Used car prices are dropping but fewer consumers can afford the payments

Photo (c) FG Trade - Getty Images

Still-high prices and rising interest rates are making both new and used cars an expensive purchase

New and used car inventories continue to improve but rising interest rates are making all categories of vehicles less affordable, according to a new study.

Automotive marketplace analyzed new and used car affordability over time by calculating its Car Affordability Index, which compares median household income to an idealized income for financing a car. It found that new car affordability fell 13.3% from August 2019 to August 2022, while used car affordability declined 26.7% over the same period.

Many consumers found it hard to purchase either a new or used car over the last couple of years, both because of shortages of new cars and record-high prices of used cars. Now that the Federal Reserve is aggressively raising interest rates, car payments are even less affordable.

“Due to supply chain shortages and increased demand, the rising prices of new and used cars have outpaced income growth,” said iSeeCars Executive Analyst Karl Brauer. “From August of 2019, well before the pandemic lockdowns started, to August of 2022, new car prices increased by almost 29 percent, and three-year-old used car prices increased by 52 percent.”

Fewer options

But Brauer says consumers’ incomes have increased by only 13%. That’s changed what consumers are buying and how they’re paying for it.

“People still need to replace their vehicles, so the resulting drop in affordability means shoppers are either taking longer loan terms and paying higher interest rates, putting down less money for a down payment or even forgoing the kind of car they originally wanted for a lower cost model in order to make ends meet,” Brauer said.

Supply chain issues during the COVID-19 pandemic led to a shortage of new cars and trucks. That led to an increase in demand for late-model used vehicles, sending those prices sharply higher.

Used car prices have begun to fall

While those prices remain much higher than in the past, there is evidence they are starting to fall. The Manheim Used Vehicle Value Index, which tracks the wholesale value of used cars and trucks, fell 2% from September to mid-October.

Whether prices continue to fall at that rate remains an open question. The latest trends in key indicators suggest wholesale used-vehicle values should decline less than normal in the second half of October.

According to the report, all categories of used vehicles saw lower wholesale prices during the first half of October. Vans and pickup trucks declined the least.

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