Americans have been paying a steep premium for their rides recently. Fortunately, rising prices appear to be coming to a screeching halt. Swiss investment bank UBS estimates global Car production will exceed sales by 6% this year, creating an excess of around 5 million vehicles. The global investment bank anticipates a price war between dealers in the latter half of 2023, and some EV makers are already starting to slash.

Put simply, car prices are due to come down fast from last year's inflation-fuelled highs, giving motorists some welcome relief from the sticker shock. 

“Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result,” the bank said in a note to clients. 

This year has been corrective for car prices. Compared to the start of the year, the average transaction price (ATP) for new vehicles is down 2.7%, or $1,335, the most significant January to July fall in the past decade, according to Kelley Blue Book. Moreover, last month's ATP was a mere 0.4% higher than in July 2022, the smallest year-over-year price increase in the previous decade. 

Given the trends, it may make sense for consumers to wait longer to land an ideal buying opportunity. Financial advisors weigh in on how to make the most of this market trend.

Dealin' and Wheelin'

Cars can be bought outright with a one-time cash payment or paid off incrementally through a loan. Either way, it sometimes pays to time the market.

“Wait for discounts,” says Doug Greenberg, President at Pacific Northwest Advisory. “If UBS anticipates a price war due to an excess in car production, it might be wise… especially if you're not urgently needing a new car.”

Greenberg recommends trying for an end-of-year or end-of-quarter purchase. He explains that shopping nearer to the end of these yearly or quarterly cycles might yield better deals as dealerships try to meet their quotas for the period.

“Keep an eye on the industry news,” he adds. “Price reductions, special offers, or financing deals may be announced by manufacturers.”

New or Old? 

Sizing up new versus used cars requires juggling costs, benefits, and personal preferences. Used cars appeal due to their lower price, although new vehicles offer warranties and modern features. Reliability is decisive – used cars might have a history, while new ones are untested. 

Buyers must try and balance between the perks of the new or the practicality of a budget-friendly option.

“Financially speaking, a Secondhand Car can be a cost-effective option, but factors such as maintenance costs and individual needs must be weighed,” says Jorey Bernstein, CEO of Bernstein Private Wealth Management.

Maintaining a secondhand car can be costly, especially if it turns out to be a clunker. The availability of vehicle parts and inflation have caused a surge in the cost of vehicle parts over the past ten years. The consumer price index for car parts, as compiled by data from the St. Louis Fed, is now at an all-time high of nearly 180. In contrast, in the years preceding the pandemic, it consistently hovered below 150.

Finding the sweet spot for the price point and value often depends on the car's life cycle and the owner's time horizon.

“New cars depreciate rapidly in the first few years, but a secondhand car that's 2-3 years old can offer significant savings while still providing many of the benefits of a new car,” says Greenberg.

It's crucial to remember that the price tag is just the tip of the iceberg; myriad costs lie below the surface. 

“Total cost of ownership considers not just the purchase price but also insurance, taxes, maintenance, and potential loan interest,” says Greenberg. 

New or used, there are no hard and fast rules for which works. Suffice it to say it pays to take the time to plan accordingly to the unique use case. Generally speaking, if the car is for short-term use or a secondary vehicle, a secondhand car might be more economical, whereas for long-term use as a primary vehicle, the warranty and enhanced features of a new car may be worth the higher cost.

Buy or Bust?

While cars remain a central feature of American life, younger generations are reassessing the necessity of owning one outright. 

A recent study from Zipcar reveals a majority of millennials (55%) actively make an effort to drive less and prefer “access over ownership” when it comes to cars. Environmental awareness and concerns over ownership costs were the main factors behind the generational shift. 

Cars are a big-ticket item and can suck up a lot of savings for young adults. Seen through an investment lens, most cars as liabilities rather than assets, as most cars depreciate in value over time. Nonetheless, there are compelling reasons to buy.

While cars tend to lose value over time, owning a car provides essential mobility and convenience,” says Bernstein. Buyers should align their decision with their lifestyle, budget, and preferences, considering factors like depreciation, maintenance costs, and reliability.

Ultimately, it all comes down to consumers' individual needs. Advisors remind us that even a cooling price does not warrant a good reason for people to buy if they are not in the market for a new vehicle. Consumers wavering on what to do should consider speaking with a local financial advisor who can offer objective guidance through a more holistic lens.

“I never recommend buying a car (new or used) just because the market may be attractive. I am a fan of ‘driving it til it dies' and purchasing based on need,” says Terri Bailey, AFC and Owner of Daily Financial Success. “Even if the supply outweighs the demand and prices get slashed, if you don't need a car, it is still an expense that likely doesn't align with your goals,” she adds.

As car prices shift, the scale tips for prospective buyers. Amidst predictions of retreating prices and potential discounts, the market seems poised to favor consumers. 

Advisors counsel patience – waiting for opportune times, like end-of-year or quarter, for potential price cuts. Regardless, a comprehensive approach is advised, assessing the total cost of ownership, lifestyle, and individual circumstances. 

Ultimately, however, it comes down to individual needs. As the automotive landscape evolves, financial planners underline that buying should align with necessity and goals, not solely market dynamics.

This post was produced by Wealthtender and syndicated by Wealth of Geeks.