IS IT A GOOD TIME TO BUY A CAR?

Summary

Average auto loan payment has increased to $667
Interest rate hikes have made auto financing less affordable
Delinquencies have increased and repossessions are expected to increase
Used car prices are expected to fall as inventory starts to increase

In 2019, we left to Dublin for sabbatical. What feels like a lifetime ago, the experience has left a lasting influence on our household consumption decisions. Living in a walk-able city changed our perspective on what owning a car means. When we returned to the U.S we vowed to have as few cars as possible, which meant we had one car.

Recent work promotions, and changes to work-from-home schedules, have forced us to reluctantly entertain the idea of buying another car. Given that it has been a while since I shopped for a car, I put on my economist hat on and did some research on the state of the market. So here is what I learned.

Increasing car payments

My personal finance strategy is to avoid financing a depreciating asset (cars). I usually save money to replace my car and pay cash when it is time to buy another one. However, that is not the typical approach. Reports indicate that 85% of new car purchases are financed. The average amount financed for a new car has increased from $36,117 in 2020 to $40,290 in 2022. The increased amount financed reflects the increase in prices we experienced during the Covid pandemic driven by higher demand and lower automible production levels. At the same time, average loan interest rates have increased from 3.95% to 4.33%. Therefore, the average car payment is $667 per month, up from $582 in 2021.

There are no cars!

Be prepared to wait for a new car. The inventory to sales ratio has fallen below 1, indicating that there are more sales than inventory of cars available. This is one reason why used car prices have increased since the start of the pandemic. As people try to avoid waiting for new cars to be delivered, they have shifted to purchasing used cars. But, it looks like the market is about to change!

Delinquencies

The increase in amounts financed coupled with higher interest rates have started to put pressure on household budgets. In 2022, 30-day delinquencies increased by 41% from the previous year, and 60-day delinquencies are up 54%.

Carvana collapse

The used car market is starting to show signs of weakening. Increased interest rates have started to impact financing costs. Carvana, reported lower sales in the third quarter of 2022 causing the firm’s market valuation to fall from $2.6 to $1.4 billion over two trading session. Carvana was once valued at $60 billion dollars.

Loan Repayment

Banks are preparing for an increase in loan defaults. We should expect an increase in car repossessions and, therefore, an increase in used cars in the used car market. Increased inventory will lead to used car prices falling.

The Good News!

If you are in the market for a car, you should start to see a decrease in used car prices. New car prices are less likely to fall but we will start to see increased inventory at car dealerships.