There has been a sharp rise in new and used car prices since the pandemic has left many buyers concerned if they can afford a vehicle. Now, some dealers are worried along with them.
Some dealers have been saying that the elevated prices and a lack of affordable models already are keeping some prospective buyers away. Now, higher interest rates and limited supply of cars are making it even more difficult for customers to make the math work on a monthly payment.
In some cases, buyers are canceling orders they placed before interest rates edged higher, dealers say. Some auto retailers are trying to increase their used-car inventories to make it more affordable for buyers.
The root cause for the lack of affordable vehicles is the supply-chain disruption that has created new vehicle scarcity in recent years, resulting in a seller’s market for used cars. Meanwhile, automakers have cut output of vehicles at the lower end of the price scale, choosing instead to emphasize their most-profitable models at higher price points.
Dealers expect the pressure will hurt total vehicle sales until availability improves. Not being able to offer any incentives or discounts in new rides is also a huge negative impact. While vehicle inventories are rebuilding, they remain at about half of pre-pandemic levels, and auto makers expect relatively tight supplies to last at least through 2023. If supply doesn’t return soon, then those available new cars will be priced out of the reach of middle-class households.
The vehicle shortage upended the car market for more than two years. Limited dealership inventory means that dealers essentially are selling every vehicle they can get their hands on, while consumers frequently paid above the manufacturer’s suggested retail price and book values. Further stoking demand, a combination of low interest rates and record-high prices for used cars, which new car buyers often trade in to offset their purchase price.
In the electric-vehicle market, Tesla price reduction across several models prompted a similar move from Ford, leading some analysts to predict a potential EV price war. Tesla has since inched some prices back up a bit, still the average price for an electric car is $66,000. The average price paid for a new non-electric vehicle hit a record of almost $50,000.
Overall, U.S. auto sales last year fell to their lowest levels in more than a decade, to 13.7 million vehicles, because of the supply chain and shortages. Many car makers are predicting sales volume to rise to around 15 million this year as parts inventories return, which still would be far below pre-pandemic levels of around 17 million.
There are some issues with those that do buy new vehicles, the National Automobile Dealers Association warns that rising monthly payments, aggravated by higher interest rates, are expected to keep a lid on sales. It’s also important to note that more Americans are falling behind on car payments these days than before the high inflation, cooling job market, and other challenges. Unfortunately, this leads to a growing number of auto repossessions, and the trend is expected to continue.
Some dealers who gathered at the dealers association’s national conference at the end of January also cited a downtick in demand as consumers strain to get into a comfortable monthly payment. In some cases, interest rates have gone up between the time customers order their cars and when they are delivered, dealers and auto executives said.
“If a customer puts in an order in October and it arrives in January, the interest rate that would have been 3.5% is now 7%,” said David Christ, who oversees North American sales and marketing at Toyota Motor Corp. “Affordability is a problem.”
Falling used-car prices also are hurting demand for new cars because of declining trade-in values, dealers said.
Some auto retailers who stocked up on pricey used vehicles during the pandemic years now say they are trying to sell them quickly to avoid a loss.
“If a customer trades in a vehicle and we don’t like it for whatever reason, we sell it wholesale the next day and pocket whatever margin we can,” said Mark Rountree, a Hyundai dealer from Maine. “Who knows what will happen with prices?”
Affordability is the underlying struggle here. There is no immediate solution. One positive sign is that used car prices are finally returning to normal following record highs.
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Lauren Fix is a nationally recognized automotive expert, media guest, journalist, author, keynote speaker and television host. A trusted automotive expert, Lauren provides an insider’s perspective on a wide range of automotive topics, energy and safety issues for both the auto industry and consumers. Her analysis is honest and straightforward.
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