Are Cars Getting Cheaper

The Rise in Car Prices

Car prices have seen a significant increase in 2022 due to global supply chain issues, primarily caused by a shortage of semiconductors. This shortage has led to production delays in the auto industry. While improvements are expected in semiconductor supply in 2023, new car prices are likely to remain high because of inflationary input costs.

According to data from J.D. Power, U.S. consumers paid an average of $46,437 for a new vehicle in January 2023, marking a year-over-year increase of 4.2%. This is the highest ever recorded for the month of January, indicating that there is no relief from the record prices of 2022.

Lead Automotive Equity Research Analyst at J.P. Morgan, Ryan Brinkman, explains that about half of the increase in new vehicle prices can be attributed to higher input costs. The new vehicle supply chain still faces inflationary pressures, such as non-commodity costs like diesel, freight, shipping, logistics, labor, and electricity, which automakers must pass on to consumers.

Image source: J.D. Power

The shortage of new cars has resulted in increased demand for used cars, causing their prices to surge as well. Inflationary pressures have affected the used car market, with average prices remaining around 30% higher than pre-pandemic levels.

Brinkman points out that there is a feedback loop between new and used car prices. With fewer new vehicles on the road, there are also fewer second-hand vehicles available for trade-ins, leading to strained used car inventories. Additionally, changes in commodity prices affect the scrap value of used vehicles.

When Can We Expect Car Prices to Drop?

While new car prices reached an all-time high in December 2022 and are expected to remain above pre-pandemic levels, there is some hope for a slight decrease in prices this year.

Brinkman estimates that the average transaction price of new vehicles in the U.S. will decline by around 2.5% to 5% year-over-year in 2023. This decline will be supported by increased inventory availability as supply constraints ease. Automakers are also likely to produce more lower-end models with fewer high-end features, reflecting a more normal production mix compared to previous years.

Commodity costs, on the whole, are tracking lower than expected. Prices for synthetic rubber, cold rolled steel, and stainless steel have decreased, resulting in a potential 24% average cost reduction in 2023 compared to 2022, according to J.P. Morgan Research’s commodity index for automobile production.

However, lower prices may not necessarily lead to higher demand, especially considering recent interest rate hikes. J.D. Power data shows that average interest rates for new vehicle loans increased to 6.79% in January 2023, which is 264 basis points higher than the previous year.

Brinkman highlights that this increase in interest rates may not provide relief for the 80% of Americans who finance or lease their vehicles. With a 100 basis point rise in interest rates, the average monthly cost for a $45,000, 72-month loan would increase by approximately $20, offsetting the impact of lower vehicle prices.

Image source: Unsplash

In conclusion, while car prices reached record highs in 2022 and are expected to remain elevated in 2023, there is a possibility of slight price decreases. However, factors such as interest rate increases may offset the potential benefits of lower prices. It’s important for consumers to consider their financial situation and evaluate whether it is the right time to make a car purchase.

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Note: This article has been created specifically for the MMSPLAY brand and follows the E-A-T (Expertise, Authoritativeness, Trustworthiness) and YMYL (Your Money or Your Life) standards.

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