(NerdWallet) – After years of sky-high car costs, prices for both new and used vehicles may be cooling off, according to automotive experts. But they warn that prices won’t be nearly as low as they were pre-pandemic.
Prices skyrocketed during the pandemic, and remained high, due to supply-chain disruptions and a shortage of semiconductor chips, which power cars and more. But now, experts predict that changing conditions in the market will drive prices down.
Current factors impacting the price drop include more inventory, higher interest rates (which increase the cost of auto loans) and inflationary concerns, meaning consumers aren’t able or willing to allocate funds to buy vehicles.
“We’ve definitely kind of hit a new paradigm in the car market where these prices are not going to be maintained at these elevated levels we’ve seen for two years,” says Karl Brauer, executive analyst at car search engine iSeeCars.com.
New car prices to cool off
Recent trends show that prices are no longer increasing as they have been. The average new-vehicle transaction price slightly decreased to $49,388 in January, a 0.6% decline from the previous month’s record high, according to Cox Automotive-owned Kelley Blue Book.
Automotive experts say prices are becoming slightly more favorable for consumers for several reasons, the first of which is due to new-vehicle supply recovery.
Although supply issues have not been substantially rectified, they are slightly better now than they were a year ago. And this is reflected by a downward shift in vehicle prices.
“What we’re seeing now is that inventory is improving on the new car side, which has been pretty bleak for some time,” says Jessica Caldwell, executive director of insights at automotive research firm Edmunds. “While new vehicles on average have been selling above MSRP since 2021, in November , the average transactions were less than the average MSRPs.”
When supply is looser, consumers are not competing for a limited number of vehicles for sale. As a result, there is potentially more wiggle room with prices, more vehicle options, more incentives with respect to interest rates and less pressure to buy as soon as possible.
In addition to the slight recovery of inventory, perhaps more impactful to the slow improvement in prices has been a decline in new-car demand from consumers. This decline is due to increased concerns about a worsening economy and the Federal Reserve’s continued interest rate hikes.
“On the demand side, prices are weaker because the cost of living is so much higher because of people’s worries about a recession,” says Caldwell.
But while car shoppers can expect a cooling off of prices, Brauer predicts that the upcoming tax season might somewhat counteract this drop and help prop prices up a little bit over the next few months. Consumers will have more cash on hand from refunds, which often leads to an increase in car buying.
Used-car prices also inching down
Used-car prices have also shown slight improvement in terms of year-over-year comparisons, although they remain significantly higher than they were pre-pandemic. Prices for the average 1-to-5-year-old car declined by 3% in December 2022 compared to the previous year, according to a recent iSeeCars.com analysis of over 1.9 million used car sales.
During the pandemic, many new car shoppers were priced out of buying new vehicles and instead were forced into the used car market, which increased demand and drove up car prices. But experts say that component of the used car market is diminishing and subsequently, pulling down used car prices.
“Many of these new customers are returning to purchasing new vehicles now that supply is slowly improving,” says Brauer. “And then a certain amount of them are maybe holding off now because of economic concerns.”
The new normal and tips for buying a car now
As prices potentially start to swing more in consumers’ favor, there may be light at the end of the freeway tunnel. But prices still remain high and unstable from a historical perspective.
“We do know that the market is getting a bit more friendlier for consumers,” says Caldwell. “Still, it’s not like it was in the glory days for auto consumers where there was more choice and dealers were likely to discount prices to be less than their competitors.”
Because inventory is still improving, she recommends being open-minded to shopping all markets including new, used and certified pre-owned vehicles.
Brauer adds that it’s important for consumers to do their research, not only by having multiple models that they feel could serve their needs but also by expanding their shopping radius as well.
“If you search only in the 30-mile radius outside your house that seems convenient, you’re greatly limiting your market,” he says. Consider using a car-buying app to find cars that are 50, 100 or even 500 miles away that may be substantially less.
Additionally, consumers should not be focusing solely on the car price but should factor in finance charges and monthly payments as well when shopping for a vehicle.