Cars Are Likely to Stay Expensive for Years

Yesterday Jeremy discussed what spiking car prices mean for overall inflation.

Today I’ll discuss the outlook for car prices themselves, based on what I heard at the Philly Fed’s conference on auto lending yesterday. Some (approximate) quotes:

The used market is red hot

Used prices are likely to stay elevated for a few years

Because used prices are so high, “If you can find the car you are looking for new right now, there’s a good chance it makes sense to buy it instead of going used.” But it could be hard to find that new car you want because inventories are so low, and even then you probably won’t be able to bargain the price down like you normally would- “75% of new cars now sell for MSRP or above, vs 36% last year”

The average new car now sells for $40k, partly because SUVs are increasingly popular, and partly to bother those who care about financial responsibility, like fellow Temple Econ PhD Adam Ozimek:

https://platform.twitter.com/widgets.js

Because of manufacturing disruptions from Covid and the chip shortage, “We’re at least a year out before we start to restock to normal dealer inventory levels” in the new market. Supply in the used market could stay low for 4-5 years because of the lower production of new cars and lower turnover of existing ones. Normally cars coming off lease & out of rental car fleets are a big sources of used cars for sale, but fleet purchases & leases are down from 40% of new car purchases to 25%. Reposessions, another source of used cars, actually decreased slightly through Covid despite the huge spike in unemployment.

All in all, its a good time to own a car and a bad time to try to buy one, and this state of affairs could persist for years absent an unexpected drop in demand or spike in supply.

Electric cars, though, seemed poised to take over much more of the market- the forecast was about 1/3 of new sales by 2030, driven by improvements in the technology, continued subsidies to new EV purchases & EV infrastructure, and car companies offering electric models in popular categories like SUVs and trucks where they are currently rare.