When will the car market return to normal?

After years of skyrocketing car costs, prices for both new and used vehicles may be cooling, according to auto experts. But they warn that prices will not be nearly as low as they were pre-pandemic.

Prices skyrocketed during the pandemic and remained high due to supply chain disruptions and shortages of semiconductor chips, which power cars and more. But now experts predict that changed market conditions will push prices down.

Current factors influencing the price drop include more inventory, higher interest rates (which increase the cost of car loans) and inflationary concerns, meaning consumers are unable or unwilling to allocate funds to purchase cars.

“We’ve definitely hit a new paradigm in the car market where these prices are not going to be held at these high levels we’ve seen for two years,” said Karl Brauer, executive analyst at car search engine iSeeCars.com.

New car rates to cool off

Recent trends show that prices are no longer rising as they have been. The average new vehicle transaction price fell slightly to $49,388 in January, down 0.6% from the previous month’s record high, according to Cox Automotive-owned Kelley Blue Book.

Higher supply

Auto experts say that prices are becoming slightly more favorable to consumers for several reasons, the first of which is due to the recovery of the supply of new vehicles.

Although supply problems have not been significantly corrected, they are slightly better now than they were a year ago. And this is reflected in a downward shift in car prices.

“What we’re seeing now is that inventory is improving on the new car side, which has been pretty dismal for some time,” said Jessica Caldwell, managing director of insights at auto analyst firm Edmunds. “While new vehicles have sold above MSRP on average since 2021, in November (2022), average transactions were less than average MSRPs.”

When supply is less, consumers are not competing for a limited number of vehicles for sale. As a result, there is potentially more wiggle room with prices, more car options, more incentives in terms of interest rates and less pressure to buy as soon as possible.

Lower demand

Beyond the slight recovery in inventory, perhaps more influential in the slow improvement in prices has been a decline in consumer demand for new cars. This decline is due to increased concern about a deteriorating economy and the Federal Reserve’s continued interest rate hikes.

“On the demand side, prices are weaker because the cost of living is so much higher because of people’s worries about a recession,” Caldwell says.

But while car buyers can expect a cooling of prices, Brauer predicts that the upcoming tax season may somewhat offset this decline and help congestion prices up a little over the next few months. Consumers will have more cash on hand from repayments, which often leads to an increase in car purchases.

The price of used cars is also falling

Used car prices have also shown a slight improvement on year-over-year comparisons, although they remain significantly higher than they were pre-pandemic. Prices for the average 1-to-5-year-old car fell 3% in December 2022 compared to the previous year, according to a recent iSeeCars.com analysis of over 1.9 million used cars.

During the pandemic, many new car buyers were priced out of buying new cars and instead were forced into the used car market, increasing demand and driving up car prices. But experts say that part of the used car market is declining and subsequently pulling down used car prices.

“Many of these new customers are returning to buying new vehicles now that supply is slowly improving,” says Brauer. “And then a certain amount of them might be holding out now because of financial concerns.”

The new normal and tips for buying a car now

As prices potentially begin to swing more in favor of consumers, there may be light at the end of the highway tunnel. But prices are still high and unstable in a historical perspective.

“We know the market is becoming a little more consumer friendly,” Caldwell says. “Still, it’s not like it was in the heyday of auto consumers, when there was more choice and dealers were likely to lower prices to be lower than their competitors.”

Because inventory is still improving, she recommends being open to shopping in all markets, including new, pre-owned and certified pre-owned vehicles.

Brauer adds that it’s important for consumers to do their research, not only by having more models that they feel could meet their needs, but also by expanding their shopping radius.

“If you’re only searching in the 30-mile radius outside your house, which seems practical, you’re limiting your market to a great extent,” he says. Consider using a car buying app to find cars that are 50, 100 or even 500 miles away, which may be significantly smaller.

In addition, consumers should not focus solely on car price, but should also consider financing costs and monthly payments when shopping for a vehicle.

Funto Omojola writes for NerdWallet. Email: fomojola@nerdwallet.com.

The article When will the car market return to normal? originally appeared on NerdWallet.

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