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
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
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.