Are Rising Car Prices a Good Thing for the Economy?

Despite the highly promotional theme that seems to always be present in the car sales market, it turns out that new vehicle prices have been rising steadily over the past five years. This is after a period of consistent declines from 1998 to 2008. Sterne Agee’s Michael Ward has a report out on Tuesday showing the trends that both new and used vehicle prices were up again in March. The question we would ask is if your paying more for a new car (or used car) is actually better for the economy as a whole.

The most recent data from the Bureau of Labor Statistics also accounts for the notion that retail incentives have been in a tight range over the past four years, averaging about 8% of the gross transaction price. His report considers that positive pricing and declining costs have contributed to record financial performance for the auto sector.

It will be interesting to see how this trend plays out with the recalls of the General Motors Co. (NYSE: GM) cars. Ford Motor Co. (NYSE: F) is actually seeing a rise in its shares after reporting strong sales trends in Europe, but Sterne Agee’s report is aimed solely at U.S. vehicle sales.

Sterne Agee data shows that new vehicle prices in March were up 0.2% compared with the year-earlier period and used vehicle prices were up 0.1%.

More importantly, new vehicle prices rose by an average of 1.1% in 2013, the fifth consecutive annual increase after declining in 10 of the 11 years between 1998 and 2008. Year to date 2014, new vehicle prices have increased 0.2%.

Used vehicle prices decreased an average of 0.3% in calendar year 2013 according to the BLS, versus a 0.9% increase in 2012. Used cars are exceeding new cars in 2014 as well, as the Sterne Agee report shows that used vehicle prices have risen 0.7%. The report further says:

Used vehicle price increases have outpaced new vehicles in the five of last six months, a positive trend for new vehicle demand.

Ward also points out that U.S. dealer inventory levels ended March at 3.7 million units, the highest comparable level since 2006 — dealer inventory levels typically peak in March and move 15% lower by the end of August, and Ward expects a similar move this year.

So, how much is an average transaction price? $31,021 per unit in 2013, up 1.7% from the last year — and monthly comps have been consistently positive for more than three years. The average transaction prices was also up 1.7% in the first quarter. By maker, the report shows the following for the month of March:

  • General Motors average prices were up 4.1%
  • Ford showed an average transaction price gain of 1.2% from
  • The CPI Used Vehicle Price Index rose by 0.1%

Again, Sterne Agee’s report said:

The gains in used vehicle prices have outpaced new vehicles in five of last six months, a favorable trend for new vehicle sales (higher relative used vehicle prices improve the trade-in value and reduce the cost for new vehicle on a trade in).

Manheim Consulting’s Used Vehicle Value Index totaled 124.4 in March, up 3.3% versus the year-earlier period — the highest value since May 2012. The Adesa wholesale price reading in March averaged $10,429, up 6.0% compared to February and up 4.0% versus the year-earlier period.

It may seem silly to think that rising car prices is a good thing for you or for the economy. But consider a few things here. This helps when you want to sell your used car. This keeps the auto industry strong — which is good for jobs.

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