BE PREPARED TO PAY STICKER PRICE

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JUNE 2021 IF YOU CAN FIND THE NEW CAR YOU WANT, BE PREPARED TO PAY STICKER PRICE… OR MORE.

By Stephen Fasano, Director of Research and Strategy for Synergy Media

People are back out buying cars and doing so in big numbers. Auto manufacturers are posting record sales numbers as post-pandemic economic optimism is taking over in major categories like housing and automobiles. But just like housing, demand is up, and inventory is down. Way down. The auto market has a supply problem, and it’s making car shopping very difficult. The reason is because of a tiny component, called a microchip. Microchips are found in nearly everything we use. Cell phones, laptops, washers and dryers, refrigerators, radios, thermostats, medical equipment and so much more. Some of these items use dozens of chips, some even use hundreds. But a typical new car has about three thousand.

Back when the pandemic first started, chipmakers thought sales of consumer goods would slow, so they laid off workers, cut production and even closed some of their factories. And more importantly, they thought the sales of big-ticket items, like automobiles, would plummet. So not only did they cut overall output, but they also switched much of that output from chips for automobiles to chips for gaming, cell phones and other electronics. And they were partially right. As people stayed home, they needed to set up home offices and home school setups. They also bought new laptops, new TVs and gaming consoles. And because of that switch, we’ve seen little effect so far on consumer electronics supply.

But the auto industry is a different story. While in the first couple of months of the pandemic, auto sales did indeed slow down, they’ve come roaring back. With the optimism that we’re past the worst of the pandemic, auto demand is sharply up. But chip factories can’t just switch back overnight. It’s a process that takes time, and even as they start producing more, the huge backlog in the supply chain means there’s no way they can keep up with demand. close to what we normally would make selling ten even with a discount. It’s a difficult situation for everyone involved.”

That’s true for dealers, and it’s true for manufacturers too. General Motors, one of the larger global automakers affected, just announced that they’ll likely lose about two billion dollars because of the shortage.

We’ve done some research on current dealer markups (an amount added above the MSRP), and the highest we can find on a mainstream brand nationally is $18,000. That’s on one of the industry’s most popular models, the Kia Telluride. But markups of up to $5000 seem to be fairly common, even on less popular models when there’s just not a lot of inventory.

The chip shortage has affected the pre-owned auto industry too. With the shortage of new cars, some people are switching to late model used cars. But the issue there is the same-no inventory and higher prices. With fewer people able to find a new car, there are fewer trade-ins. Combine that with more people looking for good used cars (because they can’t find new cars) and the problem is just exacerbated.

Congress is trying to intervene, but there’s no easy answer. No matter what happens, expect any solution to take months-if not longer, to actually start filling the supply lines again.

Meanwhile, there are millions of people who want, or need, a new car. With leases expiring, or an old car that needs replacing, for many there’s just no choice. Plus, people are more optimistic about their job prospects now that things seem to be getting somewhat back to normal. Combine those factors with record low interest rates and the typical spring market and you’ve got a problem.

A recent CNN headline reads “Prepare to pay the sticker price if you’re looking for a car”, and they’re right. In many cases, dealers are charging over sticker price because demand is so far ahead of supply. We spoke to the Vice President of a local dealer group who said “It’s just simple economics. When we’ve got twenty of a particular model, and there are only 10 people who want them this month, we obviously discount them. But when there are 10 people who want that model, and we only have two, it’s very difficult to justify a discount. In some cases there’s even a markup over sticker price. People think that with no discounts the dealer is making more money. But the reality is that two at list price, or even over list price- doesn’t come Some people have thought that waiting it out is the best strategy. That prices will return to normal in a few months and they can get a better deal when all this shortage is over. But there are a few issues with that thinking. First, if you have a trade in, you’ve got a huge benefit right now because your trade is worth more than it would normally be (because of the previously mentioned shortage of pre-owned vehicles). So the difference, the actual price you pay, could easily be more later, when the trade in market gets back to normal. Secondly, interest rates are still low. Very low. And as the economy heats up, many economic experts predict that interest rates will increase. So, you’ll likely be paying more in a purchase or lease payment, even if you’re able to negotiate a lower price.

This inventory issue is going to get worse before it gets better. There will be months this summer where if you’re looking for a particular model, dealers will have none, and if you need a car, you’ll have to buy something that wasn’t your first choice, or maybe even your second choice.