What Happens to Car Prices in a Recession?

A recession signals a period of economic contraction, marked by a decline in economic activity. Such downturns lead to shifts in consumer behavior, as individuals reduce discretionary spending and prioritize financial stability. This cautious approach impacts markets, especially the automotive sector, which is sensitive to consumer confidence and purchasing power.

New Car Price Trends

During a recession, new car sales decline as consumer confidence and disposable income decrease. Buyers delay large purchases like new vehicles when economic uncertainty prevails, leading to a drop in demand. For example, U.S. new vehicle sales fell nearly 40% during the Great Recession of 2008. Automakers and dealerships struggle to maintain sales and profitability amidst reduced consumer spending.

Decreased demand leads manufacturers and dealerships to offer discounts and incentives to move inventory. These incentives include financing deals, such as lower interest rates or extended loan terms, and cash-back offers. Dealerships also run promotions. The average new vehicle price may be forced downward by a drop in demand, especially with high interest rates increasing dealer floorplanning costs.

Reduced demand impacts manufacturer production schedules and inventory levels. When sales slow, automakers cut production to prevent oversupply. Still, inventory levels can rise during a recession, increasing pressure on dealers to offer deals. For instance, new vehicle inventory increased by 225% from pandemic lows to May 2024 levels.

Sales of luxury new vehicles may decline more sharply during a recession compared to economy-focused models. Affluent consumers might delay high-end purchases due to uncertainty about future earnings. While luxury brands are not immune, as seen with Porsche sales falling 22.5% in 2008, the impact can vary. Some past recessions have shown unexpected increases in luxury car sales for certain brands, possibly due to wealthy individuals being less affected by economic struggles.

Used Car Price Trends

The used car market behaves differently from the new car market during a recession. A recession increases demand for used cars as consumers seek to save money. Individuals need transportation but look for cheaper alternatives, making pre-owned models a preferred choice as buyers become more budget-conscious.

Fewer new car sales lead to fewer trade-ins, tightening the supply of newer used cars. Owners keep vehicles longer when economic conditions are uncertain, reducing the flow of “nearly new” cars. However, repossessions or individuals selling assets to manage financial strain can increase the supply of older, lower-priced used cars. Historically, used car prices tend to dip during a recession as the supply-demand balance shifts.

Depreciation rates for used vehicles are affected, with value retention shifting during a recession. A pre-owned model has already experienced significant depreciation, making used cars a more appealing option. However, some segments, like work trucks, may hold their value better even in a struggling economy due to ongoing business needs.

The interplay between new and used car markets is notable. If new car incentives become strong, some buyers might be drawn to new vehicles, potentially reducing used car demand. Conversely, if new vehicle prices remain high and lending becomes stricter, it increases interest in pre-owned options, pushing up demand and potentially prices for used vehicles. The average price of a three-year-old used vehicle can even climb, defying expectations when new car production recovers.

Economic Factors Driving Price Changes

Economic indicators shape car prices during a recession. Rising unemployment rates influence consumer purchasing power and sentiment, making individuals hesitant to buy vehicles. A strong negative correlation exists between new light-vehicle sales and unemployment, as job insecurity deters car purchases. For instance, unemployment accounted for 89% of the variance in monthly vehicle sales during one examined period.

Decreased consumer spending and declining consumer confidence drive price changes. Consumers become cautious, prioritizing essential items and postponing major expenditures, including cars. The University of Michigan’s Consumer Sentiment Index and the Conference Board Consumer Confidence Index gauge financial outlook, with low confidence preceding reduced spending.

Tightened credit markets, higher interest rates, and stricter lending standards make car loans more expensive and harder to obtain. This depresses demand for both new and used vehicles. Federal Reserve actions, such as raising the federal funds rate, indirectly increase auto loan interest rates, making borrowing costly. For example, a 100-basis-point interest rate increase can add $15 to $19 per month to new-vehicle loan payments. Auto loan delinquency rates can also rise, indicating consumer financial stress.

Supply chain disruptions, even if not directly caused by a recession, can exacerbate pricing if they reduce vehicle availability. Component shortages, like semiconductor chips, limit manufacturing output, leading to reduced inventory even with low demand. This can elevate prices due to limited supply despite a downturn in consumer demand. The automotive industry has experienced delays and shortages, affecting production and influencing prices.