Looming Recession: How Car Prices Might Shift in an Economic Downturn

An economic downturn impacts everyone, from automotive manufacturers to individual buyers. While there may or may not be a recession on the horizon, there could still be obstacles to overcome.

According to Kelley Blue Book, the average new car price was $47,401 in January of this year. This is a 3.5% drop from what they were a year before, but many buyers are still put off by high prices. High interest rates don’t help the cause either. Experian’s State of the Automotive Finance Market report found that the average interest rate on new cars is 7.18% across all credit scores. Used car loan interest rates average at a staggering 11.93%.

Whether or not there is a recession in the coming years, it’s good to be prepared — just in case. Here’s how car prices might shift in an economic downturn, according to industry experts.

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Sales Plummet (and So Do Prices)

Even the thought of a recession is often enough to get people to cut back on spending. But the automotive industry is as much influenced by the law of supply and demand as anything else.

“Historically, when there is a recession, people start buying less — especially large purchases. So, this means that demand for cars would decrease pretty significantly,” said Ben Michael, director of auto, Michael & Associates . “And, when demand decreases, prices decrease as well.”

Consider the Great Recession of 2008 as an example. During that time, new vehicle sales fell by almost 40%.

In 2020, sales also fell, though only for the first few months of the year. That said, they did drop by about 15% compared to the previous year.

When demand once again increased, supply couldn’t quite keep up. This — combined with high inflation and gas prices at the time — led to higher prices. It also priced many U.S. consumers out of the market for a time.

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More Incentives Come Out

The good news for those who have discretionary income is that recessions often bring about more incentives and other deals.

“In a recession, more incentives, rebates and promotions will appear as dealers need to sell cars,” said Lauren Fix, an automotive analyst at The Car Coach® . “Sitting on inventory is expensive. Every month, the dealer pays interest on each vehicle that is not sold. They lose cash flow when vehicles are not sold.”

Interest Rates May Rise

While more incentives can be a good thing, a looming recession can also negatively impact interest rates.

“A recession means higher interest rates and lower car sales,” said Fix.

As Fix pointed out, this can impact both dealers and car manufacturers. Higher interest rates can make it harder to afford a car — even for individuals less directly affected by the economic downturn. And if inventory starts to dip, prices could remain high.

But again, those who are trying to get rid of their stock so as to save money from just having the vehicles sit on their lots could keep upping those incentives. At a certain point, these incentives could balance out interest rates — though it depends on the local market, the manufacturer, the dealer and the incentives available.

What People Can Do To Prepare For This Shift

Those who currently own a vehicle and are interested in selling might want to do so with caution — and only if it absolutely makes sense for them.

“If your vehicle is still in good working order, you may be able to save money by delaying the purchase of a new vehicle altogether even though during a recession car prices might seem like you’re getting a deal,” said Erin Kemp, Bumper’s consumer advocate.

Those who have a lease might want to consider keeping the car for the long term.

“If you are trading in a lease, check the value of the vehicle; it may make sense to buy out the lease and keep the car,” said Fix.

As for those who are currently upside-down on a car loan, meaning they owe more than the vehicle is worth, Fix advised against buying another car. Instead, she suggested making extra loan payments — if possible — or refinancing for a lower interest rate. In either case, she said that holding on to your vehicle longer is likely the best option.

Whatever else, know that everyone’s situation is different. Make any decisions strategically and based on your needs rather than simply out of a concern over a coming recession.

“Examine your budget carefully, taking into account income, spending and what you may manage in the event of a difficult circumstance, such as losing your job,” said Kemp.

This article originally appeared on GOBankingRates.com : Looming Recession: How Car Prices Might Shift in an Economic Downturn