Car Dealers’ ‘Pricing Party’ May End Soon

SOUTHFIELD, MI — Car dealers made serious money last year by selling their limited number of vehicles.

Inventory shortages caused by a global microchip shortage resulted in dealers charging top dollar in 2022 for vehicles – sometimes thousands over MSRP – as demand well-outpaced supply.

Expect that to change this year.

“The pricing party will soon be over,” says Wells Fargo auto analyst Colin Langan (pictured, left). “It’s time to sober up.”

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A more normalized supply-and-demand ratio is anticipated to push vehicle prices down.

“We’re seeing signs of pricing eroding. Inventory keeps creeping up,” Langan says during the Society of Automotive Analysts’ annual outlook conference here.

“Clearly, customers are waiting for price cuts,” he adds. “Dealers are starting to normalize pricing as dealer inventory is rebuilding, although it is still low. ” (National dealer days’ supply in January was 37.) 

Moreover, consumer demand, which was high in 2022, is expected to ebb this year. Langan cites economic reasons including inflation, a possible mild recession and a rolling rise in interest rates that inflate monthly car payments.

Those are economic headwinds. But in a surprising burst of hiring, employers added 517,000 jobs in the U.S. in January, according to the Department of Labor. That brought the unemployment rate to 3.4%, the lowest since 1969.

That bodes well for 2023 auto sales because auto loan-approvals rely heavily on an applicant’s employment. No job, no loan. No loan, no car purchase, at least for most people.

Still, car loans are at a 20-year high because of a series of Federal Reserve interest-rate hikes intended to fight inflation.

The average loan rate now is 8.1% for new cars, 12.8% for used, according to Cox Automotive.

The average vehicle price is a record-breaking $49,507, according to Cox Automotive. One reason is that consumers opt for pricier vehicles such as CUVs, SUVs and pickup trucks. And many buyers are loading up their vehicles with various option packages.     

But with used-car prices dropping, new-car shoppers might become budget-minded, Langan says. “People will get less for their trade-ins, so they are less likely to spend a lot on a new vehicle.”

He also notes electric vehicle maker Tesla has cut prices on its vehicles. Ford has followed suit with its Mustang Mach-E. Langan warns of a price war.

He tells Wards that with vehicle prices expected to decrease this year, “It’s pretty clear dealers are going to take the first brunt. The publicly owned dealerships realize that more than the others.”