. This would be a slight improvement from 2024. EV prices will remain near current levels, at least when looking at MSRPs. We predict that EV incentives will continue to grow, bringing the average selling cost for a new electric vehicle down to $53,000 in 2025.

New Car Forecast: Prices Will Fall 3-5% By Late 2025

In 2024, we forecasted that new car prices would stay high, and unfortunately, that’s exactly what happened. Despite rising consumer resistance, automakers kept prices near all-time highs, relying on a combination of limited inventory and inflated production costs. But the tide is turning.

Looking ahead to 2025, the market dynamics are shifting. Automakers won’t be able to hold out against consumer pushback forever. With incentives increasing and interest rates dropping, the conditions are ripe for prices to start coming down. CarEdge’s Ray Shefska forecasts a gradual 3-5% drop in new car prices by late 2025 as automakers ramp up incentives to move inventory in the face of consumer pushback. 

These discounts and incentives will be the key to lowering prices, as manufacturers find themselves under pressure to respond to both rising new car inventory and economic shifts. It would be a welcome surprise if more than a few official MSRPs are lowered, but we don’t expect to see that. Automakers are more keen to increase incentives rather than lowering MSRPs for all.

Car buyers should expect more incentives in 2025, notably higher cash discounts, zero-percent financing deals. For those who prefer to lease, today’s best lease offers will only get better in 2025. There are already several cars and SUVs available to lease for under $200/month. In 2025, we expect even more. 

Used Car Forecast: Lower Interest Rates Help, But Prices Remain High

In 2019, the average used car selling price reached $20,000 for the first time. In the current era, the average used car selling price been stuck around $25,500 to $26,500 for months. We track used car prices weekly, and we’ve noticed a worrisome trend: used car prices are not falling further. The used car market is much more difficult to forecast for 2025, with multiple factors converging all at once. Still, there’s a glimmer of hope for lower used car prices ahead.

The case for lower used car prices in 2025 leans on one particular dynamic: with new car incentives on the rise and zero percent financing becoming more common, more would-be used car buyers will be flocking to the new car lots in search of more reasonable loan terms. As a result, the demand for used cars may drop enough to soften prices.

Sadly, one lasting impact of the pandemic remains in the auto market: a shortage of used cars. When automaker shortages slowed sales to a crawl in 2021 and 2022, fewer new cars entered the market for an extended period. Skip ahead to 2024 and 2025, and the lasting impact is far fewer used cars hitting the market than we’re used to. This acts as upward pressure on used car prices, despite other market forces working in the opposite direction.

CarEdge Prediction: Used car prices will be stable in 2025, with very slight movements reflecting the typical seasonal trends. We predict that the average selling price for a used car will remain near $25,500 in 2025.

👉 Stay on top of the latest used car price trends (updated weeky)

Wildcard Scenarios In 2025

Predictions are tough, especially when it comes to the auto market. The above car market forecasts make numerous assumptions about the state of the economy, interest rates, and consumer preferences. Of course, wildcard scenarios could drastically alter the course of the car market in 2025. Here are a few of the things we’re watching for in the coming year:

• The threat of economic recession
• Supply chain disruptions
• Political instability
• The potential for labor strikes
• Inflation
• Conflicts around the globe

These are just some of the many unknowns that could impact the U.S. auto market in 2025. What do you think? Will car prices fall in 2025 as predicted, or will manufacturers and car dealers find a way to push prices ever higher? Let us know in the comments below.