Don’t expect drastic price cuts for new, used vehicles anytime soon
If you need a new ride and can wait six months or longer, experts say chances are prices will come down a little, or at least they are unlikely to go higher.
But don't expect drastic price reductions for new cars (or used) anytime soon, they said.
While shortages of various parts are starting to subside, allowing carmakers to add more new vehicles to inventories, supply chain problems persist just enough to keep levels lower than normal. There continues to be pent-up consumer demand for cars, even as some would-be buyers step onto the sidelines while interest rates rise.
Also most economic indicators suggest a slowdown in consumer spending in the coming year, especially for larger ticket items that are financed, said Karl Brauer, executive analyst at used-car search website iSeeCars.com..
"We’ll see a definite drop in car buying over the next six to 12 months, but not enough to dramatically impact pricing," Brauer said. "There’s still a big delta in demand versus supply, so even with a drop in demand, I expect the supply of new vehicles to remain tight and most models to move pretty quickly off dealer lots."
Possible power to negotiate
Cox Automotive expects, at the very least, new vehicle prices will retreat from record highs, said Michelle Krebs, executive analyst at Cox Automotive. In September, the average transaction price across the industry, as calculated by Kelley Blue Book, was $48,094, down from the record high set in August of $48,240.
Krebs said new vehicle asking prices are down, too, by almost $500 from mid-August levels. In early October, the average listing price for a new car was $46,213, compared with $46,698 in mid-August. But, warns Krebs, prices will likely stay high because automakers' costs for materials and transportation are high.
"We would expect the first thing to go is the premium dealers have been charging above list," Krebs said. "If demand softens, dealers will negotiate more and automakers may offer some incentives, which are at historically low levels right now."
Production bottleneck persists
But Tyson Jominy, vice president of Data & Analytics at J.D. Power, said he expects prices will remain near record levels throughout this year and into next year.
"While microchips have frequently been identified as the leading cause of production issues, it has not been the only part with shortages," Jominy told the Free Press in an email. "The auto industry operates a global supply chain and a global pandemic and global economic challenges have affected many different parts."
There remain shortages of seats, wiring harnesses, paint resin, tires and some automakers struggle to get their own brand badges for their vehicles, Jominy said.
"Production remains the bottleneck, even as it has been steadily increasing as of late," Jominy said. "Inventory is just starting to increase, but at 1 million units on the ground, it is nowhere near pre-pandemic levels of 3 to 4 million."
Consumer demand is not deterred despite an uncertain economy and higher interest rates, Jominy said.
"While an estimated 6 million sales were displaced since the start of the pandemic, over 5 million are still waiting on the sidelines in the form of pent-up demand," Jominy said. "This month, 52% of vehicles will be sold within 10 days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 19 days, down from 20 days a year ago."
Those car buyers are still paying peak prices, too. In October, 57% of all consumers were paying above sticker price and while interest rates are now higher than 6% and monthly payments are a record $711, Jominy said, October sales across the industry are expected to be up 8% compared with the year-ago period.
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No big discounts anytime soon
Edmunds.com's data shows that the average transaction prices that consumers paid above the sticker prices have fallen from "a sustained and consistent six months high of $700" over Manufacturer's Suggested Retail Price to about $350 over, said Ivan Drury, director of Insights at Edmunds.
"That said, we're not forecasting a return to normal new car market anytime soon," Drury told the Free Press.
He said average transaction prices could come closer to sticker prices by early next year, "but industry discounts of $2,000 off from MSRP are still a very long way away, perhaps at the end of next year, probably more like 2024."
That's because of those deferred purchases from consumers as well as rental agencies. Also, there are many leases "in a state of flux," Drury said. People either bought out their lease or extended it and now these consumers will want to "jump into the new car market as soon as lease incentives start to reappear."
For those who finance, affordability might become an issue given that some of the lowest interest rates come with the short-term loans, such as 36 months or 48 months. But those can mean a higher monthly payment, "but at least they will saves thousands in interest, as long as they can stomach someone else's mortgage payment as a car payment," Drury said.
Barra watching demand
The top brass at General Motors told Wall Street on Tuesday they expect strong pricing to hold up in the near term despite talk of economic slowdown and rising interest rates. GM reported a 37% jump in third-quarter profits as its inventory improved. It warned that battery-production challenges could slow its rollout of electric vehicles, but average transaction prices of its gasoline-powered vehicles, especially for big SUVs and pickups, remain high.
GM CEO Mary Barra told analysts GM is "watching carefully" demand and pricing changes to balance those against incentives. She warned that GM will continue to see some semiconductor chip shortages and “overall challenges from the supply base.”
“Even a small hiccup usually has an impact,” Barra said. “We're going to continue to work those issues, but we see that improving as well. The big thing that we're looking at is, what will demand be?”
Barra said there are a lot of different predictions on the economy, but she believes “from where we are from a low inventory perspective, strong product offering … I think we're well positioned to manage through it."
GM CFO Paul Jacobson said GM anticipates keeping inventory tight into next year mostly out of precaution. GM and its dealers have learned to operate with lean inventories over the past year because of parts shortages. By continuing to keep inventory tight, if there is a slowdown in demand, GM won’t need to make a big production adjustment, Jacobson said. But if demand remains strong, GM should be able to increase production.
“The industry could normalize. We could see that, although I don't think we see big increases in production going forward," Jacobson said. "So, depending on how that pent-up demand shakes out, I think that will affect inventory."
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