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New car prices may soon start coming down — but get ready to pay more in interest

New vehicle prices hit a record in August. Even if they start coming down, interest rates are now at their highest levels in 15 years.
A Car Dealership As October Car Sales And Inventories Rise
A Mercedes-Benz sports utility vehicle for sale in Louisville, Ky., on Dec. 7. Luke Sharrett / Bloomberg via Getty Images file

New car prices may finally start declining in the coming months — but don't expect to pay much less on a monthly basis due to higher interest rates.

"To our clients who refused to pay above sticker for a new car, your patience is about to pay off," wrote Morgan Stanley chief auto analyst Adam Jonas in a note to clients on Monday. Thanks to stalling sales and a 17-month high in vehicle supplies, "deflation" may finally be arriving for new car prices, Jonas said.

In a separate report released Sept. 28, J.D. Power also predicted lower list prices could come in the coming quarters thanks to rising interest rates, higher vehicle availability and worsening economic conditions that are likely to affect overall demand.

The declines, whatever they look like, would be welcome for car shoppers. According to J.D. Power, new vehicle prices remain near record levels: In September, the average transaction price was expected to reach $45,622 — a record for the month, a 6.3% increase from a year ago and the fourth highest of any month on record. August set the record, with prices average hitting $46,259, J.D. Power said.

And the lower list prices would come at a time when interest rates to borrow for car purchases are at levels not seen in 15 years — nearly 6% on average.

The result is that lower income and lower credit quality buyers are being eliminated from the market, according to Cox Automotive, while luxury buyers will remain.

"New cars may finally become more available just when most Americans can no longer afford them," said Cox chief economist Jonathan Smoke in a note published Monday.

Instead, car shoppers may want to consider the used market, where dealers just saw the biggest one-month drop in prices paid at auction since the pandemic began, according to Kelly Blue Book.

The average used car sold for $28,061 in August, the most recent month for which data are available — a decrease of $158, or about 1%.

Analysts at auto group also suggest customers think about settling for a larger monthly payment to avoid paying more overall.

“Consumers who want to save where they can must think about the big picture when it comes to financing their car purchase," said Ivan Drury, Edmunds’ director of insights in a release Monday. "It might be a hard pill to swallow to agree to a much larger monthly payment, but if your ultimate goal is to save money and stay out of the red, you could save yourself thousands of dollars by taking this step — just make sure that the monthly payment you agree to is still within your means.”