New and used car prices in the US are reaching record highs and showing no signs of softening. While customer appetite for cars continues to grow, tight inventories and tangled supply chains make it difficult for auto companies to keep up with demand.
New car prices have soared 20% over the past year in the US, as the nation’s economy continues to struggle due to the whirlwind caused by the COVID-19 pandemic. The global shortage of microchips has slowed the production of new cars, and even used ones are available at a high price. As travel increases, car rental companies are struggling to keep up with infuriating demand as they sold the majority of their vehicles in the used car market in 2020 to survive through tough times. A low interest rate on auto loans offered by businesses adds to the high demand for cars in the United States, where auto loans account for 9.5% of US debt, second only to loans. mortgages and for students. Therefore, strong customer appetite for new cars, fewer vehicles on dealer lots, and tight inventories have resulted in an average transaction price increase. Additionally, tangled supply chains make it difficult for companies to keep up with demand. New car prices could rise further as the global semiconductor manufacturing shortage appears to be worsening due to increased demand for electronics.
Car prices beat headline consumer inflation
The average price of a new car reached a record high of USD 38,255 in May 2021 with an increase of around 12% over the same period of the previous year, the wholesale prices of used cars sold at auction have increased 39%, while retail prices for used cars have risen. it’s up 20% from last year. Prices have reached the highest levels ever and continue to accelerate rapidly, thus raising the country’s overall inflation rate. In 2020, many car dealerships closed due to a 30% drop in sales in the second quarter, the biggest quarterly drop since the Great Recession. However, strong demand for cars has led to price increases at the fastest pace in more than 13 years, with used car prices accounting for an overall increase of 5% in May 2021.
• Inventory shortage
The resurgence in demand for cars comes at a time when many new car production facilities have closed due to a global shortage of microchips. According to an investigation by Cox Automotive, New car production in North America fell to about 3.4 million vehicles in the first quarter of 2021. 53% of automakers source their microchips from outside the country and the trade war between the United States and China adds to the semiconductor shortage, which has become the biggest shock to supply. 38% of the production facilities temporarily stopped manufacturing vehicles due to the interruption in the supply of microchips. The shortage resulted in around USD110 billion in revenue loss to the automotive industry. The global microchip crisis is expected to affect the automotive sector for at least the next six months, even as efforts are underway to increase domestic semiconductor production with proposed new plants. Additionally, a shortage of used inventory due to fewer repossessions is driving up new car prices. The inventory portfolio shrinking is making distributors work harder as wholesale prices are appreciating much faster than retail prices, so margins are shrinking at a rapid pace. While smaller distributors manage to get more margin with wholesale inventory than with retail, larger distributors make up the difference with volume.
• Fewer auto repossessions
Gone are the days when used vehicles were thrown into the junkyards when they exceeded 100,000 miles. The average age of vehicles has risen to 12.1 years, up from 11.9 years in 2020, reflecting their higher value. According to Manheim Used Vehicle Value Index, The average price of used vehicles in May 2021 reached USD20,426, 46.7% more than in 2020. Factors such as the introduction of newer and safer technologies, greater reliability, better quality of cars and increased longevity are increasing the value of used cars. However, used cars are in short supply due to the effect of the pandemic on car rental businesses. Due to declining demand during the pandemic due to travel bans and repeated closure restrictions, car rental companies sold parts of their fleet without buying replacements to counter the cash shortage. With fewer people renting cars, car rental companies and other fleet buyers are not unloading as many old vehicles or purchasing as many new vehicles, adding to the price hike. Additionally, increasing competition for used vehicles, especially from online car sellers like Carvana and Vroom, due to high bidding wars at auction, is driving car prices as high as new ones.
• Stay away from the cheapest cars
Even before the pandemic hit, many automakers began replacing lower-priced vehicles that provide low profit margins, such as sedans and hatchbacks, with SUVs with relatively higher label prices. The growing shift of consumers from less expensive sedans to more expensive SUVs and pickup trucks is gaining momentum. The auto industry in the US has been abandoning the production and sale of cars below the price of $ 30,000, giving up low price territory to the used car market. Many automakers are reducing production of less popular models in response to the global shortage of microchips to meet consumer demand for new models. Additionally, next-generation technologies and green models attract customers and rapidly change their purchasing behaviors. Some consumers are ready to splurge on high-end vehicles, including premium finishes, high-tech features, and performance upgrades, all of which contribute to better prices.
• More cash available
When the pandemic hit, many shoppers weren’t spending on restaurants or vacations, so they are now choosing to use the money saved on loaded trucks or SUVs, expanding their car spending more than they would have otherwise. According to Moody’s Analytics, Americans now have an additional $ 2.4 trillion in savings compared to last year due to repeated economic downturns. Additionally, government stimulus checks are helping buyers use the money to make down payments and choose the vehicles of their choice. Low interest rates are putting vehicles within the reach of many buyers, spurring demand for new vehicles in the $ 50,000 and higher range. Therefore, the increased inclination of customers for high-priced vehicles is contributing to the average price of cars. Plus, reduced mortgage payments allow buyers to budget for their car payments that might not have been possible before.
• Opening of commercial premises
In 2020, many workplaces asked their employees to work from home as an effective measure to reduce the spread of the coronavirus without hindering work. Yet as offices are reopening with ease on lockdown restrictions and rapid vaccine inoculation drives, people are returning to work, further fueling the demand for cars. The new generation of employment added to the reopening of commercial spaces adds to the demand for car purchases. Additionally, people who used to prefer public transportation are now leaning towards commuting with their car to reduce exposure to COVID-19. Thus, the strong demand for cars for unlocking measures is driving up vehicle prices.
How are rising car prices affecting the average American?
While rising car prices are a good sign for the nation’s economy, many consumers are struggling to buy new or used vehicles. Nearly 64% of Americans commute, and those who depend on cars for transportation are forced to apply for long-term auto loans to buy a new car, which could keep the owner in debt for years to come. When buyers funnel capital into a new car, they are paying for a depreciating asset, as average car prices drop more than 20% as soon as one leaves the dealership. Car prices can drop close to 90% after two decades, inferring that no matter how much money the buyer invests in the new car, they will only earn a fraction while selling it.
According to the New York Federal Reserve, more than seven million Americans are nearly 90 days behind on their auto loans, and delinquency rates among borrowers with the lowest credit rates are increasing. Rising used car prices are adding salt to the wounds of poor Americans struggling to make ends meet without an affordable commute solution.
Supply chain shortages are hurting automakers’ bottom line. For example, the microchip shortage is expected to cost Ford and General Motors about $ 1 billion in profits in 2021. Yet dealerships are the real winners from rising car prices, whose profits have tripled. beginning in 2020. Now is the perfect time to be a car dealer as the demand is incredibly strong. However, price-sensitive buyers face a difficult market. If price becomes the deciding factor, buyers could focus on market segments where they could find better deals and healthier inventories. While many economists believe that inflation is temporary, the uncertain economic outlook is huge due to increased consumer savings and government payments, while supply chains are disrupted.
According to TechSci’s Research Report on “US Used Car Market By Vehicle Type (Small Cars, Mis-sized Cars, and Luxury Cars), By Sector (Organized vs. Semi-Organized / Unorganized), By Fuel Type (Gasoline, Diesel and CNG), Competition, Forecast & Opportunities, 2026 “, the US used car market is expected to grow at a formidable CAGR of 8% due to the increasing proliferation of websites selling used cars and discounts on after-sales services or insurance offered by used car dealers. Additionally, high new car interest rates and skyrocketing new car prices are expected to drive growth in the US used car market over the forecast period.