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Another month, another new record for car prices. In July, new car prices climbed 0.3% higher, and the average monthly payment increased by 0.9%. Used car prices have decreased at the wholesale level for eight weeks, but new car prices remain at record highs as dealer inventory stays slim. Here’s the latest new car price data from Cox Automotive, what it means for new car prices in August, and our best guess as to when new car prices may finally start to come down.
The Average New Vehicle Transaction Approaches $50,000
Source: Cox Automotive/Moody’s Analytics
The average transaction price (ATP) for a new vehicle increased by 0.3% in July to a new record of $48,182, according to the latest Kelley Blue Book transaction price report. Year-over-year vehicle price increases are astounding. Since July 2021, the average new vehicle transaction has increased 11.9%, or $5,126. Looking back two years to the heart of the pandemic slump, the average new car transaction price is up 21.5% since July 2020. Worse yet, the ATP is up 58% over a decade. In 2012, the average transaction price was near $30,000.
Why are new car prices still going up? Rather than the prices themselves increasing substantially in July, other factors are largely responsible for the new record. The average interest rate increased another 19 basis points last month. The average auto loan interest rates across all credit profiles are 3.86% for new cars and 8.21% for used cars, according to data from MarketWatch. Gone are the days of zero percent interest rates, and the Federal Reserve will likely hike rates higher to get a handle on inflation.
Another factor contributing to record high average transaction prices is the popularity of luxury vehicles. Luxury vehicle share remains historically high, pushing the average ATP higher. The post-pandemic ‘K-shaped recovery’ has resulted in divergent economic situations from one household to the next. One family might be struggling to make ends meet, while the other is more well off than ever before. This trend has contributed to a surprisingly healthy luxury vehicle market, and more consumers willing to pay a premium for a new car in 2022.
Monthly Payments Surpass Rent For Many
The average monthly payment for a new car is now $733/month. That’s a new record, and it’s just a hair above June’s previous record of $730. Nationally, median one-bedroom rent is now $1,450, which is 11% higher than a year prior. In several Midwestern and Southern states, the average car payment is now on par with rent. We’ve never seen this before.
Cox Automotive’s Vehicle Affordability Index really puts this in perspective. The Vehicle Affordability Index is driven by the consumer’s vehicle transaction prices, the income of the consumer, amount financed by the consumer, and the interest rate provided by the lender. The result is a value that represents the number of weeks of the median household income in America that would be needed to buy the average new vehicle.
The number of median weeks of income needed to purchase the average new vehicle in July increased to 42.2 weeks from a downwardly revised 42.0 weeks in June. In other words, the average new vehicle purchase costs as much as 42 weeks of median income in America. Financial advisors generally recommend keeping total car expenses below 20% of monthly income, but very few Americans are able to do that today. With an average monthly car payment of $733, monthly income would need to be AT LEAST $3,665 to achieve this.
New-vehicle affordability in July was much worse than a year ago when prices were lower, incentives were higher, and rates were much lower. The estimated number of weeks of median income needed to purchase the average new vehicle in July was up 15% from last year. One year ago, auto interest rates were near record lows, incentives still existed, and prices were 11.9% lower.
New Car Inventory Improves, But Only Slightly
In July, some automakers had improved inventory. Some, such as Ford and Toyota, had the greatest increases in inventory in several months. Still, with order backlogs and demand far exceeding supply, dealer lots remained nearly empty, and car prices remained high.
New Car Prices Will Stay High For the Remainder of 2022
New car prices will fall once automakers are able to produce more vehicles. What needs to happen for vehicle production to increase? Supply chain disruptions must come to an end once and for all. We’ve been watching automakers ration their supplies of semiconductor chips, wire harnesses, and even electric vehicle batteries as the pandemic and the war in Ukraine continue to disrupt supply chains.
There is now a question as to whether automakers will ever go back to their old ways of over producing vehicles and discounting them well below MSRP. They now see that consumers are willing to pay higher prices for cars, and that’s good for their bottom lines. As long as people agree to pay marked up prices, there will be no incentive to bring prices back down to historical norms. Many in the industry see this as the only path forward, given today’s market conditions.
A Used Car Might Be the Better Value in 2022
Wholesale used car price trends, August 2022. Source: Black Book
There is a bit of a silver lining. For eight weeks in a row, we’ve been tracking steepening declines in wholesale used car prices. We can confidently say that a trend has emerged. At auction, used car prices have dropped about 4% in two months. We expect these declines to soon translate to retail used car prices, and at the very least, dealers will be willing to negotiate a deal. Based on past trends, we expect retail used car prices to begin to decline in September. Don’t hold your breath, a used car might be the better value in 2022.
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After years of asking for a used electric vehicle tax credit, we finally have it. Unfortunately, it’s not all that we had hoped it would be. Income limits are strict, and vehicle price caps are even tighter. We analyzed price data to find every EV and plug-in hybrid that may qualify for the used EV tax credit. One takeaway: It’s hard to find a sub-$25,000 electric vehicle!
As far as we can tell from the language of the Inflation Reduction Act, the strict Made-in-America and battery sourcing requirements that apply to new EVs and PHEVs do not apply to used EVs. However, the bill allows for the Treasury Secretary to finalize rules by the end of 2022, so it’s not set in stone just yet.
The Used EV Tax Credit: A New Incentive With Strict Requirements
Beginning on January 1, 2023, car buyers can claim a $4,000 tax credit when purchasing a used electric vehicle for under $25,000. For buyers purchasing an EV under $13,300, this incentive is capped at 30% of the vehicle’s price. The seller must be a qualified dealer, and the buyer must have an adjusted gross income (AGI) of under $75,000 (individual), $112,500 (head of household) or $150,000 (joint filers).
Just how many used EVs can be easily found for under $25,000? A quick look at used EV prices is a reality check. If you’re open to settling for an electric vehicle model with lower range, slower charging and more miles on the odometer, you might find a deal that qualifies.
The used (and new) EV tax credit does make plug-in hybrids (PHEVs) eligible, as long as they have a battery capacity of at least 7 kilowatt-hours. CarEdge’s auto expert Mario Rodriguez analyzed used PHEV prices, and these are the PHEV models that have a shot at qualifying under the $25,000 price cap.
Used Car Prices Are Beginning to Drop, What About EVs?
The latest data shows wholesale used car prices dropping, but that has yet to translate to lower retail prices. Electric vehicles and plug-in hybrids are likely to be the last to see price declines, as they remain in high demand. We’ll keep you updated with the latest info.
The Inflation Reduction Act of 2022 has thrown a wrench in the EV buying plans of many. Just three weeks after we first heard word of this deal between two Senators, it has been signed into law. Time is of the essence if you’re on the fence about an EV purchase! But don’t run out to buy that shiny new Tesla Model Y just yet. The language of the Inflation Reduction Act’s ‘Clean Vehicle Credit’ details requirements and important dates that you need to know about before signing a contract to purchase.
If buying an EV in America is in your future, here’s what you need to know today.
What’s In the New EV Tax Credit? Income Limits and Several New Eligibility Requirements
These are the big changes to the EV tax credit:
For new vehicles, income is capped at $150,000 for individuals, $225,000 for head-of-household, and $300,000 for families (effective January 1, 2023).
The original 200,000 sale cap is removed on January 1, 2023. Tesla and GM will again be eligible.
To qualify, vehicles must have ‘final assembly’ in the U.S., Canada or Mexico.
The new credit is worth up to $7,500, with $3,750 from at least 50% of battery components being produced in the U.S. or Free Trade Agreement countries, and an additional $3,750 if at least 40% of battery minerals originate in the U.S. or FTA countries. These battery sourcing requirements begin when the rules are finalized by the IRS, which must be before December 31.
Beginning January 1, 2024, this incentive becomes available as a point-of-sale rebate.
A used EV tax credit begins January 1, with the lesser of 30% of the selling price or $4,000 available for used EVs purchased from a dealer and costing less than $25,000. Income is capped at $75,000 for individuals, $112,000 for head of household, and $150,000 for joint filers.
Tesla and GM: Wait Until January 2023 to Take Delivery
If you’re considering buying a Tesla Model Y, Cadillac Lyriq or Chevrolet Bolt, wait until January 1, 2023 to make the purchase. The revised EV tax credit removes the 200,000 sale cap for automakers on January 1, 2023. The 200,000 sale cap had previously disqualified Tesla and GM EV models from the original $7,500 EV tax credit.
Why only the Model Y? The Model Y is the only Tesla that will qualify for the new tax credit because of the price caps. The revised EV tax credit caps SUV and truck prices at $80,000, and sedans at $55,000. The only Model 3 under the price cap is the rear-wheel drive Model 3, but it sources batteries from CATL in China, so it is disqualified. The Model S and Model X are far too expensive. The Model Y is the most popular EV in America, so this is still good news for Tesla.
Ford currently makes the Mustang Mach-E in Mexico with batteries from LG Chem (now LG Energy Solutions). LG manufactures these battery cells in Poland, but the battery pack assembly is in North America. It’s unclear if Ford’s battery assembly meets the 40% battery component requirement. Unfortunately, Ford just signed an agreement with Chinese battery manufacturers CATL to supply batteries for upcoming Ford Mustang Mach-E’s. This may disqualify the automaker briefly, but not for the time being. Ford has already announced plans for two battery plants in Kentucky and Tennessee.
Does the F-150 Lightning qualify for the new EV tax credit? Yes, but it depends on where exactly the batteries are sourced from. Ford has said that is sources many F-150 Lightning battery packs from SK Innovation’s factory in Georgia, USA. That’s great for eligibility. However, Ford recently shared that they are sourcing more batteries for the Lightning from Chinese automaker CATL. That could complicate eligibility.
Most F-150 Lightning trim options that include the Extended Range battery (for 320 miles of EPA-rated range) are near or over the $80,000 price cap for trucks. Check your vehicle build specs and pricing to see if your total MSRP is under the $80,000 limit.
If yousecured a written binding contract to purchase before the bill was signed, you could claim the original $7,500tax credit when you file 2022 taxes.
In summary, most Ford electric vehicles will likely qualify for at least half of the new EV tax credit, which would be $3,750. Of course, this depends on battery sourcing. It’s possible that Ford EVs could eventually qualify for the full $7,500 once we know more about where Ford’s battery suppliers source their minerals.
EV Models Manufactured Outside of North America Have Lost Eligibility
The IONIQ 5 won’t qualify for the new EV tax credit until Hyundai opens the new factory in Georgia. That could take two years.
Many of today’s best electric vehicles are made overseas for now. The Kia EV6, Audi etron, Polestar 2, and my own Hyundai IONIQ 5 are all disqualified due to the Made-in-America requirement.
The language of the bill states that as soon as it is signed into law, EVs that do not have final assembly in the United States, Canada or Mexico will lose eligibility. The bill was signed on August 16, 2022.
The ‘Transition Rule’ in the new EV tax credit allows buyers to claim the original $7,500 EV tax credit if the buyer has signed a “written binding contract” BEFORE the Inflation Reduction Act of 2022 was signed into law.
The new bill states that the new used EV tax credit will take effect January 1, 2023 as a tax credit, and it will become refundable at the point of sale starting on January 1, 2024. There are STRICT limitations, however.
To qualify for the used EV tax credit, the vehicle must meet the following qualifications: cost less than $25,000; be at least 2 years old; and sold by a qualified dealer. Buyer income limits are an adjusted gross income of $75,000 for individual tax filers, $112,000 for head of household, and $150,000 for joint filers. Taxpayers are allowed one used EV credit every 3 years.
This Is A LOT to Take In
It’s a wild time to be in the market for an EV. Did we miss something? Let us know in the comments, or better yet chat with our EV and general car buying experts at the CarEdge Community Forum. You can also email me at justin@CarEdge.com. This is an evolving situation!
Each day we get asked, “When will car prices drop?” Fortunately, today we have good news to share; used car prices are starting to fall as you’re reading this.
At wholesale auctions, used car prices have dropped for seven weeks in a row. This week’s wholesale declines were so steep that the analysts at Black Book said it was reminiscent of declines seen at the start of the pandemic. If wholesale used car prices are dropping so much, why haven’t we seen an equally steep decline in retail prices? Well, we are just starting to.
In today’s turbulent world, there’s only so much we can confidently assume when drawing connections between the automotive market of the past and present. But the data is still useful. By taking a look at similar trends from years past, we can start to understand when retail car prices are likely to drop, which vehicles are likely to drop the most, by how much, and how you can approach negotiations.
Let’s dive in.
Retail Price Trends Lag Behind Changes at Wholesale Auctions
Historically, retail used car prices lag 4 to 6 weeks behind wholesale prices. We started to see significant wholesale price declines in the last week of June, and more so by mid-July. Take a look at the last 8 weeks of wholesale car prices:
+0.10% the week of June 20
-0.02% the week of June 27
-0.15% the week of July 4
-0.35% the week of July 11
-0.45% the week of July 18
-0.47% the week of July 25
-0.86% the week of August 1
-0.89% the week of August 8
Since early July, wholesale used car prices have dropped -3.19%, and some vehicle segments are down more than 5%. You may be asking why retail prices haven’t started dropping if wholesale prices started their downward trend seven weeks ago. Until the week of July 18, the wholesale declines were slight. Basically, they were within the ‘margin of error’, and the change wasn’t yet large enough to draw any big conclusions. When we started to see declines of -0.45% to -0.89% in a single week, that was the surefire indication that the price drop is real, and the bubble may even be bursting.
If used car prices are on track to follow a trajectory similar to what was seen when prices dropped in 2008 and 2020, we’d expect to see real declines 4 to 6 weeks after the start of significant declines. So when did the clock start? Conservatively, the first week of August was the first week of major declines. Wholesale used car prices dropped -0.86% last week alone. Looking ahead, we can expect retail used car prices to drop meaningfully starting in early- to mid-September. This coincides with a likely increase in repo cars that will also drive used car prices lower too.
While advertised retail prices may not be lower (why would a dealer drop their advertised price if they can find a customer willing to pay an inflated price?), we have heard more and more stories from our community of successful negotiations taking thousands of dollars off of used car deals. Negotiating on a used car is possible, and you should be encouraged to do it.
Luxury Models and Large SUVs Likely to Drop the Most
Used truck and SUV prices, August 8, 2022. Source: Black Book
The past month of wholesale data shows that luxury vehicle and larger SUV segments are on track to see the steepest price declines. Why? Their prices have been the most inflated over the past 18 months, and consumer demand for high price vehicles is decreasing rapidly. The week of August 8, every luxury segment dropped by at least -1.24% week over week. Sub-compact and full-size luxury crossovers dropped nearly 2% in just one week. Since July 11, luxury segments have seen wholesale prices drop by -5.32%, while the overall used vehicle market dropped -3.19%.
CarEdge’s Auto Experts Are Already Seeing More Deals
Our very own market researcher Mario notes that some vehicle segments are softening, but mass-market sedans and trucks are holding firm. “I’m starting to see increased negotiability with late model mid-size SUVs like the Mazda CX-9 and the luxury segment (Lexus RX, Audi Q5, Acura RDX). These segments have been softening and represent some good deals. Trucks continue holding value. I haven’t seen much change on the lower end and small sedans.”
CarEdge Auto Expert Justise also emphasized more consumer negotiating power as the first sign of a softening auto market. “ Luxury and non-hybrid vehicles are already a lot more negotiable than they were last month. I am also seeing a lot more deals across the board without as many shenanigans like nitrogen tires, and fewer markups over MSRP. Even many Toyota & Hondas that are 2020-2021 model years are coming back down to Earth.”
Are Retail Car Prices Guaranteed to Drop?
Think about what we’ve all collectively been through over the last few years. We know better than to assume anything in this market is guaranteed! Today’s car market is unlike anything we’ve ever seen before. New car inventory remains very low, and prices are sky-high while interest rates complicate matters even more. And we haven’t even discussed inflation. So no, nothing is guaranteed, but it’s undeniable that overall market pressure is building that will most likely push dealer sales managers to adjust pricing downwards.
Another factor to take into account is that dealer sales managers are going to try their hardest to cover their losses. Those who bought severely overvalued used vehicles at auction two to six months ago are going to either stand defiantly and demand high prices, or they’ll ‘be smart about it’ and cut their losses by negotiating with prepared, knowledgeable car buyers.
CarEdge’s own Ray Shefska said it best. “The smart dealers will take their losses, and sell what they can now. Wholesale price trends are indicating that they bought overpriced used vehicles for the past several months, and they’re losing money every day they don’t sell their inventory. This could drive prices downward sooner rather than later. Smart sales managers look at pricing weekly. If cars aren’t selling quickly like they have been, that’s a sign that the market is changing.”
Update: On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. Within the 755 page bill is a massive, and controversial, revision of the electric vehicle tax credit (more on that here). Frankly, it’s a mix of good and bad news. The new incentives are sure to accelerate the growth of domestic production in the United States, however many models are losing the credit due to strict limits on eligibility.
Important Note: The IRS and Department of Energy have issued guidance, which can be found here and here. The vehicle price caps do not begin until January 1, 2023, which means that luxury EVs like the Lucid Air and Rivian R1T will qualify UNTIL the new year. These models are not on this list, as their inclusion is only for the rest of 2022.
The original 200,000 sale cap that took the previous tax credit away from Tesla and GM will be removed on January 1, 2023. EVs from these two automakers will not be eligible until after 1/1/2023.
We recommend checking out these official notices from the government for more information.
EV Tax Credit Requirements
Although the Inflation Reduction Act’s language dictates that the Treasury Secretary will finalize several aspects of the new EV tax credit, many provisions and eligibility requirements are now final.
The revised EV tax credit adds the following requirements for eligibility:
As soon as the bill is signed by the President, final assembly must be in the United States, Canada or Mexico. That starts now.
Beginning in 2023, 40% of battery minerals (by value) must be sourced from the U.S, or countries we have free trade agreements with. This requirement increases by 10% from 2024-2028. The battery mineral sourcing requirement is worth $3,750 in the form of either a federal tax credit (starting 1/1/2023) or rebate (starting 1/1/2024).
Beginning in 2023, 50% of battery components must be sourced from the U.S, or countries we have free trade agreements with. This requirement increases by 10% from 2024-2028. The battery component sourcing requirement is worth an additional $3,750, for a total of $7,500.
The price cap for sedans is $55,000; for SUVs, trucks and vans, the cap is $80,000. Price caps begin on January 1, 2023.
A point-of-sale rebate option begins in 2024.
Plug-in hybrids (PHEVs) will qualify, as long as they meet the requirements listed above. More on that below.
(final assembly overseas; the Polestar 3 EV will be assembled in the U.S.)
Porsche Taycan
(too expensive… by a lot)
Rivian R1T and R1S
(too expensive)
Subaru Solterra
(final assembly overseas)
Tesla Model 3
(too expensive, RWD batteries produced overseas)
Tesla Model S and Model X
(too expensive)
Toyota bZ4X
(final assembly overseas)
Volvo C40 and XC40 Recharge
(final assembly overseas)
These Electric Vehicles Are Most Likely to Qualify for the New EV Tax Credit in 2023
The 2024 Chevrolet Equinox EV is likely to qualify
Cadillac Lyriq
This EV will be built in America, and powered by GM’s Ultium batteries. It is likely to qualify for at least $3,750, of the full $7,500.
Chevrolet Bolt
Currently the most affordable EV in America, it’s built in America with batteries manufactured in Michigan. It is likely to qualify for at least $3,750 of the full $7,500, depending on battery mineral sourcing.
Chevrolet Blazer EV
Recently revealed, this EV will be built in America, and is powered by GM’s Ultium batteries. It is likely to qualify for at least $3,750, and possibly the full $7,500. We don’t know where GM intends to source battery minerals.
Chevrolet Equinox EV
This EV will be built in America, and powered by GM’s Ultium batteries. It is likely to qualify for at least $3,750, and possibly the full $7,500. As with all other GM EVs, we don’t yet know where GM intends to source battery minerals.
Chevrolet Silverado EV
GM will manufacture this EV in America, with GM’s own Ultium batteries. It is likely to qualify for at least $3,750, and possibly the full $7,500, depending on battery mineral sourcing. We do know that the battery components will have assembly in America.
Honda Prologue
General Motors will make the Prologue for Honda in the United States using U.S.-made Ultium batteries. It is likely to qualify for at least $3,750, and possibly the full $7,500.
Nissan Leaf
Nissan builds the Leaf in Smyra, Tennessee. The AESC-supplied batteries are also assembled there, but it’s not clear where minerals are sourced from. The Leaf should qualify for at least $3,750, and perhaps the full $7,500. Nissan has plans for the impending retirement of the Leaf, so it’s not clear if one of America’s only affordable EVs will even be on sale next year.
Tesla Model Y
This is the top-selling EV in America. Final assembly is in Texas and California. Battery components sourcing is from Tesla and Panasonic in Texas and California. Battery mineral sourcing is unknown. It is likely to qualify for at least $3,750, and possibly the full $7,500.
Volkswagen ID.4
Final assembly is in Chattanooga, TN (for select VIN numbers, check with your dealer representative). SK Innovation makes the battery components in Georgia. Battery mineral sourcing is unknown. It is likely to qualify for at least $3,750, and possibly the full $7,500.
What About Ford? It depends on battery sourcing.
2022 Ford F-150 Lightning may qualify, depending on battery sourcing
Ford Mustang Mach-E and F-150 Lightning
Ford currently makes the Mustang Mach-E in Mexico with batteries from LG Chem. LG Chem manufactures these battery cells in Poland, but the battery pack assembly is in North America. It’s unclear if Ford’s battery assembly meets the 40% battery component requirement. Unfortunately, Ford just signed an agreement with Chinese battery manufacturers CATL to supply batteries for upcoming Ford Mustang Mach-E’s. This may disqualify the automaker briefly. Ford has already announced plans for two battery plants in Kentucky and Tennessee.
Will Plug-In Hybrids Be Eligible For the New Tax Credit?
Plug-in hybrids (PHEVs) WILL be eligible, but they must meet the same requirements listed above, and have a minimum battery capacity of 7 kilowatt-hours.
With the Made-in-America requirement beginning as soon as the bill as signed, most plug-in hybrids won’t be eligible. This includes the RAV4 Prime, Prius Prime, Hyundai Santa Fe PHEV, Hyundai Tucson PHEV and some BMW PHEVs, such as the 330e made in Germany. The popular X5 and X3 PHEVs are among those that will qualify, as long as the MSRP stays under $80,000.
The Chrysler Pacifica Hybrid should qualify for at least half of the new credit. It is manufactured in Ontario with batteries assembled in Michigan.
Jeep PHEVs, such as the Wrangler 4xe and Grand Cherokee PHEV, should qualify for at least half of the new credit. The Wrangler 4xe is made in Toledo, Ohio, however it’s unclear where the Samsung SDI batteries are sourced from.
Used EV Tax Credit
Beginning on January 1, 2023, America’s first used electric vehicle tax credit begins. Eligibility requirements are strict:
Selling price is capped at $25,000
The vehicle must be sold by a dealer and be at least 2 years old
The income is cap is $75,000 for individuals, $112,500 for head-of-household, and $150,000 for join filers.
The Inflation Reduction Act has been signed into law, so the ‘Made in North America’ requirement has begun. The Treasury Secretary will set the final rules for other portions of the EV tax credit, and that must happen before the end of this year. We’ll update this page as more information becomes available.
