The biggest car price bubble we’ve ever seen has already burst, and now we’re being warned that the auto market crash will accelerate even further during the final stretch of 2023. With production going up, and dealership lots starting to fill, the conditions that allowed new and used vehicle prices to shoot up are no longer in place as rising supplies finally meet consumer demand. Even some of the biggest Wall Street banks are sounding the alarm about the coming wave of price cuts and how this will impact struggling auto dealers. Recently, they have been coping with a series of financial challenges, including a historical surge in the number of repossessed vehicles due to record loan default rates. Continued below the video
Many factors are combining to create a perfect storm for the U.S. car market, and that will likely result in severe financial losses for both auto lenders and buyers this quarter and the next. During the first half of the year, the average price of a new vehicle fell by $865, according to a new report from Kelly Blue Book. That number is forecasted to have reached $927 in July, and researchers predict it will hit $978 by the end of August. Price cuts are expected to accelerate in the third and fourth quarters, meaning that new car prices may see a double-digit decline by December. At the same time, used car prices are already facing double-digit losses. Used vehicle prices are down on average by 16.5% since the start of the year, with monthly declines getting bigger in the second half of 2023. In the past 30 days, used car prices fell 6% after dropping 4.2% in June.
That represented the largest monthly drop since the early days of the pandemic when demand collapsed and forced auto dealers to slash prices. Right now, the market is moving away from the volatility of that era, when a convergence of factors caused prices to surge dramatically, including a shortage of semiconductors, slower manufacturing, near-zero loan rates, and stimulus checks boosting consumer demand, explains Cox Automotive Chief Economist Jonathan Smoke. “The unique conditions that led to unprecedented appreciation in vehicle values in 2020 and 2021 have been replaced by more normal conditions where demand and supply are more balanced,” Smoke added. There are two main developments happening at the same time that are helping buyers: Automakers are increasing their incentive spending and dealerships are agreeing to sell cars with larger discounts off sticker prices.
Kelley Blue Book reports that the average incentive spend from manufacturers was $1,928, or 6.2.% of the purchase price, in July. Incentives can take the form of special financing deals or cash rebates. On top of that, new vehicle inventory was at 2.2 million at the end of last month, which is an increase from 1.75 million in January. But even though buyers are having a greater ability to score a discount at the dealership, that doesn’t mean things will get easier for them in the short term. Soaring auto loan rates will continue to suppress demand for the time being. 80% of Americans who finance or lease their vehicle may not experience any relief, given that a 100 bp rise in interest rates translates into an approximately $20 increase in monthly cost for the average $45,000, 72-month loan. This potentially offsets the impact of lower vehicle prices. All of this indicates that the U.S. car market crash will intensify from this point on. And conditions will get a whole lot worse before they get better.
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