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MNI INTERVIEW: US Car Prices Seen Flattening As Consumers Tire

Photo by why kei on Unsplash

National Independent Automobile Dealers Association President-elect Gordon Tormohlen told MNI he sees car prices stabilizing this year as higher interest rates squeeze buyers, a downshift from a recent surge that drove up overall inflation and forced the Fed's hand on tightening.

New car prices may begin to decline soon, while an earlier drop in used car prices should stabilize as dealers pass on their own cost increases, Tormohlen said. "On average the unit that I buy is up roughly 30% in cost at the auction and then I still have to bring it back and invest money to recondition it and get it ready for the lot," he said.

Used car prices measured by the consumer price index have slid 11.2% in the last year and were down 0.9% in March, cooling from the previous months' declines. The Manheim Used Vehicle Value Index released last week showed used car prices declined 2.7% from March in the first 15 days of April but is still up 6.5% since November.

But new cars are up 6.1% over the year and were up 0.4% last month and look likely to turn negative sometime in the second quarter, he said. The two categories represent almost 7% of the CPI weight. "If I had a franchise, I'd be very concerned right now," Tormohlen said, a former franchise dealer. "I just don't see the average consumer having the ability to pay these [new car] prices."


The NIADA chief said central bank rate increases are causing some concern among consumers, with the the average new auto loan rate around 9% and the average used auto loan rate around 14%. "It's creating an anxiety where they're trying to make a decision fast before it goes up again," he said, noting an increase in spreads indicating the assessment of risk.

(See: MNI INTERVIEW: Community Bankers Say U.S. Already In Recession)

Surging car prices helped push consumer price inflation to 9% after Covid hobbled production of microchips needed for new vehicles. That was one reason the Fed embarked on its toughest rate hike campaign in decades, though some investors see it signaling a pause next week. The Fed may add language about strains following the collapse of SVB, though Tormohlen said he's seen no sign of a lending squeeze yet beyond the rate hikes.

"The more you see those increases, the more difficult it's going to be," he said, also noting tightening underwriting standards.

The decline in used car prices means customers seeking credit have less collateral to backstop a loan, Tormohlen said, making some transactions more difficult.

Loan terms are often being extended to six or seven years and "that will lower underlying demand because customers will not be in the position to trade until they get to the fifth or sixth year," he said.


The new car market is still working through the imbalance of supply and demand created by production slowdowns.

"You don't need a higher supply if that marketplace is going to be down in terms of demand," he said. "Supply is probably adequate. I'm concerned in terms of what demand is going to do," he said, nodding to looming recession risks.

With sales still below where they were before Covid, there remains scope for increases this year as pent-up demand is fulfilled. The pre-pandemic market moved about 17 million new cars a year and about 42 million used cars, now down to 15 million and 38 million, he said.

"Although the first couple of months this year were abnormally slow, we're anticipating a normal year in our operation."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |

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