Prices on new and used vehicles remain 30% to 50% above where they were when the pandemic erupted. The average used auto cost nearly $31,000 last month. The average new vehicle transaction price: $48,000. With higher prices and loan rates combining to push average monthly payments on a new vehicle above $700, millions of buyers have been priced out of the new-vehicle market and are now confined to used vehicles.

The high prices are yielding substantial profits for most automakers despite sluggish sales. On Tuesday, for example, General Motors reported that its third-quarter net profit jumped more than 36%, thanks in part to sales of pricey pickup trucks and large SUVs.

“Depreciation is going to go up because of the net effect of used-car prices coming down,”

Many vehicles are becoming slightly more affordable. Signs first emerged weeks ago in the 40-million-sales-a-year used market. As demand waned and inventories rose, prices eased from their springtime heights.

Car Max said it sold nearly 15,000 fewer vehicles last quarter than it had a year earlier pointing to inflation, higher borrowing rates and diminished consumer confidence.

A “buyer’s strike” is characterized as sales drops — a dynamic that typically foretells lower prices. And indeed, the average used vehicle price in September was down 1% from its May peak.

At AutoNation, the nation’s largest dealership chain, sales of used vehicles and profit-per-vehicle both dropped last quarter. The supply of vehicles remains low, used-auto prices are declining.

“Our analysis shows that we are coming off the high values that we saw before,”.

Consumers Can Benefit From Lower Prices on Used Cars

While smaller profit margins on used vehicles may spell bad news for car dealers and rental car companies, consumers can celebrate. If you can afford to pay cash for a used car — or secure 0% financing with a good credit score — you’ll benefit from lower prices without being subject to higher interest rates. And, as a secured loan with the vehicle as collateral, auto loans typically have lower interest rates than unsecured debt, such as credit cards.

In October 2022, U.S. News reported that the average interest rate for a used car loan (if you have a credit score of 750 or above) is 9.23%. You can save on your monthly payments and interest charges by putting more money down.

The drop in used car prices is also good news for the U.S. Federal Reserve, which has been steadily raising interest rates in hopes of slowly curbing inflation without sending the U.S. spiraling into a recession.

It will take years for used prices to fall close to their pre-pandemic levels. Since 2020, automakers haven’t been leasing as many cars, thereby choking off one key source of late-model used vehicles.

Similarly, rental companies haven’t been able to buy many new vehicles. So eventually, they are selling fewer autos into the used market. That’s crimped another source of vehicles. And because used cars aren’t sitting long on dealer lots, demand remains strong enough to prop up prices.

When auto prices first soared two years ago, lower-income buyers were elbowed out of the new-vehicle market. Eventually, many of them couldn’t afford even used autos. People with subprime credit scores (620 or below) bought only 5% of used vehicles last month, down from nearly 9% before the pandemic. That indicated that many lower-income households could no longer afford any vehicles.

Higher borrowing rates have compounded the problem. In January 2020, shortly before the pandemic hit, used-vehicle buyers paid an average of 8.4% annual interest. Monthly payments averaged $412. By last month, the average rate had reached 9.2%. And because prices had risen for over two years, the average payment had jumped to $567.

The 1% average drop in used prices will help financially secure buyers with solid credit scores who can qualify for lower loan rates. But for those with poor credit and lower incomes, any price drop will be wiped out by higher borrowing costs.

The new-vehicle market, by contrast, has become an option mainly for affluent buyers. Automakers are increasingly deploying scarce computer chips to make costly, loaded-out versions of pickups, SUVs and other outsize vehicles, typically with relatively low gas mileage. Last month, the average price of a new vehicle was down slightly from August but remained more than $11,000 above its level in January 2020.

Federal Reserve’s interest rate hikes, by contributing to pricier auto loans, are slowing showroom traffic.

“We can feel some pullback,”

Analysts generally say that with shortages of computer chips and other parts still hobbling factories, new-vehicle prices won’t likely fall substantially. But further modest price drops may be likely. The availability of vehicles on U.S. dealer lots improved to nearly 1.4 million vehicles last month, up from 1 million for most of the year.

Before the pandemic, normal supply was far higher — around 4 million. So historically speaking, inventory remains tight and demand still high. Like Hudson, many buyers are still stuck paying sticker price or above.

“It’s extraordinarily expensive these days,” estimating that there are still 5 million U.S. customers waiting to buy new vehicles.

Despite recent stock market declines, many such buyers have built up wealth, especially in their homes, and are rewarding themselves with high-end autos. In the San Francisco Bay area.

“There’s just a lot of money out there,” he said.

In its earnings report Tuesday, GM noted that its customer demand is holding up. Though GM and other automakers would like to produce more vehicles, at the moment they are benefiting from slower production, which typically means higher prices and profits.

Near-record new-vehicle prices were starting to decline. And consumer appetites are starting to change: Demand for midrange vehicles, he said, has begun to outpace more profitable autos loaded with options.

Next year could be a turning point. With the economy likely to weaken and possibly enter a recession, prices could fall “as consumers become more focused on their financial situation and what they’re willing to bite off from a payment perspective.”

It’s possible Americans will see the price of other consumer goods falling in advance of the holidays, especially since economists are predicting the Fed will hike rates by another 75 basis points at its meeting.