A Variety of Factors Make This a Great Time to Buy
If you’ve been thinking about a new car but haven’t felt ready to take the plunge, don’t put it off any longer, because the deals won’t get better any time soon.
Everybody knows the three factors that influence new car deals: prices and incentives on new cars themselves, interest rates, and the value of your trade in. When incentives or trade-in values peak, it can make a good time to buy a new car. When interest rates drop, it can be a good time to buy a lot of things. Rarely do all three factors converge as clearly as they do today, according to a parade of experts at the 2017 Automotive Forum, organized by the National Automobile Dealers Association and J.D. Power and Associates. The Forum coincided with the start of the 2017 New York International Auto Show.
Background: A Confluence of Events
During the recession, when two of America’s major automakers went bankrupt and downsized dramatically, automakers cut production rapidly. Sales fell from about 17 million cars and trucks in 2007 to less than 11 million in 2009. Americans coped with this crisis by hanging onto their old cars longer and in some cases buying used cars rather than new ones when they needed to upgrade.
This generated two effects from which automakers are only now recovering: First, the dramatically lower production between 2009 and 2011 – and the slow ramp-up since then – means there are fewer used cars available from those model years today. Second, all those consumers who put off buying a new car during those years continued to drive their old cars into the ground. This created a pent-up demand for new and late-model used cars, which the lower production of cars during the intervening years was not able to meet.
To meet that pent-up demand, automakers have been building more cars than ever before. Now, that pent-up demand is nearly sated, according to Nariman Behravesh, chief economist at IHS Markit, who has been analyzing auto sales trends for many years. Since automakers have a difficult time paring back production, this elevated supply of new cars has started stacking up on automakers’ and dealers’ lots.
1) A Great Selection of Cars
For now, that built-up inventory can also help give you a great selection of colors and options to easily find what you’re looking for – especially if you’re looking for a sedan.
Since the recession, sales of pickups, SUVs, crossovers, and minivans have exploded from just 35 percent of the market during the recession to around 60 percent today. Sales of midsized sedans have dropped 16 percent, even as total car sales have risen. The automakers, with billion-dollar factories and years-long planning processes, haven’t been able to adapt quickly enough, leaving excess sedan production stacking up on overflow lots.
2) Generous New Car Rebates
To sell down this inventory, automakers have jacked up rebates to record levels of over $4,000 off MSRP across the industry, rising toward $4,500 per vehicle, according to Thomas King, vice president of OEM Operations, Marketing, and Media at J.D. Power. That amounts to about a 15 percent discount off the price of a new sedan.
That more than offsets an increase in the MSRP of new cars of about $500 since last year. These higher prices, however, are on better-equipped cars with features such as automated safety systems, the latest infotainment options, and richer trim levels.
3) Valuable Trade-ins
Of course, one of the best ways to get a great deal on a new car is to get the most money for your old one. As new car sales fell during the recession and more buyers turned to used cars, it created a scarcity of used cars on the market. That drove used car prices to record highs. Resale values have been at record highs since the recession, but they started dropping last year, according to J.D. Power.
J.D. Power keeps an index of used car prices, which fell 10 percent last summer, another record rate. King expects used car prices to continue falling, which means whatever you’re trading in will never be worth more than it is today. In most states, the value of your trade in has a compound effect on the affordability of your new car. A higher trade-in value means you can make a bigger down payment and reduce the amount you need to borrow and pay interest on, and it can also reduce your sales tax bill.
4) Low Interest Rates
The average interest rate on new car loans today is about 4.5 percent; on used cars it’s about 8.5 percent, according to Mitch Bainwol, CEO of the Alliance of Automobile Manufacturers, an industry lobbying group. Lending rates tend to trickle up from the federal reserve, which has raised interest rates twice in the past 12 months. Wall Street observers such as Behravesh expect three more interest rate increases from the Federal Reserve this year.
Even then, interest rates are at historic lows. Next year, rates may be a point higher, which will reduce consumers buying power by about $1,000, according to King. You can afford a slightly nicer car if you don’t wait.
5) Flexible Loan Terms (Use With Caution)
Since automakers find it difficult to cut back production to meet demand, another way they work to make cars more affordable is by offering financing terms as long as seven or even eight years. Consumer advocates don’t recommend you buy a car with a loan that long, because it’s far longer than the warranty on most new cars, and as the number of consumers who sign up for such long loan terms rises, default rates go up.
Today, while car rebates are high, relatively few buyers are taking 84-month loans, and relatively few automakers and banks are offering them. It’s better for consumers’ long-term financial health to take advantage of low interest rates, high trade-in values, and big rebates than to resort to a seven-year loan to buy a new car.
6) Good Leasing Opportunities
If today is a great time to buy a new car, it may be an even better time to lease one. With car lots swimming in inventory, big rebates on new cars, and low interest rates, more consumers are opting for new cars over used ones. That’s pushing used-car values down even faster than automakers and banks can anticipate. Because leases only charge you for the difference between the cost of the new car and its anticipated value after three years and those values are falling faster than analysts expected, you’re likely to pay less than the car actually depreciates. At the end of the three-year lease, your buyout price is likely to be more than the car is worth, but you don’t have to buy it. It’s better to let the automaker’s bank take the risk of that excess depreciation than to pay for it yourself.
With low interest rates, high inventory, a great selection, high used car prices, and reasonable loan terms, all the factors that make a great new-car deal are working in your favor today. Sure, six months ago might have been an even better time to buy a new car, but the picture wasn’t as clear then. Now is the time to act. If you wait six more months, you’ll end up paying more.