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Car prices are finally starting to creep down from inflated highs

Car prices are finally starting to creep down from inflated highs

DETROIT (AP) – All summer long, Aleen Hudson continued to search for a new minivan or SUV for her expanding passenger shuttle service.

She had good credit and enough cash for a down payment. Still, dealers in the Detroit area did not have suitable vehicles. Or they would demand that she pay $3,000 to $6,000 above the sticker price. Months of frustration left her despondent.

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

A breakthrough came in late September, when a dealer called about a 2022 Chrysler Pacifica. At $41,000, it was hardly a bargain. And it wasn’t quite what Hudson wanted. Still, the dealer only asked a little more than the sticker price, and Hudson didn’t feel in a position to walk away. She is back to work with her own van.

It could be worse. Hudson made its purchase as the prices of both new and used vehicles have fallen from their dazzling record highs and more vehicles are gradually becoming available at dealerships. Hudson’s van would probably have cost even more a few months ago.

Not that anyone would expect prices to fall anywhere near where they were before the pandemic recession hit in early 2020. The rapid recovery from the recession left automakers with no parts and vehicles to meet demand. The price shot up and nothing much has changed since then.

Prices of new and used vehicles remain 30% to 50% higher than when the pandemic broke out. The average used car cost nearly $31,000 last month. The average new? $47,000. With higher prices and loan rates pushing average monthly payments for a new vehicle above $700, millions of buyers have been priced out of the new vehicle market and are now limited to used vehicles.

The high prices are generating significant profits for most automakers, despite slow sales. For example, on Tuesday, General Motors reported that third-quarter net profit has increased more than 36%, thanks in part to the sale of expensive pickup trucks and large SUVs.

Still, as Hudson found, many vehicles are becoming a little more affordable. Signs first popped up in the second-hand market weeks ago with 40 million sales a year. When demand waned and inventories rose, prices fell from their spring highs.

CarMax said it sold nearly 15,000 fewer vehicles in the quarter than a year earlier. The CEO of the Richmond, Virginia-based used vehicle company pointed to inflation, higher borrowing rates and diminished consumer confidence.

A “buyer’s strike” is how Adam Jonas, an auto analyst at Morgan Stanley, characterized the decline in sales — a dynamic that typically predicts lower prices. Indeed, according to Edmunds.com, the average used car price in September was down 1% from its peak in May.

At AutoNation, the nation’s largest dealer chain, used vehicle sales and earnings per vehicle declined in the past quarter. CEO Mike Manley noted that while vehicle supply remains low, used car prices are falling.

“Our analysis shows that we are coming from the highs we saw before,” Manley told analysts on Thursday.

Ivan Drury, director of Insights at Edmunds warned that it will take years for used product prices to fall close to their pre-pandemic levels. As of 2020, automakers have stopped leasing as many cars, suffocating a major source of late-model used vehicles.

Likewise, rental companies have not been able to purchase many new vehicles. So in the end they sell fewer cars on the used market. That’s another source of shrunk vehicles. And because used cars don’t sit on dealer lots for long, demand remains strong enough to drive prices up.

When car prices first rose two years ago, lower-income buyers were driven out of the new vehicle market. In the end, many of them couldn’t even afford used cars. People with subprime credit scores (620 or lower) bought just 5% of new vehicles last month, up from nearly 9% before the pandemic. That indicated that many lower-income households could no longer afford vehicles, said JD Power Vice President Tyson Jominy.

Higher lending rates have exacerbated the problem. In January 2020, shortly before the pandemic hit, used vehicle buyers were paying an average of 8.4% annual interest, according to Edmunds. Monthly payments averaged $412. Last month, the average rate had reached 9.2%. And because prices had been rising for more than two years, the average payment had risen to $567.

The 1% average drop in used prices helps financially secure buyers with solid credit scores that can qualify for lower loan rates. But for those with poor credit and lower incomes, any drop in prices will be offset by higher borrowing costs.

The new vehicle market, on the other hand, has mainly become an option for affluent buyers. Automakers are increasingly using scarce computer chips to create expensive, fully loaded versions of pickup trucks, SUVs and other outsized vehicles, usually with relatively low gas mileage. Last month, the average new vehicle price was slightly lower than in August, but remained more than $11,000 above the January 2020 level.

Glenn Mears, who runs five dealerships south of Canton, Ohio, says the Federal Reserve’s rate hikes, contributing to more expensive auto loans, are slowing his showroom traffic.

“We can feel a relapse,” he said.

Analysts generally say that with shortages of computer chips and other parts that factories are still stumbling on, new vehicle prices are unlikely to fall substantially. But further modest price cuts are likely. Vehicle availability on U.S. dealer lots improved to nearly 1.4 million vehicles last month, up from 1 million for most of the year, Cox Automotive reported.

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

“It’s extremely expensive these days,” says Jominy, who estimates there are still 5 million US customers waiting to buy new vehicles.

Despite recent stock market dips, many of these buyers have built wealth, especially in their homes, rewarding themselves with high-quality cars. In the San Francisco Bay area, for example, notes Inder Dosanjh, who leads a 20-dealer group that includes General Motors, Ford, Acura, Volkswagen and Stellantis, many people have received significant pay increases.

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

In its earnings report Tuesday, GM noted that customer demand is holding up. While GM and other automakers are eager to produce more vehicles, they are currently benefiting from slower production, which typically means higher prices and profits.

John Lawler, Ford’s chief financial officer, noted on Wednesday that new vehicle prices, which hit record numbers, had begun to fall. And consumer appetites are starting to change: Demand for mid-range vehicles, he said, is beginning to outpace the more profitable option cars.

Next year could be a turning point, suggested Jeff Windau, an analyst at Edward Jones. With the economy likely to weaken and potentially plunge into recession, prices could fall “as consumers become more focused on their financial situation and what they’re willing to bite the bullet from a payments perspective.”

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This story has been corrected to show that 9% of new vehicle buyers had subprime credit scores and that has since dropped to 5%.