Experts suggest that after years of exorbitant prices for both new and used cars due to pandemic-related supply chain disruptions, prices are starting to cool off. However, prices will remain higher than pre-pandemic levels. Factors contributing to this decline include increased inventory, higher interest rates, and lower demand.
Questions Answered in this Article
- What caused the surge in prices for new and used cars during the pandemic?
- The surge in prices during the pandemic was caused by supply-chain disruptions and a shortage of semiconductor chips, which are essential to the functioning of vehicles.
- What factors are contributing to the decline in car prices?
- Factors contributing to the decline in car prices include increased inventory, higher interest rates, and concerns about inflation.
- Are new car prices cooling off?
- Yes, the average transaction price for a new vehicle was $49,388 in January, which is a 0.6% decrease from the previous month’s all-time high.
- Why are used car prices inching down?
- Used car prices are inching down because the demand for 1-to-5-year-old cars is diminishing as many new customers are returning to purchasing new vehicles as supply slowly improves.
- What tips do experts recommend for buying a car now?
- Experts recommend being open-minded to shopping all markets, including new, used, and certified pre-owned vehicles, expanding the shopping radius to find the best deals, and not focusing solely on car prices but also factor in finance charges and monthly payments.
Factors Contributing to the Decline in Car Prices: Increased Inventory, Higher Interest Rates, and Lower Demand
Automotive experts suggest that prices for both new and used cars, which have been exorbitant for years, may be starting to cool off. However, they caution that prices will remain significantly higher than they were before the pandemic.
During the pandemic, prices surged due to supply-chain disruptions and a shortage of semiconductor chips, which are essential to the functioning of vehicles. But experts now predict that changing market conditions will bring prices down.
Some of the current factors contributing to the price decline include increased inventory, higher interest rates, and concerns about inflation, which may make it difficult or unappealing for consumers to spend money on buying cars.
Karl Brauer, the executive analyst at car search engine iSeeCars.com, notes that the car market has entered a new phase where the elevated price levels seen over the past two years are unlikely to be sustained.
Car Prices Set to Cool off After Years of High Costs, Say Experts
It appears that the upward trend in new car prices may be coming to an end. In January, the average transaction price for a new vehicle was $49,388, which is a 0.6% decrease from the previous month’s all-time high, according to Kelley Blue Book, which is owned by Cox Automotive.
Higher Supply
Automotive experts have noted that vehicle prices are becoming more favorable for consumers for several reasons, one of which is the recovery of new-vehicle supply.
While the supply issues have not been fully resolved, there has been some improvement compared to a year ago. This has led to a decline in vehicle prices.
According to Jessica Caldwell, executive director of insights at Edmunds, the new-car inventory has been pretty scarce for a while, but now there is some improvement. Since 2021, new vehicles have been selling above MSRP on average, but in November 2022, the average transactions were less than the average MSRPs.
When there is more supply, consumers do not have to compete for a limited number of vehicles, leading to potentially more flexibility in pricing, more options, better interest rate incentives, and less pressure to make a purchase immediately.
Lower Demand
In addition to the recovery of inventory, a significant factor contributing to the slow price improvement is the decline in new-car demand from consumers. This can be attributed to heightened concerns about a worsening economy and the Federal Reserve’s interest rate hikes.
According to Caldwell, the cost of living has increased substantially, causing people to worry about a potential recession, which has weakened demand and put downward pressure on prices.
However, despite the anticipated price decline, Brauer suggests that the upcoming tax season may help support prices somewhat over the next few months. Consumers typically have more cash on hand from tax refunds, which can lead to increased car buying.
Used-car Prices are also Inching Down.
The prices of used cars have also improved in year-over-year comparisons, although they are still considerably higher than pre-pandemic levels. A recent analysis of over 1.9 million used car sales by iSeeCars.com revealed that prices for the average 1-to-5-year-old car dropped by 3% in December 2022 compared to the previous year.
During the pandemic, many new car shoppers could not afford new vehicles and turned to the used car market, leading to increased demand and higher car prices. However, experts suggest that this component of the used car market is diminishing, driving down used car prices.
According to Brauer, many new customers are returning to purchasing new vehicles as supply slowly improves, while some are holding off due to economic concerns.
The New Normal and Tips for Buying a Car Now
As car prices show signs of improvement for consumers, it’s important to remember that prices are still high and unstable compared to previous years. While the market may be friendlier, dealers are not likely to discount prices to be less than their competitors.
To take advantage of the improving market, Jessica Caldwell, executive director of insights at automotive research firm Edmunds, recommends being open-minded to shopping all markets, including new, used, and certified pre-owned vehicles. Karl Brauer, the executive analyst at car search engine iSeeCars.com, emphasizes the importance of research and expanding the shopping radius to find the best deals.
Using a car-buying app can help find cars that are further away but may be substantially less. Additionally, consumers should not focus solely on car prices but also factor in finance charges and monthly payments when shopping for a vehicle.
Summary
- Automotive experts predict that prices for new and used cars, which surged during the pandemic, may be starting to cool off.
- The surge in prices during the pandemic was caused by supply-chain disruptions and a shortage of semiconductor chips, which are essential to the functioning of vehicles.
- Factors contributing to the decline in car prices include increased inventory, higher interest rates, and concerns about inflation.
- The average transaction price for a new vehicle was $49,388 in January, which is a 0.6% decrease from the previous month’s all-time high.
- Used car prices are inching down because the demand for 1-to-5-year-old cars is diminishing as many new customers are returning to purchasing new vehicles as supply slowly improves.
- To take advantage of the improving market, experts recommend being open-minded to shopping all markets, including new, used, and certified pre-owned vehicles, expanding the shopping radius to find the best deals, and not focusing solely on car prices but also factor in finance charges and monthly payments.
