Car Prices Keep Falling, Consumers Keep Waiting

The LA Times is reporting New auto prices are falling at a record rate.

The average cost of a new vehicle in the second quarter was $25,632 -- a 2.3% decline from the year-earlier period and the steepest drop recorded in the bank's 41-year-old survey.

The price drop comes as automakers are already coping with mounting losses and declining sales. Carmakers are shifting away from trucks and sport utility vehicles, which command high profit margins, toward manufacturing smaller cars, which are less profitable.

Although vehicle sales are expected to remain weak in the near term, the analysts said, the price decline is leading to better affordability and could translate into a big recovery for auto sales by the second half of 2009.

"If the labor market begins to improve in the second half of 2009 ... buyers returning to the vehicle market may find the costs of owning a new vehicle to be unusually attractive," Patel and Levinson wrote.

"Vehicles have become much more affordable to average consumers," Patel and Levinson wrote.

More Affordable For Who?

• Jobs data that show jobs decline 8th consecutive month, unemployment hits 6.1%.
• Those unemployed have a distinct tendency to not buy cars.
• Those fearing unemployment have a distinct tendency to not buy cars.
• Those with a mindset on frugality have a distinct tendency to not buy cars.

For all three classes above, a 2.3% drop is not going to make cars "affordable". Furthermore, those who do want to buy need to be aware of the tight credit squeeze affecting dealers.

GM (GM), Ford (F) and Chrysler are all cutting back on credit extended to their dealers. This is putting some auto dealers in extreme jeopardy.

The industry sees signs of hope even as GM, Ford, Chrysler sales collapse. Hope in a bear market is almost never rewarded. The bottom is unlikely to be in until hope is crushed and despair sets in. In the meantime I expect to see many auto dealers go bust.

Overcapacity is rampant, especially in light of a rapidly deteriorating jobs picture. Price rollbacks have just begun. Those rollbacks are going to spread to other sectors as well as the battle for consumer discretionary spending heats up. Why buy a house or a car or a boat today when all three will be cheaper tomorrow?

Comments

[2houndz:]

What a strange world this is. Inflation is off the charts (figuratively) but people are waiting for prices of big ticket items to keep falling. This is great if you are in cash and looking for a house (I am) and it really sucks if you're Ford or GM.

2008 Sep 05 06:47 PM

[Miken:]

The LA Times is expert at stating the obvious and selling it.

2008 Sep 05 08:09 PM

[David Martin:]

And the big 3 are still hoping to load the smaller cars they are being forced into selling with extras to increase margin.
They deserve to go bust, not to be bailed out.

2008 Sep 06 09:57 AM

[Paul Killinger:]

The Detroit 3 need to begin building dual-fueled (CNG + gasoline) vehicles once again. The 40% discount for CNG vs. gasoline will sell them. What are they waiting for?

Oh, I forgot, the $50 billion handout they're getting from the Democrats in Washington. Must be their reward for going along with the Congressional moratorium against more domestic oil and gas production.

2008 Sep 06 10:41 AM

[Jimbo:]

Sounds like deflation to me.

2008 Sep 06 10:41 AM

[Doug Korthof:]

Very true, despite the billions dumped into "fuel cell research", they could use CNG, it's here, now, cheaper than gas, any car can be converted to CNG, doesn't need a $300,000 fuel cell stack, the tanks are much cheaper (H2 gas permeates metal, embrittling it), and it's a well-proven technology with existing distribution tanks at 3600 psi (H2 requires 10,000 psi, much more difficult) for the same range.

And there are plug-in Electric cars, like the Toyota RAV4-EV, which don't use gas at all and plug in anywhere, powered by rooftop solar power systems that are paid for by the gas we DON'T buy.

Instead, GM and other car makers pretend that CNG doesn't exist, and pretend that EVs don't exist.

2008 Sep 08 01:35 AM

[frisch333:]

The lawmakers have not yet approved the $25 B loan plan. And, they have not yet even considered the $50 B plan.


On Sep 08 01:35 AM Doug Korthof wrote:

> Very true, despite the billions dumped into "fuel cell research",
> they could use CNG, it's here, now, cheaper than gas, any car can
> be converted to CNG, doesn't need a $300,000 fuel cell stack, the
> tanks are much cheaper (H2 gas permeates metal, embrittling it),
> and it's a well-proven technology with existing distribution tanks
> at 3600 psi (H2 requires 10,000 psi, much more difficult) for the
> same range.
>
> And there are plug-in Electric cars, like the Toyota RAV4-EV, which
> don't use gas at all and plug in anywhere, powered by rooftop solar
> power systems that are paid for by the gas we DON'T buy.
>
> Instead, GM and other car makers pretend that CNG doesn't exist,
> and pretend that EVs don't exist.

2008 Sep 08 03:20 PM