DETROIT — All summer, Allen Hudson continued to look for a new one minivan or an SUV for her growing passenger shuttle.
She had good credit and enough money for a down payment. yet dealerships there were no suitable vehicles in the Detroit area. Or they would require her to pay $3,000 to $6,000 above the sticker price. Months of frustration had left her desperate.
“I was depressed,” Hudson said. “I was angry too.”
The breakthrough occurred at the end of September, when a dealer called about a 2022 Chrysler Pacifica. At $41,000, it was hardly a bargain. And that wasn’t exactly what Hudson wanted. Still, the dealer was asking just above sticker price, and Hudson felt like he couldn’t walk away. She is back in business with her own van.
It could have been worse. Hudson made her purchase just as prices for both new and used cars were slowly falling from record highs and more cars were gradually becoming available at dealerships. A few months ago, Hudson’s van would have cost even more.
Don’t expect prices to fall anywhere close to what they did before the pandemic in early 2020. The rapid recovery from the recession has left automakers short of parts and vehicles to meet demand. The price skyrocketed and they have hardly budged since.
Prices for new and used cars remain 30-50% higher than they were at the time of the pandemic. Last month, the average used car cost nearly $31,000. Average new car deal price: $48,000. With higher prices and loan rates combined, average monthly payments increase by a a new vehicle above $700, millions of buyers have been pushed out of the new car market and are now limited to used cars.
High prices bring significant profits to most automakers, despite sluggish sales. On Tuesday, for example General Motors reported that its net income rose in the third quarter more than 36%, thanks in part to the sale of expensive pickup trucks and large SUVs.
Still, as Hudson discovered, many cars are becoming a bit more affordable. The plates first appeared a few weeks ago on the 40 million-year-old used car market. As demand eased and inventories rose, prices fell from their spring highs.
CarMax reported that it sold nearly 15,000 fewer vehicles last quarter than a year earlier. The CEO of the Richmond, Va.-based used car dealership pointed to inflation, higher borrowing rates and declining consumer confidence.
“Buyers’ strike,” says Adam Jones, the company’s automotive analyst Morgan Stanley described the drop in sales, a trend that usually predicts lower prices. And indeed, according to Edmunds.com, the average used car price fell 1% in September from its peak in May.
At AutoNation, the nation’s largest dealer chain, both used-car sales and profit per vehicle fell last quarter. CEO Mike Manley noted that while the supply of cars remains tight, used car prices are falling.
“Our analysis shows that we’re moving away from the highs we’ve seen before,” Manley told analysts on Thursday.
Ivan Drury, director of insights at Edmunds, warned that it will take years for used prices to fall close to pre-pandemic levels. Since 2020, there have been no automakers leasing as many cars, thereby choking off one of the key sources of late-model used cars.
Likewise, rental companies have not been able to purchase many new cars. So, in the end, they sell fewer cars in the used car market. Here is another source of transportation. And because used cars don’t linger long on dealer lots, demand remains high enough to support prices.
When car prices first soared two years ago, low-income buyers were squeezed out of the new car market. After all, many of them could not even afford used cars. People with mortgage credit scores (620 or lower) bought just 5% of used cars last month, down from nearly 9% before the pandemic. This indicates that many low-income households can no longer afford vehicles, said JD Power Vice President Tyson Jomini.
Higher borrowing rates compounded the problem. According to Edmunds, in January 2020, shortly before the pandemic began, used car buyers paid an average of 8.4% per annum. Monthly payments averaged $412. Until last month, the average figure reached 9.2%. And with prices rising for more than two years, the average payment jumped to $567.
An average 1% drop in used car prices will help financially secure buyers with good credit who can qualify for lower loan rates. But for those with bad credit and low incomes, any drop in prices will be wiped out by higher borrowing costs.
The new car market, on the other hand, has become a choice mainly for wealthy buyers. Automakers are increasingly using scarce computer chips to make expensive loaded versions of pickup trucks, SUVs and other oversized vehicles, typically with relatively low gas mileage. Last month, the average new car price was down slightly from August, but remained more than $11,000 above January 2020 levels.
Glenn Mears, who operates five dealerships south of Canton, Ohio, says the Federal Reserve’s interest rate hikes are driving up prices car loansslow down his showroom traffic.
“We’re experiencing some pullback,” he said.
In general, analysts say, with shortages of computer chips and other parts still plaguing factories, new car prices are unlikely to fall significantly. But a further modest drop in prices is possible. Vehicles on U.S. dealer lots rose to nearly 1.4 million vehicles last month, up from 1 million for most of the year, according to Cox Automotive.
Before the pandemic, the usual supply was much higher — about 4 million. So, historically, inventories remain tight and demand remains high. Like Hudson, many buyers are still stuck paying sticker price or higher.
“It’s extremely expensive these days,” said Jomini, who estimates there are 5 million more customers waiting in the U.S. buy new cars.
Despite recent Stock exchange declines, many such buyers have stocked up, especially in their homes, and reward themselves with high-end cars. For example, in the San Francisco Bay Area, notes Inder Dosanjh, who manages a group of 20 dealers that includes General Motors Company, Ford, Acura, Volkswagen and Stellantis, many people received significant pay increases.
“There’s just a lot of money,” he said.
In its earnings report on Tuesday, GM noted that consumer demand is holding up. While GM and other automakers would like to produce more cars, for now they benefit from slower production, which usually means higher prices and profits.
John Lawler, Ford’s chief financial officer, noted on Wednesday that near-record prices for new cars have begun to decline. And consumer appetites are beginning to change, with demand for midsize cars, he said, starting to outpace more profitable cars with lots of options.
The next year could be a turning point, suggests Jeff Window, an analyst at Edward Jones. With the economy likely to weaken and possibly enter a recession, prices could fall “as consumers become more focused on their financial situation and what they are willing to bite in terms of payment.”