When will the car market return to normal?

Don’t expect car prices to drop significantly any time soon.

Instead, new-vehicle prices, already at record levels, will remain high, auto experts say. At the same time, used vehicle prices should moderate as the Federal Reserve continues to raise interest rates to curb inflation. Analysts are closely monitoring vehicle demand, with consumer confidence slipping amid signs of a worsening economy and a resurgence in gasoline prices.

“The next 12 months are going to be very turbulent as these interest rate increases trickle down into the economy,” says Charlie Chesbrough, senior economist at Cox Automotive. “Certainly they are going to have an impact on the new and used vehicle markets.”

Prices soared during the pandemic as automakers grappled with ongoing supply chain disruptions and shortages of semiconductor chips that power smartphones, refrigerators, TVs, cars and more. When new car production slowed, Americans held on to their vehicles longer, reducing supply on the used market and, in some cases, driving up used prices above new.

And natural disasters like Hurricane Ian, which wreaked havoc in the Southeast, can cause the total loss of hundreds of thousands of cars, further reducing supply and driving up prices.

New car prices continue to rise

The average new vehicle transaction price in August was $48,301, according to Cox-owned Kelley Blue Book, a record high fueled by low inventory, high demand and a lack of incentives. Automakers are allocating off-the-shelf computer chips to high-margin vehicles, such as luxury offerings and SUVs with hefty price tags.

Meanwhile, high prices could rise as automakers face higher manufacturing costs. Ford said last month that it expected to spend an additional $1 billion on third-quarter inflation-related supplier costs.

“New car prices are likely to be much higher in the next 12 months,” says Karl Brauer, senior analyst at car search engine iSeeCars.com. Because most vehicle purchases are financed, rising interest rates could curb consumer demand and lead to higher monthly payments, which averaged closer to $750 before the latest hikes.

But if demand for new cars drops, dealers can offer discounts to “sweeten the pot a bit to attract customers,” Chesbrough says. He adds that car buyers should see more normal prices as the supply of new vehicles picks up.

The new normal for new cars

Pre-pandemic inventory levels are unlikely to return anytime soon, auto experts say.

Before the pandemic, an estimated 3.5 million new cars sat on dealer lots. In August, there were about 1.2 million, according to Cox. The anticipated sweet spot is somewhere in the middle.

“Dealers and automakers have found some real benefits to having less inventory, in terms of profits, margins, being able to plan a little better and not having to spend as much on incentives,” says Jessica Caldwell, executive director of automotive insights. . research firm Edmunds. Deep discounts are likely off the table, she adds, for at least the next two years.

Chesbrough predicts that consumer habits could change after the pandemic. For example, instead of buying the lot the same day, customers can choose to order custom vehicles and wait for delivery.

Used car prices are slowly going down

Used car sales have defied logic, with some used vehicles fetching higher prices than their new counterparts, mainly due to inventory shortages.

But wholesale prices for used vehicles, what dealers are paying at auction lots, have fallen in recent months, according to Cox’s wholesale price tracker, the Manheim Market Report. Additionally, used vehicles have started to depreciate again, another sign that the market is getting back on track.

Used car buyers in August paid a premium of $8,497, on average, compared to what they would have paid under normal market conditions, according to car-shopping app CoPilot’s “Return to Normal” index. That is down from its June peak of $10,046.

However, demand may increase as buyers with lower incomes and below-average credit scores turn to used cars because they are priceless to buy new vehicles.

“New vehicles are becoming more of a…luxury product,” says Chesbrough. “Even having the ability to buy a new vehicle and afford one certainly puts you at the top end of American household income.”

Tips for buying a car now

Although the conventional wisdom about car buying has been turned upside down by the pandemic, there are still tried-and-true tips for buying a carsuch as getting pre-approved for a car loan and requesting quotes from various dealers.

Caldwell recommends looking at new and used vehicles if you need to buy a vehicle now or in the next few months. Expand your search radius across the country: you can use a app to buy cars to do so, and consider surrendering the vehicle. If it’s not urgent, join a waiting list.

For new vehicles, don’t feel ripped off if you’re paying around the manufacturer’s suggested retail price, she says. “That’s how it works now,” says Caldwell.

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