What's Causing the Big Spike In Car Prices, and How Consumers Should React
(Chinatopix via AP)
What's Causing the Big Spike In Car Prices, and How Consumers Should React
(Chinatopix via AP)
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For years, few things fell faster than the value of a new car driving off a dealer’s lot. Lately, though, car prices have been defying gravity. 

Vehicle prices are soaring, and older cars are retaining value like never before. Dealers are selling new cars above the sticker price. The cost of a used one has risen 40 percent since December 2020. 

Though cars have traditionally been viewed as a depreciating asset, the recent runup in valuations has left many consumers taking a new financial look at what’s parked in the driveway.  Have cars become more than something to just drive?

As chief executive of a company that analyzes valuations of thousands of cars and trucks each year, I think consumers would be wise to consider how the economics of vehicle ownership have changed in the past two years of pandemic. They also shouldn’t expect these high prices to last.

Why prices are so high now

When Covid first hit in 2020, people were reluctant to shop. Dealerships were ghost towns. Manufacturers responded with 84-month, 0 percent interest deals to coax back buyers. Inventory quickly ran out, but the assumption was that Covid would retreat in a few months, and the car business would return to normal. 

How wrong this was.  

As Covid continued, factories remained shuttered. Ships couldn’t unload auto parts. Virtually every aspect of the global supply chain was thrown into disarray. Dealers couldn’t replace what they had sold from their lots. 

For a few months, vehicle inventories were helped by car rental companies, which reacted to the Covid travel shutdown by halting purchases of new vehicles and then selling off existing fleets. Yet that reprieve wasn’t enough to satisfy pent-up consumer demand. By the spring of 2021 – the annual boomtime for auto sales as tax refunds arrive – inventory was badly depleted again.   

Today dealers have roughly half the selection they did in 2019. Buyers can’t find new cars, so they moved on to used cars, driving up those prices and causing the same scarcity. 

Meanwhile, Covid outbreaks are flaring again in Asia, a chief supplier of computer chips that direct modern vehicles. At the same time, people are driving more and commuting longer following a pandemic exodus from central cities.  

All of which points to continued price pressure on the auto market – with no end in sight. You can’t suddenly build new factories or make parts closer to home to fill immediate demand. In an industry this large, the time it takes to turn the ship is measured in years, rather than months. 

But if you bought a car before the big inventory crunch, then the auto industry’s pain is your gain. 

Better bang for the buck

The average price of a new car now tops $47,000, according to Kelley Blue Book. That’s $6,220 more than in 2020. Sticker prices traditionally have been a starting number that car buyers negotiate downward. Now some dealers are boasting that they’ll never charge you more than sticker. 

At these high prices, the average monthly payment hovers near $800. Throw in inflation, rising gas prices, and grand leaps in housing costs, and car buyers are being squeezed from every direction. Consider yourself lucky if you’re not in the market. You’re getting much more bang for the buck than anyone buying today. 

With a desperate shortage of computer chips, new cars are likely to start coming with fewer options, because that will allow manufacturers to get by with fewer chips. This means losing options like intermittent wipers or mechanical seats – without a corresponding drop in price. After all, high demand means never having to say you’re sorry. 

If you have a seldom-used vehicle that you can do without, by all means sell. Prices have never been better. Yet if you need your car for work and family and all the things you normally do, now is the time to hold tight onto that vehicle – it would cost too much to replace. 

We’re living in a unique moment when your car is holding its value. Remember, though, that it’s a tool, not a savings account, and it will wear down over time. Only so many people can afford the $800 monthly payment of a new car. The rest will turn to used cars instead. And when it’s your time to make a move, the car already parked in your driveway will look better than ever.  

Tom Holgate is CEO of iLendingdirect.com.

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