Car shopping comes with rules. Rules like “the sticker price is just the starting point and negotiate down from there” and “cars are cheapest at the end of the month and end of the year.”
That rule book got thrown out in the last two years. Shoppers grew accustomed to paying more than MSRP, or the manufacturer’s suggested retail price. They watched prices rise steadily, with no cyclical drops. The end of well-established patterns leaves many car shoppers scratching their heads. The question we get most is, “When will new car prices drop?”
The answer is more than a little complicated. In some cases, new vehicle prices have already started to decline. In others, they may stay the same for the foreseeable future. The new world of car shopping requires an open mind and new skills.
In this story, we’ll explain how to navigate the new patterns of car buying and dealership pricing, so if you’re in the market to purchase a vehicle, you’ll be equipped with the best information we know from our experts. We also dig deeper to answer the question about car prices dropping, even if the answer remains unclear.
Finkelmeyer is the senior director of new-vehicle solutions at Cox Automotive, the parent company to Kelley Blue Book.
Average transactions for new cars topped $49,500 in December. That’s up more than 5% from the same month a year earlier and more than 20% higher than in December 2020.
As another point of reference, new car average transaction prices were $37,876 in February 2020. That’s an increase of nearly $12,000 in the price of new cars since before the United States government urged people to stay home because of COVID-19.
According to Finkelmeyer, the typical factors affecting new car prices are:
All four of those factors faced major disruptions in the last two years.
In the past several years, inventory fell to record lows, primarily driven by a worldwide microchip shortage. Without enough crucial microchips, which control everything from engine timing to navigation systems, automakers haven’t been able to build cars as fast as they’d like.
Automakers measure their stock of new cars to sell in a metric they call “days of inventory” — how long it would take them to sell out of new vehicles at today’s sales pace if they stopped building new ones. Last year, many automakers’ inventory fell to just one week. By the end of December, many carmakers’ inventory was 65% higher than the year-ago period.
RELATED: Is Now the Time to Buy, Sell, or Trade-In a Car?
Overall, inventory remains low by historical standards. At the end of December 2020, automakers had a 68-day supply of vehicles to sell. That compares with a pre-pandemic December 2019 supply of 82 days.
In December, incentives for buying a car increased to 2.7% of the average transaction price (ATP), compared with 2.2% in November. By comparison, incentives averaged 3.8% of ATP in December 2021. Before the COVID-19 pandemic, the average incentive package was 10.9% of ATP.
“Incentives overall are still very low but trending upwards. Electric vehicles and luxury cars had incentives close to 6% of ATP, and both saw ATP decline in December. Plus, with the new tax credits on the way, electric vehicle ATPs will drop lower for qualifying vehicles,” said Rebecca Rydzewski, research manager of economic and industry insights for Cox Automotive.
Honda and Kia vehicles sold on average between 5% and 6% over sticker price in December. Mercedes-Benz and Land Rover transacted between 2.6% to 6.5% over sticker price. Luxury brands Audi, BMW, Infiniti, Lexus, Lincoln, and Volvo sold 1% or more below MSRP in December 2022.
Traditionally, dealers often tack their own discount offers onto manufacturer incentives. You’ll see those less often at the moment.
Trade-in value is the last factor driving prices and the strangest in today’s market.
“Used-car inventories across the country are currently bloated with expensive used merchandise priced over $35,000,” Finkelmeyer says.
Automakers scaled back production for several years after the 2008 recession. That leaves the higher-mileage, older cars dealers sell for less than $10,000 particularly hard to find now.
Meanwhile, the high gas prices that plagued much of 2022 have some buyers looking to shed less fuel-efficient, new-model trucks and SUVs — even if they’re still relatively new.
Dealers value your trade-in based partly on what they need in stock. They’re more likely to offer a good deal on a car fewer people are looking for currently. Car dealers are oversupplied with relatively expensive used cars.
“Consumers trading in a 2018 Honda Civic will be much happier with the trade appraisal than those trading in a 2021 Jeep Grand Cherokee,” Finkelmeyer explains.
So, when will vehicle prices go down?
For some brands and some dealerships, prices began dropping a bit.
“For some volume brands like Honda, Kia, and Toyota, new inventories remain very tight … and deals are nearly impossible to find,” Finkelmeyer says.
With other brands, shoppers must be prepared to hunt.
Still, other carmakers face a glut of new vehicles to sell. “If consumers want the best selection and the best deals, they should head down to the local Jeep or Ram dealer,” Finkelmeyer says. For example, some buyers in metro Atlanta can obtain up to $7,800 on select vehicles like the Ram 1500 Big Horn.
Shoppers should also be prepared to shop their trade-in around. It’s slightly more complicated to pull off, but it may make sense to sell your old car to one dealership and buy your new car from a different one if the numbers work out better. Use the Kelley Blue Book Instant Cash Offer tool to shop your trade-in to dealerships near you. When you let the deals come to you without obligation, you can select the best trade-in offer for your situation.
“Ultimately, we believe inventory and incentive levels will increase in the future,” Finkelmeyer says. Recent Federal Reserve moves to rein in inflation make big-ticket purchases harder for everyone. That will slow sales.
The microchip shortage will likely resolve sometime in 2023. That will increase supply.
Cox data show that supply varies by market. Shoppers will find plenty of vehicles to buy in Minneapolis-St. Paul, Detroit, and Denver. But inventory remains tight in places like Atlanta and throughout Florida, which was hard-hit by hurricanes last fall.
Those trends could bring down the price of even the most popular cars. But experts can’t put a date on when that will happen. Instead, shoppers should be flexible.
It’s already possible to find a low price on a new car. It just may not be the car you thought you would buy. Or you may need to go buy the car in a smaller town outside of the big city where the competition isn’t as tough.
Editor’s Note: This article has been updated for accuracy since it was originally published.
