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Saturday, December 03, 2022

USA: Car prices have finally started to fall

USA: Car prices have finally started to fall

Ellen Hudson spent an entire summer looking for a new van for her passenger transportation service.

He had good credit and enough cash to make the down payment. But none of the Detroit-area dealerships had a suitable vehicle. Or they were asking $3,000 to $6,000 above list price. She was feeling hopeless after months of despair.

“I was sad,” Hudson said. “Too angry.”

Things changed in late September, when a dealer told him about the 2022 Chrysler Pacifica. Its $41,000 price tag wasn’t exactly a bargain. And the model wasn’t what Hudson wanted. But it wasn’t much more than list price, and Hudson felt he wasn’t in a position to quibble. He is working again with his truck.

This could be the worst. Hudson makes its purchases just as prices for new and used vehicles are falling from record highs, and as units available at dealerships increase. The price of Hudson’s truck could have gone up a few months back.

Not that anyone expects prices to fall back before the pandemic meltdown in early 2020. With a rapid recovery after the recession, automakers ran out of parts and vehicles to meet demand. Prices skyrocketed and have remained virtually unchanged since then.

New and used vehicle prices remain 30% to 50% above where they were at the start of the pandemic. The average price for a used vehicle last month was about $31,000. What about a new one? $47,000. The average monthly payment on new cars exceeded $700 after high prices and interest on loans made millions of buyers squeezed out of the new vehicle market and confined to secondhand ones.

Despite sluggish sales, higher prices are driving major profit margins for most automakers. For example, on Tuesday, General Motors reported that its third-quarter net profit jumped more than 36%, thanks in part to sales of its more expensive pickup trucks and larger SUVs.

Still, as Hudson found, many vehicles are getting a little more affordable. The first signs of a used vehicle market emerged weeks ago, reaching 40 million sales annually. As demand fell and inventories increased, prices began to fall.

CarMax said it sold 15,000 fewer cars in the last quarter compared to a year ago. The CEO of the Richmond, Virginia-based used car company cited inflation, higher interest rates and declining consumer confidence as reasons.

Adam Jonas, an auto analyst at Morgan Stanley, describes a decline in sales to a “buyers’ strike,” a dynamic that usually initiates lower prices. And of course, average used car prices in September were down 1% from May levels, according to Edmunds.com.

In AutoNation, the country’s largest dealership chain, used vehicle sales and profit per vehicle declined last quarter. The company’s CEO, Mike Manley, said that although the supply of vehicles remains low, the prices of used cars are falling.

“Our analysis shows that we are coming out of higher prices than we’ve seen before,” Manley told analysts on Thursday.

Evan Drury, director of new ideas at Edmunds, warned that it could take years for used car prices to come close to pre-pandemic levels. Since 2020, automakers have not been leasing many cars, reducing one of the main sources of late-model used vehicles.

Similarly, car rental companies have not been able to buy as many new vehicles. For this reason, they are selling less cars in the second hand market. This has affected another source of vehicles. And used cars don’t spend much time in dealerships, as demand is strong enough to keep prices high.

When vehicle prices skyrocketed for the first time two years ago, low-income buyers priced the new car out of the market. After all, many of them couldn’t even afford the old vehicles. People with a below average credit score (620 or less) bought just 5% of new vehicles last month, compared to 9% before the pandemic hit. JD Power vice president Tyson Jomini said it made it clear that many low-income families could no longer afford vehicles.

High interest rates have compounded the problem. According to Edmunds, in January 2020, shortly before the pandemic hit, used car buyers were paying an average annual interest rate of 8.4%. Monthly payments average $412. By last month, the average rate had reached 9.2%. And because prices have been rising for the past two years, the average monthly payment has risen to $567.

An average 1% drop in pre-owned prices will help buyers with financial security and strong loans who may be eligible for lower interest rates. But for those with poor credit and low incomes, the higher credit costs will offset any drop in vehicle prices.

Meanwhile, the new car market has become an almost exclusive option for wealthy buyers. Automakers are increasingly turning to rarefied microprocessors to create expensive kit-out versions of pickup trucks, SUVs and other large vehicles, often with relatively high fuel consumption. Last month, the average price of a new vehicle dropped slightly from August, but was still above $11,000 from January 2020 levels.

Glen Mears, who runs five dealerships south of Canton, Ohio, noted that interest rate hikes by the Federal Reserve have caused fewer people to parade through their agencies.

“We may be feeling some slowdown,” he said.

Overall, analysts say with a shortage of microprocessors and other parts impacting factory production, prices for new vehicles may not drop significantly. It is possible that there may be a slight decline in the prices. Cox Automotive reported that vehicle availability at dealerships across the country increased to nearly 1.4 million last month, with the figure hovering around 1 million.

Before the pandemic, the general supply was much higher, about 4 million. So, historically speaking, inventory remains low and demand remains high. Like the Hudson, many buyers have no choice but to pay the list price, or perhaps more.

“It’s extraordinarily expensive these days,” said Jomini, who estimates that there are still 5 million consumers in the United States waiting to buy a new vehicle.

Despite the recent fall in the stock market, many of these buyers have accumulated wealth, and are indulging in expensive vehicles.

For example, in the San Francisco Bay Area, many people have received significant pay increases, says Inder Dosanjh, who runs a cluster of 20 dealerships for brands including General Motors, Ford, Acura, Volkswagen and Stelantis.

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

In its earnings report on Tuesday, GM stressed that customer demand is increasing. Although GM and other automakers want to make more vehicles, for now they benefit from slower production, which often means higher prices and higher mileage.

Ford Chief Financial Officer John Lawler noted Wednesday that new vehicle prices, which were at historically high levels, had begun to decline. And consumer appetites are beginning to change. The demand for mid-range vehicles has started increasing over the more profitable alternative cars.

Jeff Windau, an analyst at Edwards Jones, suggested that next year could be a turning point. Given the possibility that the economy weakens and even falls into a recession, prices could fall “as consumers focus more on their financial situation and what they are willing to do from a payment perspective.” Huh.”

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