Lots of Americans (and people around the world) are wondering if new and used car and truck prices will ever get back to “normal.” This probably depends on your definition of normal. New and used car and truck prices skyrocketed last year, but some believe prices will come back down to more reasonable levels this year. Maybe, maybe not.
A shortage of necessary parts – primarily computer chips – limited production of new vehicles around the globe last year. This left car dealers short of supply to meet demand, allowing them to charge a premium for the cars they had available – including both new and used vehicles.
The average transaction price for a new car was $46,426 in December 2021, according to Edmunds.com (a popular car valuation service), which was up $5,850 — or 14% — from a year prior on average. That increase was primarily due to customers paying more than the listed sticker price – an average of $700 above what manufacturers were asking at sticker price.
In December 2020, a year earlier, car buyers paid an average of $2,550 below the sticker price, close to the typical discount buyers traditionally paid for a new car.
Used car prices exploded last year with an average price of nearly $30,000, up about $6,800 — or 29% — from a year earlier, according to Edmunds. In some markets, used cars were up over 35% from a year earlier. Apple Leasing, the largest lease dealer in Austin/San Antonio said its used car prices went up 37% on average.
The spike in car prices was a major factor in the largest jump in overall inflation in nearly 40 years in 2021. The 7% annual consumer price increase at the end of 2021 would have stood at 5.5% if car prices had remained unchanged.
Buying a car is not only a major purchase for most Americans, it’s also a surprisingly frequent one. About 40% of US households buy a car every year. (Keep in mind the average US household includes 2.6 to 3.4 people depending on whose data you believe.)
But with the automakers expecting the supply of chips and other parts to improve this year, that should help with inventories and take the pressure off prices, according to auto industry experts. That could lead to a return of consumers paying less than the sticker price, a big break for buyers, even if the price in the window doesn’t go down.
“From everything we are looking at, once production is back online in the latter half of the year, we should see inventories start to build again,” said David Paris, senior manager of market insights at J.D. Power.
For example, J.D. Power forecasts the average wholesale price of used cars should fall about 9% from the 4Q of last year to the 4Q of this year, and prices should continue to decline in 2023, they say. We’ll see about that, but this still won’t get prices to where they were before the pandemic.
“Prices will be going down, but they’re not going to get to 2019 levels,” Paris predicted.
Pat Ryan, founder and CEO of CoPilot, a car buying app, said used car prices are already showing signs of decline. “There is no longer the same upward pressure on prices,” he said. But he also ruled out a return to 2019 levels.
“This market can get back to 10% above the pre-Covid pricing, but not all the way back,” he said.
Jonathan Smoke, chief economist at Cox Automotive, also believes there will be only a modest decline in used car prices relative to the spike in 2021.
“History tells us that a decline of more than 10% is rare indeed. Why? As prices fall, demand builds. In 25 years, we have never seen a decline of as much as 13% within a year,” he said.
As for the supply of new cars, “inventory levels should improve but remain historically tight,” Smoke said.
One reason the average purchase price for new cars could continue to climb is that the types of vehicles many customers are looking to buy will continue to be more expensive. Buyers want more safety options, such as automatic braking, cruise control that’s capable of slowing the car when the vehicle in front slows, as well warnings when cars are in a driver’s blind spot, etc.
There is also the continued shift towards more expensive SUVs and trucks, and the expectations that new electric vehicle offerings will attract buyers to those models, which are typically more expensive.
All in all, this means the average transaction price for new vehicles could continue to edge up, Smoke said, perhaps even faster than overall inflation.
The bottom line is car and truck prices may come down a bit this year as parts shortages ease and production gets back to more normal levels. On the other hand, prices may just hold steady for a while, and we simply get back to paying something less than the sticker price.
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