New-Car Prices Are Starting to Cool After Years of Soaring to New Records
Inventory on dealer lots is ticking up again, but executives say pent-up demand should keep prices elevated for the foreseeable future
After a multiyear surge in new-car prices, buyers are starting to see some relief on dealership lots.
Inventory levels are gradually coming back, giving shoppers more options when browsing showrooms, and some discounting has crept back into the market, albeit in a limited fashion.
The average price paid for a new vehicle hit a record of $46,173 in July and has been trending downward in recent months, according to data from research firm J.D. Power. In October, consumers paid an average of about $45,600 for a new car or truck, several hundred dollars off the summer peak but still 33% higher than before the pandemic, the firm’s data show.
“You will see a continued, slight mitigation on new-vehicle prices,” said Mike Manley, chief executive of AutoNation Inc., a publicly traded dealership group. “But I don’t think you’re going to see, anytime soon, a return to what we saw prepandemic.”
“They will not drop as fast as they shot up,” he added.
The extent to which car companies can keep buyers paying top dollar for vehicles—a core driver of profitability within the industry throughout the pandemic—was a focus of recent earnings calls. Analysts questioned how higher interest rates and recessionary concerns might dent the recent pricing momentum, which has lifted earnings across the sector in recent quarters.
Auto executives remain optimistic that a backlog of pent-up demand will continue to keep car prices elevated in the coming months, and production challenges continue to linger, making it difficult to fully replenish stock.
The shifts in the U.S. car market reflect a broader choppiness in the economy, where the pricing power companies have enjoyed in recent years is starting to wobble as consumers and businesses pull back on spending. Even as supply-chain constraints continue to keep prices aloft, some shoppers are feeling too stretched and are delaying or skipping purchases.
New- and used-car prices had been climbing throughout much of the pandemic, pushed up by supply-chain snarls and near-empty dealership lots as car companies struggled to get their factories fully back online. More than half of vehicles sold in October sold for higher than their listed sticker price, according to J.D. Power.
This year, however, marked a turning point with inflation and worries about an economic downturn starting to weigh on buyers’ willingness to splurge. The average interest rate on a new-car loan was 5.7% in the third quarter, up from 4.3% in the prior-year period, according to car-shopping firm Edmunds.
Used-car prices started to level off this spring and have continued to cool in recent months with transaction values down for many models that are five years or older, industry data show. This means buyers trading in their used vehicles don’t have as much money to offset the price of a new car.
The softening has also begun to affect dealer profitability with some publicly traded car retailers reporting a decline in used-car gross margins in the third quarter.
Meanwhile, dealership stock levels are improving, having ticked higher through the summer.
The number of new cars and trucks available on lots or en route to stores at the end of September was about 1.4 million, up 46.9% from the same month a year ago, according to Wards Intelligence, a firm that tracks auto-industry data.
On earnings calls last week, executives said they were seeing some easing of the supply-chain problems that have dogged the industry over the past couple of years, including on semiconductors.
“Overall, I would say chips are getting better than certainly where they were a year ago,” General Motors Co. Chief Financial Officer Paul Jacobson told reporters Tuesday. “The fact that we were able to produce while clearing out some of those vehicles speaks to some of that improvement.”
With more availability, some sales promotions have returned, such as the low-interest rate financing deals that were prevalent before the health crisis.
For instance, brands like Buick and GMC have been offering 0% financing deals on loan terms as short as 36 months, said Ivan Drury, director of Insights at Edmunds.
“You save a lot of money in interest—a good $7,000 to $10,000 in interest. But you have to pay off the car in half the time,” he said.
Still, the level of discounting remains at a historic lows, and while prices appear to be moderating, it is likely to be a long time before they revert to levels seen at the end of the last decade, analysts, executives and dealers say.
Auto makers, having seen the benefits of keeping supplies scarce, aren’t eager to return to the days when lots were flooded with excess inventory.
The availability of new cars and trucks is improving, but many manufacturers are still struggling to fully restock, given how low inventories have fallen this year, said Geoffrey Pohanka, chairman of Pohanka Automotive Group, which has dealerships in Maryland, Virginia and Texas.
“There are a lot of empty buckets out there,” Mr. Pohanka said. “It’ll take time to fill those buckets.”
