Home Buying Guide High demand and limited supply lead to increased prices for both new and used cars

High demand and limited supply lead to increased prices for both new and used cars

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High demand and limited supply lead to increased prices for both new and used cars

The Impact of High Prices on the Car Market

Prices for vehicles, both new and used, have been steadily rising, causing challenges for car shoppers. Factors such as higher interest rates and limited inventory have contributed to these increased costs. As a result, consumers are finding it difficult to find the same level of discounts they once enjoyed.

According to Jessica Caldwell, the head of insights at Edmunds, the reduced inventory is the primary driver behind the higher prices. As a result, dealers have little incentive to offer discounts since cars continue to sell despite the elevated costs. This lack of inventory has led to an increase in the annual percentage rate (APR) on car loans, reaching levels similar to those seen during the Great Recession. In the third quarter, the APR for new vehicles rose to 7.4%, while it increased to 11.2% for used vehicles.

Rising interest rates have contributed to higher monthly payments as well. The average monthly payment for new vehicles reached a record $736 in the third quarter, up from $733 in the previous quarter. However, for used cars, the average monthly payment slightly decreased from $569 to $567.

Despite these challenges, the car market is experiencing pent-up demand from consumers who postponed purchasing vehicles in 2020 but are now eager to buy despite the higher costs. Caldwell believes that people are reaching a point where they can no longer delay making their purchases and are returning to the market.

One of the key factors driving the limited availability of discounts is the low inventory and high demand in the current market. Traditionally, dealers would receive new model year vehicles by the end of summer, creating opportunities for discounts on older models. However, this year, the situation is different. Tom McParland, a contributing writer for automotive website Jalopnik, explains that there are no leftover vehicles for the average consumer. These cars are selling months before they even arrive at the dealership.

The chip shortage experienced during the Covid-19 pandemic has further impacted car sales and discounts. The shortage of semiconductors led to reduced production levels, causing significant revenue losses for the auto industry. As a result, end-of-summer sales were scarce last year for vehicles such as sedans, crossovers, and hybrids, which are targeted at the average consumer. Conversely, there may be leftover deals for luxury electric vehicles that have been sitting around.

Nevertheless, there are exceptions to the limited discounts in the market. Shoppers may find more inventory and better deals in the electric vehicle (EV) market. At the beginning of October, EV availability was higher than the industry average due to increased product availability and production. McParland believes that now is an excellent time to explore the EV market. Additionally, recurring price cuts from Tesla throughout the year may contribute to lower prices in the EV market as a whole.

According to Kelley Blue Book, the average price paid for an EV in September was $50,683, down from $52,212 in August and significantly lower than the price a year ago. There are also opportunities for pre-owned electric vehicles to be purchased for under $25,000, making buyers eligible for an additional federal tax credit of $4,000.

However, buyers should be cautious when considering pre-owned EVs. While they have fewer parts compared to gas-powered cars, accurately predicting the lifespan of their rechargeable batteries remains challenging. Caldwell explains that EVs from five years ago or 2018 were not as advanced in terms of ranges and charging efficiency.

In a low-inventory car market, it is unlikely that overall prices for vehicles will drop significantly in the future. The incorporation of costly technologies, such as electrification and autonomous technology, will continue to drive prices upward. Therefore, it is crucial for car shoppers to conduct thorough research before heading to the dealership. Caldwell offers three tips:

1. Get preapproval for an auto loan from your personal bank or local financial institutions and credit unions to obtain the most competitive financing options.

2. Expand your research to include both new and used cars, and consider certified pre-owned vehicles for added peace of mind.

3. Research trade-in values by obtaining quotes from different sources and dealers. Take advantage of various appraisal features to ensure you are getting the best value for your trade-in.

In conclusion, the car market is currently experiencing higher prices and limited discounts due to factors such as reduced inventory, increased interest rates, and pent-up demand. However, there may be opportunities for deals in the EV market, thanks to increased availability and recurring price cuts from certain manufacturers. Car shoppers should conduct thorough research and consider various financing and vehicle options to make informed decisions.

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