DETROIT (AP) — All summer, Aleen Hudson continued to search for a new minivan or SUV for her growing passenger haul.
She had a good credit rating and enough money for a down payment. However, dealers in the Detroit area did not have any suitable vehicles. Or they would require her to pay $3,000 to $6,000 over the sticker price. Months of frustration left her despondent.
“I was depressed,” Hudson said. “I was angry too.”
A breakthrough came in late September, when a dealer called about a 2022 Chrysler Pacifica. At $41[ads1],000, it was hardly a bargain. And that wasn’t quite what Hudson wanted. Still, the dealer was asking just a little over the sticker price, and Hudson felt unable to walk away. She is back in business with her own van.
It could have been worse. Hudson bought her just as prices for both new and used cars have come down from eye-popping record highs and more vehicles are gradually becoming available at dealerships. Hudson’s van probably would have cost even more a few months ago.
Not that anyone expected prices to fall anywhere near where they were before the pandemic recession hit in early 2020. The rapid recovery from the recession left automakers short of parts and vehicles to meet demand. The price skyrocketed, and they have barely budged since.
New and used vehicle prices remain 30% to 50% above where they were when the pandemic broke out. The average used car 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 over $700, millions of buyers have been priced out of the new vehicle market and are now limited to used vehicles.
The high prices mean significant profits for most car manufacturers despite weak sales. On Tuesday, for example, General Motors reported that net profit for the third quarter rose more than 36%, thanks in part to sales of expensive pickup trucks and large SUVs.
Still, as Hudson discovered, many cars are getting a little more affordable. Signs first appeared weeks ago in the used market with 40 million sales a year. As demand slowed and inventories rose, prices fell from their spring highs.
CarMax said it sold nearly 15,000 fewer vehicles last quarter than it had a year earlier. The CEO of the used car company, based in Richmond, Virginia, pointed to inflation, higher interest rates and declining consumer confidence.
A “buyers’ strike” is how Adam Jonas, an auto analyst at Morgan Stanley, characterized the drop in sales — a dynamic that usually predicts lower prices. And in fact, the average used car price in September was down 1% from its peak in May, according to Edmunds.com.
At AutoNation, the nation’s largest dealership chain, sales of used vehicles and profit per vehicle fell last quarter. CEO Mike Manley noted that while the supply of vehicles remains low, used car prices are falling.
“Our analysis shows that we are coming off the highs we saw before,” Manley told analysts on Thursday.
Ivan Drury, director of insights at Edmunds, warned that it will take years for used prices to fall close to pre-pandemic levels. Since 2020, automakers have not leased as many cars, choking off a key source of late-model used vehicles.
Similarly, rental companies have not been able to buy many new cars. So gradually they sell fewer cars on the used market. It has shrunk another source of vehicles. And because used cars don’t sit on dealers’ lots for long, demand is still strong enough to prop up prices.
When car prices first rose two years ago, lower income buyers were elbowed out of the new vehicle market. Eventually, many of them could not even afford used cars. People with subprime credit scores (620 or lower) bought just 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 JD Power vice president Tyson Jominy.
Higher loan interest rates have exacerbated the problem. In January 2020, shortly before the pandemic hit, used vehicle buyers were paying an average of 8.4% annual interest, according to Edmunds. Monthly payments averaged $412. Last month, the average rate had reached 9.2%. And because prices had been rising for over two years, the average payment had jumped to $567.
The average 1% drop in used prices will help financially secure buyers with solid credit scores who can qualify for lower loan rates. But for those with bad credit and lower incomes, any price drop will be wiped out by higher borrowing costs.
The new vehicle market, on the other hand, has become an option mainly for wealthy buyers. Automakers are increasingly using scarce computer chips to make expensive, stripped-down versions of pickup trucks, SUVs and other large vehicles, usually with relatively low gas mileage. Last month, the average price of a new vehicle was down slightly from August, but remained more than $11,000 above its January 2020 level.
Glenn Mears, who operates five dealerships south of Canton, Ohio, says the Federal Reserve’s rate hikes, by contributing to more expensive auto loans, are slowing his showroom traffic.
“We can feel a pullback,” he said.
Analysts generally say that with shortages of computer chips and other parts still hogging factories, new vehicle prices are unlikely to fall significantly. But further modest price falls may be likely. Availability of vehicles on U.S. dealer lots improved to nearly 1.4 million vehicles last month, up from 1 million for most of the year, Cox Automotive reported.
Before the pandemic, normal supply was far higher – around 4 million. So historically, inventory is still tight and demand is still high. Like Hudson, many buyers are still stuck paying sticker price or higher.
“It’s extraordinarily expensive these days,” said Jominy, who estimates there are still 5 million U.S. customers waiting to buy new vehicles.
Despite recent stock market falls, many such buyers have built up wealth, especially in their homes, and reward themselves with high-end cars. In the San Francisco Bay area, for example, notes Inder Dosanjh, who runs a 20-dealership group that includes General Motors, Ford, Acura, Volkswagen and Stellanti brands, many people have received significant pay raises.
“There’s just a lot of money out there,” he said.
In its earnings report Tuesday, GM noted that customer demand is holding up. Although GM and other automakers want to produce more cars, they currently benefit from slower production, which usually means higher prices and profits.
John Lawler, Ford’s chief financial officer, noted Wednesday that near-record prices for new vehicles began to decline. And consumer appetites are beginning to change: Demand for midsize cars, he said, has begun to outpace more profitable cars full of options.
Next year could be a turning point, suggested Jeff Windau, an analyst at Edward Jones. With the economy likely to weaken and possibly enter a recession, prices could fall “as consumers become more focused on their financial situation and what they are willing to bite off from a payment perspective.”
This story has been corrected to show that 9% of new vehicle buyers had subprime credit scores, and that has since dropped to 5%.