Despite recent highs, car prices are likely to fall
While the U.S. inched its way out of the Great Recession, consumers went car shopping in droves. Now, the price trend is set to reverse itself.
DETROIT — While the U.S. inched its way out of the Great Recession, consumers went car shopping in droves. As sales rebounded, the price of cars and trucks rose to record highs.
Now, the price trend is set to reverse itself, partly because some buyers are unwilling or unable to pay the high prices and instead are opting for used cars.
Although overall industry sales are tracking last year's record 17.5 million, many automakers are selling more cars to rental companies to maintain the momentum. Sales to consumers are declining, so companies are ramping up incentives. Discounts in September hit a level not seen since automakers were desperate for sales during the financial crisis in late 2008.
"Inherently, you're seeing a price war," says John Mendel, executive vice president of Honda North America. "You're already seeing the pricing pressure."
Analysts say the deals will only get better during the next two years as millions of leased cars flood the used-car market and pull new-car prices down.
Auto prices have risen every year since the Great Recession, hitting a record average of $31,825 in December of 2015, according to J.D. Power. The average price in September was $30,862, an all-time high for the month. Prices have remained elevated largely because buyers are still paying top dollar for red-hot segments such as crossovers and big SUVs, which cost more than sedans.
Now, many analysts say the perfect climate is developing to pull prices lower soon:
- SLOWING SALES: It may be high prices or it may be good deals on late-model used cars, but sales of new vehicles have plateaued, and even fallen for the past two months. That is forcing discounts from automakers to keep market share. September incentives hit a record $3,888 per vehicle, beating the old mark set in 2008, according to J.D. Power.
- FAMILY CAR BLUES: Demand for cars has fallen as buyers snap up higher-priced SUVs and pickup trucks. Cars made up only 40 percent of U.S. sales last month, barely above the record low set in July, meaning companies will need to lower prices to move sedans off dealer lots. Analysts say prices of the better-selling vehicles will remain high in the near-term but eventually fall as well.
- LEASES SURGE: Leasing dried up during the financial crisis, cutting off a main supply of used cars. It recovered to 25 percent of new car sales in 2014, and is now over 30 percent. That means many late-model cars in good condition are coming to the market. Kelley Blue Book estimates 3.5 million leases expire next year, and as many as 4.5 million expire in 2018. Automakers will offer discounts to move the used vehicles, and prices of new cars will have to drop to stay competitive. "You're going to see greater and greater pressure put on the used-car market, more significant discounting," says KBB senior market analyst Alec Gutierrez.
As prices hit record levels and household income grew slowly, many buyers were priced out of new cars. Prices are so high now that the average family in the nation's 50 largest metro areas can't afford to buy a new vehicle, according to a study by Bankrate.com. That hasn't stopped some buyers, who are borrowing larger amounts at longer terms to secure that new car, Bankrate says.
"Customers have an affordability problem," says Wes Lutz, owner of a Chrysler-Dodge-Jeep-Ram dealership in middle-class Jackson, Michigan, west of Detroit. About one-third of his customers can't get credit, another third have trouble, and the rest are credit-worthy, he said. Even if prices fall, Lutz expects government safety and fuel economy requirements to push them back up, driving more people from new cars to used. He's adding personnel and square footage to his used-car operation in anticipation.
Alaina Dishman, 19, of Lansing, Michigan, was among those who didn't have enough credit to buy a new car when she went to Lutz's showroom last summer. But a salesman got her into a program that helps young people build credit. Her father co-signed, and she got a two-year lease on new Jeep Compass small SUV for under $200 per month. Dishman, who works at a grocery store, traded in a 1995 Nissan Maxima with 260,000 miles on it, fearing the car wouldn't be reliable in the winter.
Even with slower car sales, times will remain good for the auto industry. Jeff Schuster, senior vice president for forecasting at the consulting firm LMC Automotive, predicts 2016 U.S. sales will fall a bit shy of last year's record, with slight increases in 2017 and 2018. Mendel says that's still good business, especially for automakers like Honda with a lot of new products. But higher incentives and lower prices could hurt automaker profits down the road.
Schuster says many automakers were using rental fleets and incentives to boost sales in hopes of avoiding headlines that could cause consumers to delay purchases and investors to balk at buying stock. "If everything continues to be wonderful, it gets reported as wonderful, and I should go buy a new car," he says.