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The United States federal government ended the COVID-19 public health emergency in March 2023, but the cost of car ownership hasn’t returned to its pre-pandemic level. When will car prices drop again?
What Factors Influence Car Prices?
As with other goods, supply and demand is the most influential driver of car prices. The latter has recently exceeded the former, causing shoppers to fork over more cash than the manufacturer’s suggested retail price (MSRP).
Automakers have experienced lengthy production delays due to supply chain issues. Natural disasters and geopolitical tensions have led to shortages of crucial car components — particularly chips.
Low inventory means fewer units up for grabs. Carmakers are willing to spend about 20% of the average transaction price on incentives to attract shoppers to move more product off dealer lots. However, they’re less motivated to discount vehicles when there aren’t enough of them to begin with.
Dealers are taking advantage of the situation, significantly marking up popular models to make bank. The U.S. Bureau of Labor Statistics has identified dealership markups as an inflation fuel, recording a 144.7% increase in dealership margins from December 2019 to December 2022.
The combination of low inventory, less manufacturer incentive and high dealer markups has driven up new vehicle prices and compelled many buyers to turn to the secondhand market. Surging demand has made used ones more expensive, too. The Consumer Price Index for secondhand cars and trucks rose by 38.38% from June 2020 to October 2023, peaking in January 2022.
Strong interest in used or pre-owned automobiles, whose resale values should be low due to mileage, condition and accident history, can diminish the merits of buying them — unless you target 2000s Ford, Chevy, Toyota and Honda models that sell for less than $5,000.
Will Car Prices Drop in 2024?
New vehicle prices either declined or plateaued in 2023. Auto industry observers believe that this downward trend will continue in 2024.
In September 2023, prices were 3.4% lower than at the beginning of the year. Consumers should take higher inventory levels and manufacturer incentives for this. The prices of non-luxury cars hardly jumped by less than 1% year over year, while luxury ones sell for less than they did the same time last year.
In addition, the interest rates on five-year auto loans in the same month reached 7.51% — nearly double the rate recorded in October 2021.
Electric vehicles (EVs) saw the sharpest price drop. Nothing exemplifies it better than Tesla, whose cars in September 2023 became 24.7% more affordable over the past 12 months. Imagine the prices of Hyundai Kona Electric and Nissan LEAF now after Teslas — widely considered as premium EVs — have become almost a quarter cheaper.
EV supply was higher than the industry average. EVs’ “days of inventory” started 2023 at about 52 days — practically the same as their internal combustion engine (ICE) counterparts. EV production surged since then, peaking at 111 days in July. On the other hand, ICE inventory occasionally increased but stayed within 58 days.
Can Dealerships Go Below MSRP?
Yes, dealerships can go below the MSRP and make a profit. This pricing benchmark includes the production cost, market conditions, accessories and packages and profit margin.
The invoice price is the amount a dealer pays a manufacturer for a vehicle, which is lower than the MSRP. The sticker price is the amount a dealership advertises as the cost of a sedan, hatchback, coupe, sports utility vehicle or pickup truck. The sticker price includes the destination fee — the amount a manufacturer charges a dealer to transport a vehicle from the factory to the car lot.
Furthermore, some car costs are unadvertised. Taxes, registration and title are some fees you have to pay to drive a vehicle off the lot, inflating the total cost of buying a car.
The gap between the MSRP and the invoice price plus the destination fee gives dealerships wiggle room when coming up with competitive sticker prices. These third parties can go below the MSRP when it makes business sense. However, they have few reasons to take this route when the demand for vehicles exceeds the supply.
Will Dealerships Ever Go Below MSRP?
Dealerships will go below the MSRP to part ways with unpopular vehicles — such as purple sedans that depreciate by 24.6% after 3 years and convertibles in cold regions. They can do this proactively or reactively.
What Month Is It Best to Buy a Car?
The best month to buy a car is generally October, November or December. Salespeople keen on meeting their monthly, quarterly, and yearly quotas are more open-minded at the negotiating table.
Can You Haggle on a New Car?
Yes, you can haggle on a new car. You can’t negotiate the MSRP down since it’s just a recommendation. It’s what the manufacturer thinks a vehicle should be worth to keep everybody happy. The sticker price is more relevant because it’s the amount a dealer sets.
No one will stop you from negotiating a vehicle’s sticker price down. However, you must be strategic to get what you want. Shop around to collect data and use it to pit dealers against one another. Ask them to beat each other’s sticker price to gain your business so you can spend less cash on a car they secretly want to get rid of.
What Not to Say to a Car Salesman?
Never say any closed-ended statements to a car salesman. Expressing too much desire for a particular vehicle, mentioning a specific monthly car loan payment you can afford, and quoting the highest trade-in price you want are the worst mistakes you can make during the negotiation.
Any car salesperson knows you’re interested in buying when you walk into the door, but play hard to get. Play your cards close to your chest so sales professionals can’t use them against you.
When Will Car Prices Drop Again?
Will car prices drop in 2024 and beyond? Nobody has a crystal ball to predict the future accurately, but what goes up must come down. The days of rising car prices may be over for now as vehicle supply increases and skyrocketing auto loan interest rates crush demand.
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