Auto prices poised to fall as demand falters

DETROIT -- While the U.S. inched its way out of the recession, consumers went car shopping in droves.

As sales rebounded, the price of vehicles rose to record highs.

Now, the price trend is set to reverse itself, partly because some buyers are unwilling or unable to pay the high prices and are opting for used cars.

Although overall industry sales are tracking last year's record 17.5 million, many automakers are selling more cars to rental companies to maintain the momentum.

Sales to consumers are declining, so companies are ramping up incentives.

Discounts in September hit a level not seen since automakers were desperate for sales during the financial crisis in late 2008.

"Inherently, you're seeing a price war," says John Mendel, executive vice president of Honda North America. "You're already seeing the pricing pressure."

Analysts say the deals will only get better during the next two years as millions of leased cars flood the used-car market and pull new-car prices down.

Auto prices have risen every year since the recession, hitting a record average of $31,825 in December, according to J.D. Power.

The average price in September was $30,862, an all-time high for the month.

Prices have remained elevated largely because buyers still are paying top dollar for red-hot segments such as crossovers and big SUVs, which cost more than sedans.

Now, many analysts say the perfect climate is developing to pull prices lower soon:

• Slowing sales: It may be high prices or it may be good deals on late-model used cars, but sales of new vehicles have plateaued and even fallen for the past two months. That is forcing discounts from automakers to keep market share. September incentives hit a record $3,888 per vehicle, beating the old mark set in 2008, according to J.D. Power.
• Family-car blues: Demand for cars has fallen as buyers snap up higher-priced SUVs and pickup trucks. Cars made up only 40 percent of U.S. sales last month, barely above the record low in July, meaning companies will need to lower prices to move sedans off dealer lots. Analysts say prices of the better-selling vehicles will remain high in the near-term but eventually fall as well.
• Leases surge: Leasing dried up during the financial crisis, cutting off a main supply of used cars. It recovered to 25 percent of new car sales in 2014 and now is over 30 percent. That means many late-model cars in good condition are coming to the market. Kelley Blue Book estimates 3.5 million leases expire next year, and as many as 4.5 million expire in 2018. Automakers will offer discounts to move the used vehicles, and new-car prices will have to drop to stay competitive.