Car prices are finally starting to crawl from inflated heights

DETROIT (AP) — All summer long, Allen Hudson has been searching for a new pickup truck or SUV for her growing passenger service.

She had a good credit rating and enough cash to make a down payment. However, dealerships in the Detroit area did not have any suitable cars. Or they’ll charge her $3,000 to $6,000 over the label price. Months of frustration left her desperate.

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

A breakthrough arrived in late September, when a dealer called a 2022 Chrysler Pacifica. At $41,000, it was hardly a bargain. And that wasn’t quite what Hudson wanted. However, the dealer was only asking a little higher than the sticker price, and Hudson felt he was in no position to get away. She’s back at work with her own truck.

It could have been worse. Hudson made the purchase completely as prices of new and used cars fell from their amazing record highs, and gradually more cars became available at dealerships. The Hudson truck would probably have cost more than that a few months ago.

Not that anyone should expect prices to fall anywhere near where they were before the pandemic recession hit in early 2020. The rapid recovery from the recession has left auto parts and automakers unavailable to meet demand. The price has skyrocketed, and they haven’t budged since.

Prices for new and used cars are still 30% to 50% higher than they were when the pandemic broke out. The average cost of a used car was nearly $31,000 in the last month. The new medium? $47,000. With soaring prices and loan rates combined to drive average monthly payments on a new car above $700, millions of buyers have priced out of the new car market and are now confined to used cars.

Higher prices bring big profits to most automakers despite slowing sales. On Tuesday, for example, General Motors reported that its third-quarter net profit had jumped Over 36%, thanks in part to sales of expensive pickup trucks and large SUVs.

However, as Hudson discovered, many vehicles became a bit more affordable. The brands debuted weeks ago in a used market of 40 million sales annually. With demand waning and inventories rising, prices have retreated from their spring highs.

CarMax said it sold nearly 15,000 fewer cars in the last quarter than it did a year earlier. The CEO of the used car company, based in Richmond, Virginia, pointed to inflation, rising borrowing rates and waning consumer confidence.

A “buyer’s strike” is what Adam Jonas, auto analyst at Morgan Stanley, called sales declines — a dynamic that usually predicts lower prices. Indeed, the average price for a used car in September is 1% below its peak in May, according to Edmunds.com.

At AutoNation, the nation’s largest dealership chain, used car sales and profit per vehicle declined last quarter. CEO Mike Manley noted that while the supply of vehicles remains low, the prices of used cars are declining.

“Our analysis shows that we are giving up the high values ​​we’ve seen before,” Manley told analysts on Thursday.

Evan Drury, director of insights at Edmunds, warned that it will take years for used prices to drop near pre-pandemic levels. Since 2020, automakers haven’t leased many cars, throttling one major source of late-model used cars.

Likewise, the rental companies were not able to buy many new cars. So in the end, they sell fewer cars on the used market. This crimped is another source of compounds. And because used cars don’t sit long on many dealers, demand remains strong enough to support prices.

When car prices first rose two years ago, low-income buyers were driven out of the new car market. In the end, many of them could not afford to buy used cars. People with high-risk credit scores (620 or less) bought just 5% of new cars last month, down from nearly 9% before the pandemic. This indicates that many low-income families can no longer afford vehicles, said Tyson Gomini, vice president of JD Power.

High borrowing rates have exacerbated the problem. In January 2020, shortly before the pandemic hit, used-car buyers paid an average of 8.4% annual interest, according to Edmunds. Average monthly payments were $412. By last month, the median rate was 9.2%. Given the price hike for more than two years, the average payment jumped to $567.

A 1% decrease in average rates used will help secure buyers financially with strong credit scores that they can qualify for lower loan rates. But for those with poor credit and low incomes, any fall in rates will be wiped out by higher borrowing costs.

By contrast, the new car market has become a primary choice for wealthy buyers. Automakers are increasingly deploying rare computer chips to make expensive, loaded versions of pickups, SUVs and other bulky vehicles, usually with relatively low gas mileage. Last month, the average price for a new car was slightly lower than in August, but still more than $11,000 above its January 2020 level.

Glenn Mears, who runs five dealerships in southern Canton, Ohio, says raising interest rates at the Fed, by contributing to higher-priced auto loans, is slowing showroom traffic.

“We can feel a bit of a backsliding,” he said.

Analysts generally say that with shortages of computer chips and other parts still stumbling factories, prices for new cars are unlikely to fall significantly. But more modest price drops may be possible. Cox Automotive reported that vehicle availability at many U.S. dealerships improved to nearly 1.4 million vehicles last month, up from 1 million for most of the year.

Before the pandemic, the natural supply was much higher – about 4 million. So historically, inventory is still tight and demand is still high. Like Hudson, many buyers are still stuck paying the sticker price or higher.

“It’s very expensive these days,” Jomini said, estimating that there are still 5 million American customers waiting to buy new cars.

Despite recent declines in the stock market, many of these buyers have amassed fortunes, especially in their homes, and are rewarding themselves with high-end cars. In the San Francisco Bay Area, for example, notes Inder Dosanjh, who operates a group of 20 dealerships that includes General Motors, Ford, Acura, Volkswagen and Stellantes brands, many people have received big pay increases.

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

In its earnings report on Tuesday, General Motors noted that demand from its customers is rising. Although General Motors and other automakers would like to produce more cars, for the time being they are benefiting from slower production, which usually means higher prices and profits.

John Lawler, Ford’s chief financial officer, noted Wednesday that prices for new semi-standard cars are starting to fall. And consumers’ appetites began to change: He said the demand for mid-range cars was beginning to outpace the more profitable and option-laden cars.

Jeff Windo, an analyst at Edward Jones, suggested that next year could be a turning point. With the economy potentially weakening and possibly entering a recession, prices could fall “as consumers become more focused on their financial situation and what they are willing to bite into from a payment perspective.”

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This story has been corrected to show that 9% of new car buyers had sub-prime credit scores, and that has since fallen to 5%.