Auto prices finally begin to creep down from inflated highs
DETROIT — All summer long, Aleen Hudson kept looking for a new minivan or SUV for her growing passenger shuttle service.
She had a good credit rating and enough cash for a down payment. Yet dealerships in the Detroit area didn’t have any suitable vehicles. Or they’d demand she pay $3,000 to $6,000 above the sticker price. Months of frustration left her despondent.
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“I was depressed,” Hudson said. “I was angry, too.”
A breakthrough arrived 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. Yet the dealer was asking only slightly above sticker price, and Hudson felt in no position to walk away. She’s back in business with her own van.
It could have been worse. Hudson made her purchase just as the prices of both new and used vehicles have been inching down from their eye-watering record highs and more vehicles are gradually becoming available at dealerships. Hudson’s van likely would have cost even more a few months ago.
Not that anyone should expect prices to fall anywhere near where they were before the pandemic recession struck in early 2020. The swift recovery from the recession left automakers short of parts and vehicles to meet demand. Price skyrocketed, and they’ve scarcely budged since.
Prices on new and used vehicles remain 30% to 50% above where they were when the pandemic erupted. The average used auto cost nearly $31,000 last month. The average new? $47,000. With higher prices and loan rates combining to push average monthly payments on a new vehicle above $700, millions of buyers have been priced out of the new-vehicle market and are now confined to used vehicles.
The high prices are yielding substantial profits for most automakers despite sluggish sales.
On Tuesday, for example, General Motors reported that its third-quarter net profit jumped more than 36%, thanks in part to sales of pricey pickup trucks and large SUVs.
Still, as Hudson discovered, many vehicles are becoming slightly more affordable. Signs first emerged weeks ago in the 40-million-sales-a-year used market.
As demand waned and inventories rose, prices eased from their springtime heights.
CarMax said it sold nearly 15,000 fewer vehicles last quarter than it had a year earlier. The CEO of the used-vehicle company, based in Richmond, Virginia, 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 sales drops — a dynamic that typically foretells lower prices. And indeed, the average used vehicle price in September was down 1% from its May peak, according to Edmunds.com.
At AutoNation, the nation’s largest dealership chain, sales of used vehicles and profit-per-vehicle both dropped last quarter. CEO Mike Manley noted that while the supply of vehicles remains low, used-auto prices are declining.
“Our analysis shows that we are coming off the high values that we saw before,” Manley told analysts Thursday.
Ivan Drury, director of insights at Edmunds cautioned that it will take years for used prices to fall close to their pre-pandemic levels. Since 2020, automakers haven’t been leasing as many cars, thereby choking off one key source of late-model used vehicles.
Similarly, rental companies haven’t been able to buy many new vehicles. So eventually, they are selling fewer autos into the used market. That’s crimped another source of vehicles. And because used cars aren’t sitting long on dealer lots, demand remains strong enough to prop up prices.
When auto prices first soared two years ago, lower-income buyers were elbowed out of the new-vehicle market. Eventually, many of them couldn’t afford even used autos. People with subprime credit scores (620 or below) bought only 5% of new vehicles last month, down from nearly 9% before the pandemic. That indicated that many lower-income households could no longer afford vehicles, said J.D. Power Vice President Tyson Jominy.
Higher borrowing rates have compounded the problem. In January 2020, shortly before the pandemic hit, used-vehicle buyers paid an average of 8.4% annual interest, according to Edmunds. Monthly payments averaged $412.
By last month, the average rate had reached 9.2%. And because prices had risen for over two years, the average payment had jumped to $567.
