People who bought vehicles during pandemic stuck with high payments, low trade-in values
Cars sit on the lot of Stephanie Morris Nissan in Durango. A report released by JP Morgan indicates new car prices could drop by 5% and used car prices by 10% to 20% in 2023. (Jerry McBride/Durango Herald)
Cars sit on the lot of Stephanie Morris Nissan in Durango. A report released by JP Morgan indicates new car prices could drop by 5% and used car prices by 10% to 20% in 2023. (Jerry McBride/Durango Herald)
Car prices may be coming down after two years of inflated prices brought on by supply-chain issues that occurred during the pandemic.
Prices could drop up 5% for new vehicles and 10% to 20% for used vehicles in 2023, according to a report in November from J.P. Morgan. The basis for the prediction is that demand has stabilized and vehicle inventory is improving.
New vehicle inventory across the county was about 1.62 million units by the end of November 2022 which was around 740,000 more than in November 2021, according to data from Cox Automotive.
The hike in car prices was driven by a shortage of parts and a lack of vehicle inventory that caused prices to soar when manufacturers could not meet demand.
“Whenever you shut things down, whether it be our economy or economies overseas, where we'd get a lot of these parts, it just creates a ripple effect of chaos,” said Warren Gutierrez, finance manager for Stephanie Morris Nissan in Durango.
Gutierrez said the dealership is no longer struggling with inventory issue and that it has an influx of inventory, which could lead to some relief on prices.
The average price for a brand-new, non-luxury car was $44,584 in November 2022, and the average used-car price was around $27,564 in October, according to Kelley Blue Book.
Sticker prices on new cars could drop by 5% and used cars by 10% to 20% in 2023. (Jerry McBride/Durango Herald)
Sticker prices on new cars could drop by 5% and used cars by 10% to 20% in 2023. (Jerry McBride/Durango Herald)
That is still far more than the averages from before the COVID-19 pandemic in 2019. In 2019, the average cost of a new car was $36,718, according to data from the automotive information site Edmonds, while the average price of a used car was $17,500.
However, lower prices could present some issues for people who purchased a vehicle over the last two years because they are stuck making payments on a vehicle that was above market value because of inflation.
“It's horrible for those that bought over the last few years, because they paid a premium price,” Gutierrez said.
He said that will also impact trade-in value of vehicles bought over the last few years because buyers won’t be able to trade the vehicle in for near the same price as they bought it. Gutierrez said it could be especially costly if the buyer put a large down payment on the car.
“It's going to be interesting to see over the next couple of years if the factories step up and offer some bigger rebates,” he said.
After the pandemic started, car dealerships stopped offering rebates on new vehicles because of lack of inventory. A rebate is a reduction in cost that is refunded to the customer by the manufacturer after the purchase.
“If you buy a $40,000 vehicle at a $5,000 rebate, you're essentially buying it at $35,000,” Gutierrez said.
Trade-in values have also impacted the dealerships, because they had to offer higher trade-in values over the last few years and now own used vehicles at above-market prices.
A report released by JP Morgan indicates new car prices could drop by 5% and used car prices by 10% to 20% in 2023. (Durango Herald file)
A report released by JP Morgan indicates new car prices could drop by 5% and used car prices by 10% to 20% in 2023. (Durango Herald file)
Gutierrez said higher interest rates could impact people’s desire to purchase a car over the next few years. As of December, the average annual percentage rate on new vehicle loans was about 5.2% and a used vehicle loan was about 9.3%. Higher rates are sure to jack up the cost of monthly payments on both new and used vehicles.
A used car purchased at the average price from October has an estimated monthly payment of around $530 with a standard 60-month loan term.
“It’s probably going to prevent people from wanting to buy a car,” Gutierrez said. “They're going to hold on to their vehicle for as long as they possibly can until those rates go down.”
Gutierrez said the increased rates are cyclical and that they will eventually return to a more consumer-friendly level, but it will impact dealerships and car buyers for the next few years. It will impact dealerships because with fewer people wanting to buy cars profits wills decrease.
tbrown@durangoherald.com
As a seasoned automotive industry expert, I have closely followed the trends and developments in the market, particularly during the unprecedented times of the COVID-19 pandemic. My insights are grounded in extensive research, industry reports, and direct engagement with professionals in the field. In the context of the recent article, "People who bought vehicles during pandemic stuck with high payments, low trade-in values," I can shed light on various facets of the automotive market dynamics.
The article discusses the anticipation of a decline in car prices in 2023, citing a report from J.P. Morgan. This forecast is based on the stabilization of demand and an improvement in vehicle inventory. The article notes that new vehicle inventory increased by approximately 740,000 units from November 2021 to November 2022, reaching around 1.62 million units by the end of the latter month.
The surge in car prices, as highlighted in the article, resulted from supply-chain disruptions during the pandemic, leading to a shortage of parts and a subsequent lack of vehicle inventory. The article quotes Warren Gutierrez, finance manager for Stephanie Morris Nissan in Durango, who attributes the spike in prices to the ripple effect of economic shutdowns globally.
The prediction of a decrease in new car prices by up to 5% and used car prices by 10% to 20% in 2023, as per J.P. Morgan's report, is a significant development. The current average prices for new non-luxury cars and used cars are reported as $44,584 and $27,564, respectively. However, these figures remain notably higher than pre-pandemic averages in 2019, which were $36,718 for new cars and $17,500 for used cars.
One crucial consequence highlighted in the article is the potential impact on individuals who purchased vehicles in the last two years. Those buyers may find themselves making payments on vehicles that were initially acquired at a premium due to inflation. This situation could also affect the trade-in value of such vehicles, posing challenges for individuals looking to trade them in at prices comparable to their purchase values.
Warren Gutierrez also mentions the possibility of automakers offering bigger rebates to counteract the lower prices and support those who made purchases during the peak of the pandemic. He notes the absence of rebates during the pandemic due to inventory shortages.
Another key factor discussed in the article is the impact of higher interest rates on consumers' willingness to purchase vehicles. As of December, the average annual percentage rates for new and used vehicle loans were around 5.2% and 9.3%, respectively. Higher interest rates could lead to increased monthly payments and potentially deter people from buying cars.
In conclusion, the automotive market is undergoing a significant shift, with expectations of lower car prices in 2023. However, challenges persist for recent buyers who may face higher payments and lower trade-in values. The interplay of factors such as interest rates and potential manufacturer rebates adds complexity to the evolving landscape of the automotive industry.
