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New car prices are finally coming down as vehicle inventory improves and auto loan interest rates reach the highest level in three years.

The average transaction price for new vehicles remains extremely high — up more than 24% in the past two years — but the trend is changing, according to a recent report from consumer research firm J.D. Power. The average transaction price for October is expected to be several hundred dollars cheaper than the record level it reached during the summer. It's set to fall to $45,599 for the month of October compared to a high of $46,173 in July.

While it's just a dip — and new vehicles continue to be extraordinarily expensive in the grand scheme — the October price drop could be part of a downward trajectory similar to that of used car prices, which have been declining for the past several months, according to government data.

For lots of buyers, buying a new car remains difficult. Average auto loan interest rates are likely to come in above 6% for the month of October. And the average monthly payment for new car purchases is expected to be $711, up from $664 a year ago, according to Thomas King, president of the data and analytics division at J.D. Power.

The rising interest rates combined with higher-than-normal prices mean it’s a tough vehicle market to buy in.

Still, the pace of new vehicle sales in the U.S. increased in October as vehicle inventory improved, helping make it a strong month for car manufacturers, King said in the report.

“Although rising interest rates continue to put pressure on affordability, buyers spent more money on new vehicles this month than any previous October,” King added.

In a recent earnings call, General Motors executives said supply chain issues have been easing and car parts have become more available (despite ongoing issues in countries like Mexico that continue to impact vehicle output). Cox Automotive, the parent company of Kelley Blue Book, reports that the inventory of new vehicles in the U.S. just reached the highest level since June 2021 as manufacturers produce more cars.

Like J.D. Power, Kelley Blue Book reports that new car prices have begun to decline, with a 0.3% drop from August to September. However, vehicle affordability worsened month-to-month because auto loan rates have risen so much due to the Federal Reserve's interest rate hikes aimed at slowing inflation.

The end of the year is traditionally when new vehicles are discounted to make space for the newer models, according to Cox. But vehicles from certain manufacturers remain in such short supply that significant discounts are unlikely this year.

Ford executives, in an earnings call last week, said high auto loan rates are reducing affordability for some buyers, but they are optimistic there will still be enough demand from U.S. buyers for car prices to remain high at least throughout the end of 2022. Going forward, they expect manufactures to offer more discounts to try to keep buyers interested even with auto loan interest rates at high levels.

In the absence of discounts at the moment, some buyers are responding to higher rates by opting for shorter financing terms to keep their interest payments down. But due to the high prices, other buyers are stuck going with long loan terms to get lower monthly payments, according to Ford.

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