Auto Market Anticipates Major Price Drops as New Car Sales Slump in 2023 - Tesla Leads the Plunge

Consumers in the market for a new or used car have undoubtedly noticed the recent surge in prices. However, the affordability of vehicles has become a limiting factor as this trend progresses. In a sudden shift, the U.S. car market is undergoing a transformation, with analysts anticipating an imminent price war stemming from an excess supply of vehicles.

A report from UBS reveals that global car production is projected to surpass sales by 6% this year, resulting in a surplus of 5 million vehicles that will necessitate price reductions for successful sales. While these price cuts may not take effect until later in 2023, automakers are already preparing for the battle, with certain electric vehicle manufacturers taking the lead by lowering prices.

UBS states, "Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result... The price war has already started unfolding in the EV space, and we expect it to spread into the combustion engine segment [during the second half of 2023]."

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Family car manufacturers are expected to be hit hardest by the price cuts, while luxury carmakers are anticipated to fare better.

According to a recent study conducted by automotive marketplace iSeeCars.com, the electric vehicle (EV) segment is witnessing significant price declines, with certain models experiencing even more substantial drops. The study reveals that in June, used EV prices plummeted by 29.5% compared to the previous year, following a decline of 28.9% in May. The downward trend continued in April with a decrease of 24% and nearly 17% in March.

iSeeCars Executive Analyst Karl Brauer highlights the contrasting trajectory of used EV prices compared to the overall used car market, stating, "A year ago, used EV prices were on the upswing, rising faster than the average used car. Electric vehicle prices are now falling at nearly 10 times the rate of the average used vehicle, reflecting a clear shift in EV supply and demand."

The study identifies Tesla models as the primary contributors to the significant price declines, with three out of the four EVs experiencing the sharpest drops belonging to the Tesla lineup. The average price of the Tesla Model 3 stood at $37,023 last month, marking a substantial year-over-year decline of 30%.

Electric vehicle manufacturers may face challenges due to rising energy costs and high prices that make them less accessible to consumers. 

There is already evidence of declining car prices across all segments. The Manheim Used Vehicle Value Index revealed a 4.2% drop in wholesale used-vehicle prices from May to June, the largest since the Covid-19 start.

Kelley Blue Book's report confirms a three-month decline in new vehicle prices, suggesting a potential ongoing trend. However, despite these declines, prices still remain historically high.

Rick Salmeron, a certified financial planner in Dallas, offers an analogy to shed light on the situation: Just like the soaring prices of Taylor Swift concert tickets driven by high demand and limited availability of seats, car prices have experienced a similar peak. As a result, consumers are now contemplating whether they are willing to pay such substantial amounts for a vehicle.

Salmeron identifies two factors contributing to the declining demand for cars: consumer hesitation to pay high prices and the impact of rising interest rates on borrowing and debt repayment capacities. As supply outpaces demand, prices are naturally expected to decrease.

While the plummeting car prices may bring benefits to consumers and offer a short-term boost to the economy, Salmeron cautions against the long-term implications.