Vehicle prices are ultimately declining It appears to resemble a favorable market for purchasers

Declining vehicle prices suggest a favorable market for buyers

Declining Vehicle Prices: In a noteworthy development, the longstanding concern over the soaring prices of brand-new vehicles appears to be subsiding, marking a positive turn for both eager car buyers and cautious automotive investors. The automotive industry is currently grappling with the economic fallout from the Covid-19 pandemic. However, amidst these challenges, there is a noticeable shift towards increased affordability—a welcome change following years of escalating costs.

Rising Costs and Economic Challenges

Recent data indicates that the average cost of a new car in the United States has surged to approximately $47,000. This marks a significant increase of around $10,000 compared to pre-pandemic levels. The surge, coupled with elevated interest rates, has resulted in a substantial increase of 33% in typical car payments. This change has been observed since the onset of the pandemic.

“The surge in U.S. new car prices, hitting $47,000, poses a 33% increase in payments, fueled by pandemic-related factors,” according to Barron’s Subscription.

Tides Turning: Signs of Improvement

However, the tides are turning, with interest rates hovering just below their peak and the average price of a new car witnessing a decline of nearly $3,000 from its zenith in December 2022. This positive trend in affordability receives further support from a concurrent increase in wages.

Wage Growth and Market Dynamics

Over the past year, average wages in the U.S. have seen a commendable rise of 4%, coinciding with the declining vehicle prices, as new-car prices have experienced a 5% reduction. Zooming out to late 2019, before the pandemic took hold, wages have surged by an impressive 21%, slightly outpacing the 29% increase in the price of a new car during the same period.

Analyzing the Landscape: The Barron’s Affordability Index

Barron’s, in a comprehensive analysis, has formulated a new-vehicle affordability index, taking into account wages, interest rates, and new-car prices. This index, which averaged around 56 in the latter half of 2019, spiked to nearly 66 in December 2022, and currently stands at 61—positioned squarely in the middle of that range.

Industry Expert’s Perspective: Anticipating Further Improvements

Rebecca Lindland, senior director of industry data, insights, and cars commerce at Cars.com, anticipates continued improvements for new-car buyers in the coming months. Lindland points out that almost 50% of shoppers have intentions to spend less than $30,000 on a new car. This aligns well with the prevailing market conditions.

Market Dynamics: From Seller’s to Buyer’s Market

As dealer inventory and new-car production steadily recover, Lindland envisions a transition. From the seller’s market of recent years, there is a shift towards a more favorable “buyer’s market.” This shift is expected to bring relief not only to potential car buyers but also to investors.

The Path to Restoration: A Potential Price Adjustment

A potential 3% reduction, equal to $1,500, in the price of a new car could help restore new-car affordability to average 2019 levels. This reduction would be accompanied by a 3% wage increase and a one-percentage-point drop in interest rates. However, even with these adjustments, prices would still remain at around $46,000—$8,500 higher than pre-pandemic levels.

Industry Outlook: Managing Profitability Amidst Change

The majority of automakers are signaling a trend towards lower pricing for the current year, although they do not anticipate an imminent crash in new-car prices. They are projecting robust full-year profitability. General Motors, for instance, anticipates a 2% to 2.5% pricing headwind. They anticipate achieving a full-year operating profit of around $13 billion. This reflects a rise compared to the $12.4 billion generated in 2023.

Recovery Amidst Abnormalities: Used Car Inventory Challenges

This positive shift towards affordability is a promising indicator. It suggests that the automotive industry is gradually recovering from the tumult induced by the Covid-19 pandemic. Certain abnormalities persist. One such challenge is the ongoing issue of low used-car inventory. This is a consequence of fewer leased vehicles returning to the market in the years 2020, 2021, and 2022.

Market Dynamics: Used-Car Pricing and Market Trends

Rebecca Lindland emphasizes that there are approximately 10 million “missing” cars, and patience is key to resolving this issue. Despite the scarcity in used-car inventory, there is a suggestion that used-car pricing might hold better than investors expect. This is because it remains intrinsically linked to new-car pricing.

Market Recap: Industry Statistics and Trends

In 2023, Cox Automotive reported that around 36 million used cars were sold in the U.S., indicating a trend of Declining Vehicle Prices. This number was slightly lower than the figure recorded in 2022. In comparison, roughly 15.5 million new cars were sold in 2023, a notable increase from 13.9 million in 2022. Before the pandemic, Americans were annually purchasing around 17 million new cars, highlighting the industry’s gradual return to pre-pandemic levels.

“The 2023 report by Cox Automotive suggests a decline in used car sales, contrasting new car growth,” according to Bloomberg.

Call Now Button