March 10, 2022
‘It’s not a great time to buy either a new or used vehicle,’ VCU expert says
George Hoffer, emeritus professor of transportation economics at VCU, explains why car buying is so different in 2022.
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If you’re in the market for a new or used car, you are probably in for a surprise. Like most everything else today, the effects of the COVID-19 pandemic — including manufacturing woes, supply chain disruptions and labor shortages — have changed the car buying experience. And, it’s definitely not for the better.
Negotiating price, for example, was always an option for the savvy buyer pre-pandemic. Now buyers are lucky if they can find the vehicle they want without having to order one from the dealer or the factory and waiting months for it to arrive.
To make matters worse, most of the new cars being delivered to dealers have already been sold. Finding one that is unsold is about as difficult as tracking down a four-leaf clover in a field of daisies.
“A false perception exists that the new vehicle market is almost nonexistent,” said George Hoffer, Ph.D., an emeritus professor of transportation economics in the School ofBusiness at Virginia Commonwealth University. “But in 2021, 15.3 million new vehicles were registered (11.8 million of these were trucks.) The problem is that strong demand and continuing supply issues have pushed transaction prices higher than published manufacturer prices. This price mismatch for mass market vehicles has not been seen in the U.S. for 70 years. What looked like promising increases in 2022 supplies are less certain now.”
A note of caution: If gasoline prices do not decline from their current all-time high, expect a rapid turn from a seller’s market to a buyer’s market. That is what has happened with every unexpected rapid fuel price increase since the early 1970s. New vehicle markets are especially vulnerable since the hottest vehicles have been the most fuel inefficient.
Hoffer, an automobile industry expert, discussed the ups and downs of car buying today in an interview with VCU News.
Are there fewer cars being sold now than in previous years?
Given the current economic condition, the annual new vehicle sales rate should be over 17 million units. So far in 2022, it has been around a 15 million unit rate. Thus, we see the upward new vehicle price pressure. The used vehicle market is slightly different. Annual used car/truck sales have hovered around 40 million for a decade. In 2021, 39 million units were sold. New car markets have more institutional restraints on prices than does the used car market. Thus, used car price indices increased by approximately 40% in 2021, four times that of new vehicle prices.
Is this a bad time to purchase a vehicle?
In my opinion, it’s not a great time to buy either a new or used vehicle. Going into 2022, used vehicle price indices were at an all-time high. They have fallen slightly at wholesale auctions in the first two months of this year, but sellers still have higher-cost used vehicle inventories (55 days of inventory currently). Normally, used car prices are highest in the spring as Americans spend their tax refunds. If wholesale prices continue to decline, one might consider a used car in several months, but they still will be overpriced by any traditional measure. But, if one needs a car, you have to be in the market.
Why is buying a new car a better deal than a used car at this time?
New vehicles are a better buy as long as you do not pay over MSRP (manufacturer’s suggested retail price). Some dealers in the area are trying to add five-digit market adjustment surcharges. If you find such a dealer, go to another dealer. The factories are trying to get such dealer behavior under control by threatening to lower their new vehicle dealer allocations.
A surprisingly well-received outgrowth of the current situation has been factory online manufacturing portals. Expect these to continue. Some manufacturers are offering a $1,000 discount if you order the vehicle directly through their portal. Most factories continue to offer subvented (subsidized) financing to well-qualified credit buyers. While interest rates are increasing, the manufacturer owned finance subsidiaries can borrow in the market at a rate such that they will continue to offer subvented financial rate assistance as the dominant incentive.
When in the life cycle of a car should you purchase it?
If you buy early in the product life cycle, your vehicle is a much better substitute for a new car and will retain its value better. In addition, the new generation models include the latest structural upgrades.
With all of these semiconductor shortages, etc., should a buyer be worried about how well the car is made?
I would not be concerned. Attempts to build vehicles and later install the semiconductors have all failed. Note, however, some accessories that you may have assumed to be there may not be because of the semiconductor shortages, such as heated seats or power side view mirrors. Ensure that the items you expected are listed on the government required Monroney sticker.
Should you buy a hybrid, electric or traditional internal combustion engine vehicle?
The current decade is ushering in two transformational innovations that have the potential to reshape the structure of the light motor vehicle industry and how the cars will reach the consumer. They are the autonomous (self-driving) vehicle (AV) and the electric propulsion (EV) vehicle. Each innovation is a separate story. Both are in their infancies, especially the AV. With respect to EVs, the hype is here, while the more innovative electric propulsion vehicles for the most part are one to three model years away. Since the early innovations will be outdated quickly, early adopters should watch out. Already some entrants and systems, such as General Motors’ Volt and light hybrids, are gone.
Most existing electric vehicle offerings are adaptations of existing internal combustion engine (ICE) vehicles. Many have limited range and are full of design compromises. Gasoline-electric hybrids (like the Toyota Prius) have been offered for approximately 20 years. The gasoline hybrids have proven to be very dependable. However, if you drive disproportionately at highway speeds the gasoline hybrid loses much of its attractiveness, as the vehicle defaults to internal combustion engine power. Hence, EPA-rated urban and highway mileages are similar.
Many of the newly introduced EVs are plug-in hybrids. You charge them at night or at work like a pure EV (Tesla). But, the plug-in hybrids often have a limited electric range (as little as 25 miles) before they also seamlessly switch to ICE propulsion. The economic attractiveness of these short-range plug-in hybrids depends on whether the large federal tax credit is still available on a particular model. Vehicle eligibility is a function of how many EVs the manufacturer has sold.
Finally, there is the pure EV, like all Teslas. The issues here are vehicle range, the staying power of the manufacturer, is the vehicle platform designed from the ground up to be an EV, and does the purchase price make any economic sense?
What are your thoughts on whether interest rates on car loans will go up in the next several months?
I’m not worried about interest rates for car loans right now. Car loans are usually for no more than six years, making the lender’s exposure not that great. The lower rates should continue. They will not skyrocket overnight on new car loans. As the Federal Reserve tightens money, one can expect that (interest rate incentives) will become even more important.
When looking for a new vehicle, is there a way to figure out which manufacturer is best?
To compare the different vehicles you are considering, go to Consumer Reports because they test virtually every vehicle, and they present the results using a common reporting platform. Look for these three takeaways from their testing regimen — the overall vehicle score, how satisfied are the current owners, and would the owners buy this vehicle again.
Historically, has there ever been a time like this before where buyers are basically waiting for cars and dealers hold all the cards?
Yes there has been. There was virtually no civilian production of vehicles between 1942 and late 1945 during World War II. In the immediate post-war period, the American public was flush with money like now. The first thing they wanted was a new car but there were supply problems, like now. Americans took anything that could be built and paid a premium price. There wasn’t a normal market again until the 1949 model year. But remember, watch out, motor fuel issues may not keep this a seller’s market for long.
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