At the same time, new and used car inventories are starting to improve, but increasing interest rates are making vehicles less affordable for consumers overall.
iSeeCars’s Car Affordability Index found that the affordability of new cars dropped 13.3% from August 2019 to August 2022, while the affordability of used cars fell 26.7% during the same time. Record high prices on used cars are a big part of the problem, but with the Fed aggressively raising interest rates, car payments are becoming even more difficult for many Americans to afford.
iSeeCars Executive Analyst Karl Brauer noted: “Due to supply chain shortages and increased demand, the rising prices of new and used cars have outpaced income growth. From August of 2019, well before the pandemic lockdowns started, to August of 2022, new car prices increased by almost 29 percent, and three-year-old used car prices increased by 52 percent.”
With consumer incomes only rising 13%, there has been a big change in the types of vehicles consumers purchase and how they pay for them. Some people have to replace their vehicles regardless of the economy, so many buyers are going for loans with longer terms and paying higher interest rates or making lower down payments, while others are choosing low-cost models to stretch their dollars further.
Meanwhile, the supply chain issues that were seen during the pandemic resulted in a shortage of new vehicles, driving up the demand for late-model used vehicles and bringing their prices up in response.
Although used car prices still remain significantly higher than they were in the past, the fact that they are starting to drop may be a good sign, although it's difficult to predict if prices will continue to fall at a similar rate. Recent trends in key indicators appear to suggest that the values of wholesale used vehicles will decline less than usual during the second half of the month.
Used car dealers' earnings dropping
The nation's biggest used car dealer, CarMax, recently reported that its earnings had dropped 54% as its car sales during the quarter dropped 6.4% compared to one year ago. The company cited issues such as “vehicle affordability challenges” due to inflation, along with low consumer confidence and increasing interest rates as being behind their lower performance.
The limited supply problem that is sending new car prices upward can largely be attributed to a shortage of parts such as computer chips. Higher vehicle prices have been a significant factor in overall inflationary pressures as two out of five American households buy a car every year.
Unfortunately, not all people in the market for a vehicle right now have the luxury of waiting for the situation to improve. Experts say it is important to pay attention to what is happening in your local market if you need to buy a car right now and compare the prices available at different dealerships as well as on major listing sites like Autotrader.com and Cars.com.
Once you know your car's trade-in value, figure out what kind of down payment you can afford to make as well as your monthly budget, and stick to it while shopping. Like many consumers, you may find that you have to compromise on some features you’re looking for or purchase an older model in order to find a reasonable price in the face of ongoing inflation.
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