Written by: Garrick King
Since the start of the COVID-19 pandemic it is no secret that many every day products and services have had shortages, whether in labor or material. The car industry in the U.S. or abroad was no exception to this and can still be seen today with many dealerships having empty lots and top dollar being paid for used vehicles. Below are the answers to some of these questions and what to look out for if you in the market for a new or used car:
What has caused car prices to jump and inventory to fall the past ~2 years?
Shut downs in the supply chain due to COVID-19 stopped all phases of the car production process, but probably the biggest was the halt of semiconductors production. Semiconductors, commonly called microchips/chips, are arguably as important as an engine and tires in manufacturing these days given the level of electronics in modern vehicles. So much so that some plants have, like the GM plant in Fort Wayne, IN, for example have 15,000+ trucks waiting for semiconductors alone before they can be shipped (MSN, LaReau). It is not that the car makers were unprepared for a run on chips, but the record high demand for vehicles during the pandemic drained their semiconductor reserves. Toyota, being one of the more future oriented manufacturers, had a larger reserve than competitors after re-evaluating from the 2011 Fukishima earthquake, but recently announced they are cutting production 30-40% given depletion (Boudette, NYT). The main component for these chips is silicon was also constrained during the shut-down and re-opening of manufacturing. The shortage affected cars as much as cell phone, computer, gaming systems makers, etc. that are now all jockeying for the limited supply to lessen the blows to profits.
The record high demand and low supply resulted in prices jumping 12% and now averaging $45,000 for a new car from last fall to this fall. Used car prices have doubled that, increasing as much as 26% the past year (Morris, Fortune). You may think consumers would be willing to part with an old car given the high trade-in and dealer offers, but then the gain is essentially lost buying another car. With limited inventory, dealers are less willing to haggle on things like doc fees or others you may have been able to negotiate in the past. The same conundrum can be seen in the housing market as well. Demand was in part fueled by record low interest rates since most qualified buyers can get sub-3% APR or interest free for potentially 60-84 months depending on the dealer promotion. The influx of stimulus payments and increased unemployment benefits (which have now gone back to pre-pandemic levels) fed into demand as well. So be ready to pay or put down more money when your next purchase comes around.
With gas prices also rising, what financial advantages do electric/hybrid vehicles offer?
Almost simultaneously gas prices have risen along with car prices. Some of you may be thinking is it worth switching to electric or hybrid vehicles to save money at the pump or have peace of mind if there is a run on gas (i.e. the Colonial Pipeline hack). As with any purchase that may require financing, it depends. Electric cars do seem to be the way of the future with the growth of Tesla, Volvo manufacturing only electric engines since 2019, and GM planning to have 20 electric model lines by 2023 (Eisentein, NBC). Since December 2009, the government has incentivized these purchases with tax credits. They can only be used in the year of purchase and if it takes your tax liability to zero, any remaining credit is lost and cannot be carried over. There are two types of vehicles when it comes to the credit: electric vehicles (EVs), plug-in hybrids. EVs all fully battery powered and will let you get the max $7,500 credit allowed whereas the hybrids only allow you a reduced credit since it is still mainly powered by a gasoline engine. In the case of Tesla, the credit amount may depend on what time frame you purchased it. The credit also phases out once the vehicle has 200,000 miles or more on the odometer. This can helps lessen the burden of purchasing a new car and the model types and amount of power these vehicles have is increasing. The IRS site has a list of all makers and models that can obtain a credit that you can access here: IRC 30D New Qualified Plug-In Electric Drive Motor Vehicle Credit | Internal Revenue Service (irs.gov)
Related: 2022 Trends in Automotive Industry