Will Car Prices Drop in 2023?

They could -- but only if one thing happens.

Owning a car is, for many people, a necessity more so than a luxury. But this year, car prices have been sky-high, forcing some people to put automobile purchases on hold or otherwise attempt to bear the cost of barely manageable auto loan payments. And at a time when consumers are increasingly dipping into their savings and racking up large credit card balances to cover everyday expenses, that's a big problem.

But will things improve in 2023? Or will car buyers be in for another year of sky-high vehicle prices?

Supply chain issues are largely to blame

A recent J.P. Morgan report reveals the average transaction price of new vehicles was up 11.8% in July 2022, compared to July of 2021. And all told, consumers paid an average of $45,869 for a new vehicle in July 2022, marking a record high.

So why are car prices so inflated? It has to do with a glaring lack of supply.

Car manufacturers have been grappling with microchip shortages since the early stages of the pandemic. And raw material costs are also on the rise, so car makers are passing that expense on to consumers. Furthermore, due to chip shortages, manufacturers are prioritizing their most expensive vehicles, thereby forcing some consumers to buy higher-end cars instead of the more moderate-level vehicles they might otherwise be content with.

Meanwhile, because new cars have gotten so expensive, it's been putting more pressure on the used car market. In June, used car prices rose 7.1% on a year-over-year basis.

Thankfully, used vehicle prices are starting to come down. But we're unlikely to see new car prices drop any time soon -- at least not until chip supply increases enough for manufacturers to ramp up production.

What does 2023 have in store for car buyers?

There's a good chance used cars will get more affordable in 2023, since prices seem to have already peaked earlier this year. But new cars could remain expensive if the chip shortage isn't addressed.

One thing that might help, though, is that Americans may be getting used to the idea of taking public transportation again. During the pandemic, demand for cars soared as workers did their best to avoid packed trains and buses for fear of catching COVID-19 and falling ill. Nowadays, a lot of people are settling into a "living alongside COVID" routine, and that means relying on public transportation once more. If enough people go that route, it could ease car-related demand, potentially impacting prices to some degree.

But all told, car production needs to increase for vehicle prices to drop substantially in 2023. And while that has the potential to happen, we can't bank on it.

Those looking to buy a car in 2023 may need to pad their budgets -- especially if they're set on purchasing a new vehicle. While car prices could start to slowly but surely come down as the year progresses, based on current conditions, we shouldn't bank on any real progress during the earlier part of 2023.