How Long Are Vehicle Prices Going To Remain Insane?

With just about every resource trading at unappealing premiums, now may not be the time to make any major purchases unless you’re a financial masochist or so wealthy that the normal rules of living no longer apply. But it remains a seller’s market for just about everyone, including the plebian masses. Giant, unaccountable financial institutions will happily purchase your home and there’s a sea of disenfranchised people who will give you their last dollar if you can help them make sense of an increasingly hectic world. In the automotive sphere, we’ve seen dealerships and rental agencies hungrily scooping up secondhand automobiles for unheard-of prices just so they’ll have something on the lot.

The end result is a lot of overpriced merchandise that larger businesses are desperate to buy so they can pass on their elevated expenses to the customer. We’ve already covered the stupidly high prices surveyed consumers claimed they’d be willing to spend on a new vehicle. But there have been numerous reports claiming those days are coming to an end, with just as many suggesting we’re still in the thick of it. Yours truly has been wondering just how close to reality those assertions happen to be.

One thing that’s certain is how production shortfalls have yet to be rectified. Just about every automaker has already confirmed that 2021 output will be less than anticipated, with many continuing to announce plant closures through the summer months due to the ongoing semiconductor shortage. With ongoing geopolitical strife in Asia (specifically China repeatedly signaling its desire to invade Taiwan) it’s hard to envision a near-term future where new vehicle prices decline and chips are available in abundance. However, Bloomberg recently suggested that used automotive prices are starting to level off.

They’re still hysterically expensive, with even some of the oldest and least desirable automobiles seeing sizable upticks in their Blue Book values. But Cox Automotive has confirmed that the wholesale auction fees of secondhand cars appear to have plateaued, with one of its analysts stating that this is indicative of price declines arriving in the coming weeks.

“Wholesale prices as of right now are at their peak and should start to come down,” said Zo Rahim. “We are seeing a decelerating pace of price increases in the first two weeks of June, compared to what has been just an absolute surge [through 2021].”

From Bloomberg:

Manheim’s wholesale index of used-vehicle value was 36 [percent] higher than a year earlier as of mid-June — down from an annual rate above 50 [percent] in April. One effect of higher prices has been to push the average age of vehicles on U.S. roads up to a record 12.1 years in January.

The volatile U.S. auto market was cited by Fed Chair Jerome Powell in a House hearing on Tuesday to help explain the outlook for consumer prices.

“A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy, such as used cars and trucks,” Powell said. “Those are things that we would look to stop going up, and ultimately to start to decline.”

He added a cautionary note: “These effects have been larger than we expected and they may turn out to be more persistent than we expected.”

Car dealers expect the strong demand to persist. CarMax Inc., which sells about 1.2 million vehicles a year from 220 locations, says it’s hiring an additional 5,000 auto professionals this summer, and will offer training programs to entice workers from other industries.

The Wall Street Journal released a report supporting that last paragraph, claiming that dealerships around the country are now demanding fees well over MSRP. There were even claims that some stores were mandating that customers purchase supplemental products on certain models. While some of that was likely due to factory shortages limiting available options, it’s not really the fault of the customer that the dealership doesn’t have what they want in stock. But some of those accusations revolved around wholly unnecessary items like protective coatings and accessories installed at the dealership.

By June, J.D. Power estimated that about 75 percent of all vehicles sold in the United States went for at least the sticker price. Before the pandemic, that number was comfortably sitting around 36 percent. While vehicle prices were suppressed throughout 2020, they snapped up sharply in 2021 with preliminary surveys indicating customers might be willing to pay thousands above MSRP.

“That percentage of people paying above sticker for a vehicle has been going up and up and up,” Ivan Drury, an automotive analyst for Edmunds, told the outlet. “There’s no end in sight because there’s fewer and fewer cars on dealer lots.”

From WSJ:

Sam Pack, a Texas dealer with six stores in the Dallas area, said he is selling most of his inventory at MSRP, and in very few cases above sticker for certain limited-run, specialized models.

“We’re not negotiating like we used to,” Mr. Pack said. “There’s no room to budge when you don’t know what is coming in.”

A dealer charging above MSRP isn’t anything new. But for the most part it would happen with hard-to-find models, such as specialized sports cars or newly redesigned vehicles that are in high-demand upon their debut, dealers and analysts say.

Because dealers own the vehicles — purchasing them directly from the factory — they determine the final price. Generally, the manufacturer’s suggested retail price is intended as a starting point for negotiations, with buyers in the end paying less than sticker.

Even without spreadsheets of pre-pandemic vehicle pricing at your disposal, you can call around asking for quotes and remain struck by the above-average asking prices dealers are willing to float. We sampled several stores from the rural Midwest and urban East Coast earlier today, learning that it’s practically impossible to avoid taking a bath on a vehicle purchase without truly superb negotiation skills. While you can soften the blow by purchasing from segments that aren’t necessarily the most popular (e.g. something that isn’t a pickup or crossover), you’re still likely to confront elevated pricing and a salesperson that’s willing to dig in their heels.

The Wall Street Journal piece actually has several examples of just that, including a woman who wanted to purchase a new Kia Telluride but was told she needed to pay $10,000 over sticker. Disgruntled, she managed to find a Toyota Highlander and convinced the sales staff to let her have it for the listed MSRP — a truly hollow victory.

In addition to supply chain problems, most industries saw suppressed demand during pandemic-related lockdowns. People were saving more and buying less, with 2021 assumed to be the period where businesses recoup those losses. Unfortunately, that lost year resulted in there being insufficient product volumes across the board. When January arrived, inflation was apparent and people’s purchasing power continued to wane. This continued, with the largest pricing increases (and generalized inflation) taking place within the last six months.

With all the above in mind, we’re inclined to agree that there’s a potential for prices to drop in the coming months. But there’s really no reason to plan your life around that being a certainty. There’s precious little to suggest new vehicle prices are going to return to pre-pandemic values before 2022. Realistically speaking, our best-case scenario involves secondhand vehicle pricing coming back down at the very end of the summer. But there’s almost no way to imagine new vehicle transactions to swing anywhere near normal until supply chains have been thoroughly repaired and we’ve got a bead on securing reliable access to all the components that go into modern automobiles.

[Image: Gretchen Gunda Enger/Shutterstock]