And the price increases aren’t over yet.
The average new car price hit a record $38,255 in May, according to JD Power, up 12% from the same period a year ago.
“That puts wholesale used prices at the highest level they’ve ever been,” said David Paris of JD Power. “And we are seeing used retail prices accelerating rapidly.”
Now sales are booming, with May’s seasonally adjusted sales rate for new car sales to consumers rising 34% compared with a year ago, and up 10.6% compared with the more normal sales month of May of 2019.
The used car market is just as tight, with some measures of supply and demand in the sector showing the greatest scarcity on record.
Those two factors — strong sales and limited supply — are feeding the price boom.
“It’s a perfect storm,” said Charlie Chesbrough, senior economist for Cox Automotive. “If you’re not willing to pay near sticker price, there’s someone behind you who is. These issues will likely be with us through at least the rest of this year.”
Here’s a look at the major factors leading to the price surge:
The computer chip shortage is only one factor squeezing the inventory of available vehicles. Other auto parts, including tires and resins, are starting to be in short supply, experts say.
The chip shortage also means that automakers don’t have an excess supply of new cars they can sell to rental companies at a discount.
“The [rental car companies] typically buy 2 million vehicles a year, and that’s how many cars they typically sell into the market,” said Ivan Drury, senior manager of insights for Edmunds.com. “With the automakers not able to sell to them right now, that turnover of one- and two-year old vehicles just isn’t happening right now.”
People returning to work
As offices reopen, workers who’d been staying home are beginning to resume their commutes, further fueling demand for cars.
Many who delayed new car purchases because of job uncertainty or the lack of a commute are now looking to buy. And some of those who took public transit to and from work may now want their own car to limit their potential exposure to Covid-19.
“People who are concerned about public transit and Uber are a factor in the growing interest,” said Nick Woolard, director of industry analytics for TrueCar.
More cash on hand, low interest rates
of commuting. Record high stock market values often feed into strong auto sales as well, as the wealth effect leads consumers to put aside less money for long-term savings.
A shift away from cheaper cars
Part of what’s driving up new car prices is what consumers want to buy now. The shift from less expensive sedans to pricier SUVs and pickups was accelerating even before the pandemic.
Many new car buyers are also enticed by the next generation of options.
“People can’t buy enough content when they pull the trigger on new vehicles,” said Drury. “They’re buying high trim levels and lots of options. For certain trucks, they’re paying double the sticker price for the base model, just because of the options.”
Dealers, not automakers, are the big winners
“This is near perfect operating environment to be an auto dealer,” said Ali Faghri, analyst at Guggenheim Securities, who follows car retailers. “Demand is incredibly robust, you have a number of tail winds that have all converged at one time. You’re not only selling a lot of cars right now, but at record margins.”
Even with the automakers being hurt by the chip shortage, the industry has come roaring back to a level that was inconceivable a year ago.
One potential downside for the industry is that eventually prices could become prohibitively high, discouraging buyers.
The University of Michigan consumer survey found more consumers volunteering that they are worried about rising prices for homes, vehicles, and household durables than at any time in decades.
“These unfavorable perceptions of market prices reduced overall buying attitudes for vehicles and homes to their lowest point since 1982,” said Richard Curtin, the chief economist for the survey.