Auto prices are finally starting to creep down from inflated highs | News

“I was depressed,” Hudson said. “I was angry too.”

The breakthrough came in late September when a dealer called about the 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 to 50 percent higher than they were at the time of the pandemic. Last month, the average used car cost nearly $31,000. The average new? $47,000. With higher prices and loan rates that combined to push average monthly new car payments above $700, millions of buyers have been pushed out of the new car market and are now limited to used cars.

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.

A “buyers’ strike” is how Adam Jonas, an auto analyst at Morgan Stanley, described the drop in sales, a dynamic that usually predicts lower prices. Indeed, the average used car price in September fell 1 percent from its peak in May Edmunds.com.

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 breaking 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 before used prices fall close to pre-pandemic levels. Starting in 2020, automakers aren’t leasing as many cars, cutting 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 stay at dealers for long, demand remains high enough to keep prices up.

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 and below) bought just 5 percent of new cars last month, down from nearly 9 percent before the pandemic. That suggests many low-income families can no longer afford cars, 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 were paying an average of 8.4 percent per annum. Monthly payments averaged $412. Until last month, the average figure reached 9.2 percent. And with prices rising for more than two years, the average payment jumped to $567.

An average 1 percent 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, which are fueling more expensive auto loans, are slowing his dealership’s traffic.

“We may feel 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 more.

“It’s extremely expensive these days,” said Jomini, who estimates there are 5 million more U.S. customers waiting to buy new cars.

Despite the recent stock market slump, many such buyers have become wealthy, especially in their homes, and are rewarding themselves with high-end cars. In the San Francisco Bay Area, for example, notes Inder Dosanjh, who runs a group of 20 dealerships that includes the General Motors, Ford, Acura, Volkswagen and Stellantis brands, many people have received significant pay raises.

“There’s just a lot of money,” he said.

In its earnings report on Tuesday, GM said consumer demand was 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.”