In today’s uncertain economic climate, the automotive industry is facing challenges that impact both manufacturers and individual buyers. With the potential for an economic downturn looming, there are obstacles to overcome when it comes to car prices and affordability.
According to Kelley Blue Book, the average new car price was $47,401 in January of this year, showing a 3.5% drop from the previous year. However, high prices still deter many buyers, especially when coupled with high interest rates. Experian’s State of the Automotive Finance Market report revealed that the average interest rate on new cars is 7.18%, while used car loan interest rates average a staggering 11.93%.
Whether or not a recession is on the horizon, it’s essential to be prepared for any potential shifts in the automotive market. Industry experts provide insights into how car prices might change in an economic downturn.
Sales Plummet (and So Do Prices)
During a recession, consumer spending typically decreases, leading to a significant drop in demand for cars. Ben Michael, director of auto at Michael & Associates, explains that when demand decreases, prices also tend to decrease. The Great Recession of 2008 serves as a prime example, with new vehicle sales plummeting by almost 40%.
In 2020, sales saw a 15% decline compared to the previous year, indicating a similar trend. When demand eventually rebounds, supply may struggle to keep up, resulting in higher prices. This, combined with factors like inflation and gas prices, can make cars less affordable for many consumers.
More Incentives Come Out
One silver lining during a recession is the emergence of more incentives, rebates, and promotions from dealers looking to move inventory. Lauren Fix, an automotive analyst at The Car Coach®, notes that dealers incur costs for unsold vehicles, making it crucial to offer incentives to boost sales.
Interest Rates May Rise
While incentives can benefit buyers, a recession can also lead to higher interest rates, affecting affordability. Fix warns that higher interest rates can make purchasing a car more challenging, even for those less directly impacted by the economic downturn. Dealers and manufacturers may struggle to balance prices and incentives to maintain sales.
What People Can Do To Prepare For This Shift
For current vehicle owners, caution is advised when considering selling or trading in a car during a recession. Erin Kemp, Bumper’s consumer advocate, suggests delaying a new purchase if the current vehicle is still in good condition. Lease holders may benefit from buying out their lease or keeping the car long-term to save money.
Those with upside-down car loans should focus on making extra payments or refinancing for a lower interest rate instead of purchasing a new vehicle. Strategic decision-making based on individual needs and financial circumstances is key in navigating the uncertainties of a potential recession.
In conclusion, being mindful of market trends and personal financial situations is crucial in preparing for any shifts in car prices during an economic downturn. By staying informed and making informed decisions, consumers can navigate challenges and make the best choices for their automotive needs.