When Will Car Prices Drop?

Describing current conditions in the automotive market requires a look at immediate and ongoing factors. Cox Automotive’s Manheim Used Vehicle Value Index helps experts quantify fluctuations in the automotive market. Current conditions suggest that the normal relationship between wholesale prices (what dealerships pay at auction) and retail prices contains a new factor: the pandemic and its long-lasting effects. 

Currently, dealerships pay less for inventory to stock their lots, but customers rarely see those savings. Many automotive manufacturers have found that limited inventories and stiffer competition in the used car market profitably complement new car inventory shortages. Many manufacturers whose profit margins suffered during the pandemic now regain ground in the classic dichotomy of supply and demand. 

Vehicle pricing breakdown

The Manheim Used Vehicle Value Index also tracks year-over-year change or the difference in value between the current month and the same month one year prior. The table below describes the change in value based on the market segment: 

Car values continue to decrease, but it’s not all contributable to car depreciation. Indeed, compact car values suffer the worst, with pickups, vans, SUVs, and sports cars losing the least value. Luxury cars fall somewhere in between. 

New and used car prices have fallen since the beginning of 2023, but they remain high in contrast to historical values. New car shortages during the pandemic began the domino effect played out across the entire market, including new and used vehicles: 

• Fewer new cars on the lot decreases the number of trade-ins dealerships receive
• Buyers then turn to the used market, where they increase competition for used cars
• Dealerships are happy to accept cash over financing, especially given the reduction in used car inventory that fewer trade-ins induce
• More lessees buy out their leases, further reducing used car inventory levels 

More consumers prioritize fuel efficiency, increasing the value of hybrids and electric vehicles while decreasing the value of cars with poor fuel economy. Depending on what make and model you’re looking for, conditions may change based on availability and competition. 

Outside the automotive market, living costs have skyrocketed, leaving individuals with a smaller car-buying budget. Increased gas prices, limited supply, and rising interest rates have pushed many looking to purchase a car to seek buy-here-pay-here dealerships and alternative financing solutions. It costs more to finance a vehicle, with double-digit interest rates a common sight at dealerships. 

Inventory shortages continue to drive consumers to put additional mileage and wear and tear on their vehicles. The average age of a car on the road is now a decade or more. In these conditions, subscribing to a car and putting off your purchase can help you save money. Check out a FINN car subscription to see how much you can save while driving the vehicle you want. 

Many experts argue the industry may never return to pre-pandemic levels, especially given current economic conditions. Interest rates play a large part in how car loans work, especially in qualifying individuals with less-than-perfect credit scores. Until interest rates turn downward, competition and high pricing remain a deterrent to car prices dropping anytime soon. 

In addition, consumers tend to prefer certified pre-owned (CPO) vehicles, which dealerships charge more for based on the guarantee of a clean mechanical bill of health. Adding an extra year or two of ownership reflects in a vehicle’s wear and tear, mechanical upkeep, and annual mileage. With the increased possibility of lower-priced vehicles requiring hefty repairs, paying a few thousand more for a CPO is often safer than the alternative. 

On the new car front, overproduction, high interest rates, and low inventory levels continue to fluctuate pricing. Cox Automotive’s report highlights that many domestic brands are flush with an abundance of new models while many foreign brands struggle to continue to meet demand. Luxury markets typically have higher markups built in, which dealerships take full advantage of to entice potential buyers. 

With current buying conditions, your best bet for any chance of a deal is within the pre-owned luxury market. Models produced within the last couple of years fetch prices of brand-new comparable models now but lack the financing incentives new car owners have come to rely on. EV automakers like Tesla and Ford recently slashed prices, but the move may not be enough to meet annual quotas come December. Some experts claim the new car shortages will continue into 2024. 

Car prices, like rent, house prices, and gas, have historically maintained a steady yet gradual increase. While certain economic conditions may temporarily drop prices, the normal progression towards higher prices continues. Foregoing any drastic economic events, car prices will likely plateau but continue to rise as they’ve done over the last few decades. 

Should car price drops occur, they will likely manifest differently across vehicle segments. For example, luxury market prices may fall less steeply than four-door family sedans. Consumer preferences for electric vehicles and SUVs may keep those segments' prices high based on demand and availability. Higher prices may also drive buyers to consider new despite additional costs and dealer holdbacks, simply due to the marginal difference in price between new and used. 

The discontinuation of entry-level trims is another factor many experts cite when discussing car prices. Automotive manufacturers may take the semiconductor chip shortage in stride, prioritizing higher trims (and more expensive vehicles) over base models where they may break even. Other experts expect a slew of price wars to ensue, with dealerships fighting to acquire the limited number of buyers seeking to spend money. No matter how you look at it, a price drop seems less likely each day. 

Now may not be the ideal time to buy a car for most people. If you decide to purchase a car, it’s critical to research and pull out all the stops to negotiate a fair price. Visiting a dealership near the end of the month, during the holiday specials, and at year-end can give you the advantage and buying power you need to obtain a fair price. 

However, seeking alternative transportation options can put you in a better position to save for a purchase when conditions are more favorable. FINN car subscriptions offer short, flexible terms with a monthly payment, including maintenance, registration, insurance, and depreciation. You can choose from many vehicles, including trucks and electric vehicles. When your subscription expires, you can swap your current vehicle for another and begin your subscription terms again.