The LA Times is reporting New auto prices are falling at a record rate.

The average cost of a new vehicle in the second quarter was $25,632 — a 2.3% decline from the year-earlier period and the steepest drop recorded in the bank’s 41-year-old survey.

The price drop comes as automakers are already coping with mounting losses and declining sales. Carmakers are shifting away from trucks and sport utility vehicles, which command high profit margins, toward manufacturing smaller cars, which are less profitable.

Although vehicle sales are expected to remain weak in the near term, the analysts said, the price decline is leading to better affordability and could translate into a big recovery for auto sales by the second half of 2009.

“If the labor market begins to improve in the second half of 2009 . . . buyers returning to the vehicle market may find the costs of owning a new vehicle to be unusually attractive,” Patel and Levinson wrote.

“Vehicles have become much more affordable to average consumers,” Patel and Levinson wrote.

More Affordable For Who?

For all three classes above, a 2.3% drop is not going to make cars “affordable”. Furthermore, those who do want to buy need to be aware of the tight credit squeeze affecting dealers.

GM (GM) For (F), and Chrysler are all cutting back on credit extended to their dealers. This is putting some auto dealers in extreme jeopardy. See Auto Dealer Credit Squeeze Wildfire for more details.

The industry sees signs of hope even as GM, Ford, Chrysler Sales Collapse. Hope in a bear market is almost never rewarded. The bottom is unlikely to be in until hope is crushed and despair sets in. In the meantime I expect to see many auto dealers go bust.

Overcapacity is rampant, especially in light of a rapidly deteriorating jobs picture. Price rollbacks have just begun. Those rollbacks are going to spread to other sectors as well as the battle for consumer discretionary spending heats up. Why buy a house or a car or a boat today when all three will be cheaper tomorrow?

Mike “Mish” Shedlock
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