Car prices are skyrocketing, and they’re not going to stop

Car dealership lots have only a fraction of the vehicles – new and used – that they typically have. It helps send prices to record highs and raise the nation’s overall level. inflation rate.

And the price increases are not over yet.

The average price of new cars hit a record high of $ 38,255 in May, according to JD Power, up 12% from the same period a year ago.

About two-thirds of car buyers paid less than 5% of the sticker price in May, some pay above sticker.

Wholesale price for Used vehicles auctions are up 39% since the start of this year, according to other data from JD Power. Retail used car prices increased 20% more modestly over the same period. It’s also a big jump for this time of year, and higher wholesale prices indicate bigger increases to come.

“This puts used wholesale prices at the highest level ever,” said David Paris of JD Power. “And we are seeing second-hand retail prices accelerating rapidly.”

The US economic rebound has pushed consumer price at the fastest pace in nearly 13 years, and used car prices alone were responsible for a third of the overall 5% increase in May.

This is a 180-degree turnaround in the market from a year ago, when many car dealerships were shut down by the pandemic or limited to providing service and maintenance. Massive job losses and the shift to working from home have caused a 30% drop in auto sales in the second quarter of 2020, the biggest quarterly drop since the Great Recession.

Now sales are booming, with May’s seasonally adjusted sales rate for new car sales to consumers increasing 34% from a year ago and 10.6% from month-to-month sales. normal of May 2019.

Supply chain issues

But the resurgent demand comes at a time when automotive factories around the world are closed or are operating at reduced production due to shortage of computer chips. New car production in North America fell by about 3.4 million vehicles in the first three months of this year, according to Cox Automotive. And most automakers reported that second-quarter production was even more down than in the first quarter.

The used car market is similarly tight, with some measures of supply and demand in the sector showing the greatest scarcity on record.

These two factors – strong sales and limited supply – are fueling the price hike.

“It’s a perfect storm,” said Charlie Chesbrough, senior economist at Cox Automotive. “If you’re not prepared to pay close to the sticker price, there’s someone behind you who does. These issues will likely be with us for at least the rest of this year. “

Here is an overview of the main factors behind the price spike:

Limited supply

The shortage of computer chips is only one of the factors that reduces the inventory of available vehicles. Other auto parts, including tires and resins, are starting to be scarce, experts say.

The limited availability of new cars is making itself felt in the used car market. Car rental companies, which sold about a third of their fleets last year to raise funds and survive the recession, now have their own car shortage just like travel bounces.

The shortage of chips also means that automakers don’t have an oversupply of new cars that they can sell to rental companies at a discount.

“The [rental car companies] typically buy 2 million vehicles per year, and that’s the number of cars they typically sell in the market, ”said Ivan Drury, senior director of information for Edmunds.com. “With automakers not being able to sell them right now, that one and two year vehicle sales just aren’t happening right now. “

People returning to work

As offices reopen, workers who had stayed at home are starting to resume commuting, further fueling demand for cars.

Employers added 559,000 jobs in May, but that’s only part of the story. Other employers notify workers that offices have been closed since last year will reopen In the coming months.

Many who have delayed buying a new car due to job uncertainty or lack of commuting are now looking to buy. And some of those who have taken public transport to and from work may now want their own cars to limit their potential exposure to Covid-19.

“People concerned about transit and Uber are a factor of growing interest,” said Nick Woolard, director of industry analysis for TrueCar.

More cash, low interest rates

Many workers have lost their jobs and suffered economic setbacks over the past year. But those who have kept their jobs may have more money available than normal. By some estimates Americans have a An additional $ 2.4 trillion savings compared to a year ago.

Expenses for activities such as vacations and dining out were down, as were the cost of travel. Record stock market Stocks often fuel auto sales as well, as the wealth effect leads consumers to put less money aside for long-term savings.

And then there were the various stimulus payments from government, which totaled thousands of dollars for many households.

Low interest rates allow many buyers to spend less on car payments than they otherwise would have. And the boom of home refinancing Over the past year, they’ve cut mortgage payments by millions of dollars, sometimes enough to budget a car payment, which may not have been the case before.

The abandonment of cheaper cars

Part of what drives new car prices up is what consumers want to buy now. The shift from cheaper sedans to more expensive SUVs and vans was accelerating even before the pandemic.

Automakers are responding by cutting production on their less popular models in order to preserve the computer chips they have available for SUVs and trucks, although even these models are seeing some reduced production.

Many new car buyers are also drawn to the next generation of options.

“People can’t buy enough content when they pull the trigger on new vehicles,” Drury said. “They buy high trim levels and lots of options. For some trucks, they pay double the sticker price for the base model, just because of the options.

Dealers, not automakers, are the big winners

The automakers are taking advantage of this because they don’t have to offer a lot of incentives. Yet the supply shortage is hurting their bottom line. Ford and General Motors each expect the chip shortage cost them over a billion dollars in profits this year.

The big winners: car dealerships. This includes the thousands of private dealerships as well as AutoNation, a publicly traded company specializing in new cars, and CarMax, which focuses on used cars. AutoNation reported a record first quarter profit in April, which tripled its profits from last year.

“It’s an almost perfect operating environment to be an auto dealership,” said Ali Faghri, analyst at Guggenheim Securities, which tracks auto retailers. “The demand is incredibly robust, you have a number of tailwinds all converging at the same time. You’re not only selling a lot of cars right now, but at record margins. “

Even with automakers hit by the chip shortage, the industry is back to an unthinkable level a year ago.

“If I had told you 12 months ago that we would be in this situation, with record vehicle sales and prices, you would never have believed me,” said Faghri. “It played out in a very different way than most people were waiting when the pandemic first struck. “

A potential downside for the industry is that prices could eventually become prohibitive, discouraging buyers.

The University of Michigan consumer survey found that more consumers have volunteered to worry about rising prices for homes, vehicles and durable household goods than at any time in decades. .

“These unfavorable perceptions of market prices have reduced overall purchasing attitudes for vehicles and homes to their lowest level since 1982,” said Richard Curtin, chief economist for the survey.