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(Epic Economist)—We have good news if you’re in the market for a new or used car: The U.S. auto market is finally facing the shift everyone was waiting for – prices are reporting significant month-over-month declines, and a set of factors, including a higher-than-expected rise in supply, will lead to even steeper price cuts in the final weeks of 2023.
After over a year of continued gains, new data shows that the vehicle sector has entered a bear market. In the second and third quarters, the market shifted into lower gear, and now analysts predict that an oversupply of vehicles will lead to an end-of-year price war that will finally bring affordability back to somewhat ‘normal’ levels.
But experts with Cox Automotive – the owner of the closely followed Manheim Vehicle Value Price Index – say there’s a light at the end of the tunnel as wholesale prices continue to drop in November. Just in the first 15 days of the month, dealers paid almost 2.3% less for vehicles at auction in the U.S. And now, wholesale prices are down by 5.3% amid falling demand and surging inventories.
This means a downward spiral is already in motion. Wholesale price drops usually become retail price drops after about six to eight weeks. And retail prices are already dropping. On Friday, the Manheim Index for used vehicles fell to 206.1, meaning that it officially entered a bear market with a 20% decline. Meanwhile, new car prices have been getting better for months. The Index also shows that pickups are selling for about 4.2% less at auction right now, and SUVs for 4.8% less. Compact cars are down 10.7%, and midsize cars about 8%. Broadly, the difference in average price between new and used is back to where it was in 2019.
While that’s great for would-be buyers who have been waiting for some relief for almost two years, it is also a sign that manufacturers are already experiencing financial losses. UBS estimates that car production will exceed sales by 6% this year, resulting in an excess of 5 million cars that will require sizable price cuts to be sold before the end of the year. Some of these price cuts have already happened, with electric vehicle makers Lucid and Tesla slashing the prices of popular models by nearly $20,000.
Manufacturers and dealerships are in panic mode ahead of the holiday season. They are motivated to clear out their inventory by year-end, and that can trigger a rush to the bottom that may result in an ugly downturn for the industry. Theyneed to make room for the incoming 2024 models, and every day a 2023 model sits on the lot, it eats into their profits. The longer a car remains unsold, the more it costs in terms of dealership floorplanning expenses.
Companies are giving 2023’s year-end sales everything they’ve got. Those who have been waiting for low APR financing, shouldn’t miss this chance because this opportunity could be gone by January. There are only about six weeks left before the end of the year, and the final quarter always carries extra weight for car makers and dealerships. Meeting sales goals is now a top priority, both for business success and employee bonuses. Consequently, there’s added pressure to sell every vehicle possible in December.
Expect to see the sharp declines experts have been warning about throughout the whole year. Prices are likely to drop more abruptely than anticipated as companies try to boost their financial results to mask their losses, and divert the attention from the crisis that is unfolding in the sector with some short-term gains.
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