In This Economy?

I’ve been through four memorable economic events in my lifetime, the Savings and Loans Crisis of 1987, the Dot Com Bust and September 11th Attacks in 2001, the Financial Crisis of 2008, and the Covid Pandemic of 2020. Now whatever “this” is in 2022 - the post-pandemic inflation where things are good, but also not so good. That sentence didn’t make sense because this environment we’re in doesn’t make sense. We’ll look back at this period and say, “I should’ve done this” because we’ll benefit from hindsight. 

But since having kids, I’ve never been able to say, “in this economy?” in response to something they wanted. I’m just going to start saying it even if they aren’t asking for anything. “In this economy?” covers so many things and I won’t be able to use it forever.

My old commuter car suddenly lost the ability to stay in third gear. When I shift, I go from second to fourth. Third no longer exists. We need a new car. In this economy? 

Buying a car now comes with several challenges. But knowing how things move in this economy, waiting might benefit potential car buyers.

Inventory is tight due to constrained production, thanks to the semiconductor shortage. Just in time production strategies caused manufacturers to reduce their orders, coinciding with dropping car demand. With the rebound in car buying, car builders had to restart their orders versus having chip inventory already on hand. The problem is chips take about four months to produce. The automotive industry is looking a lot like the airline industry. 

Car dealers are selling cars before they even hit the lot, often with a dealer markup. Manufacturers have discouraged this practice but have experienced little compliance from dealers. Customers willing to pay the higher price are exacerbating the problem. 

Higher interest rates haven’t reduced demand much - yet. The average new car price continues to increase by nearly 2% in 2022, totaling $48,083. Almost 13% of car buyers in June have a $1000/month payment, up from 7% in 2021. This will not end well.

According to Statista, auto loan rates have increased significantly this year from 3.8% to nearly 4.5%, so it’s no surprise that monthly payments are higher. But at $1000/month, the average consumer should look for cheaper options or consider a larger down payment. The Fed is starting to see rate hikes at work, car buying should begin to slow as affordability is out of reach for many. 

Graph source: Statista. https://www.statista.com/statistics/290673/auto-loan-rates-usa/ 

Raising rates is focusing on the demand part of the equation when the bigger issue is supply. Granted, the Fed can raise rates enough to destroy consumer demand, to a point that cars are unaffordable if buyers need to take out a loan. The St. Louis Fed tracks total vehicle sales, which in a normal environment is over 17 million. We’re now at 13 million. That 4 million car gap isn’t an issue of demand. 13 million is the most car companies can pump out.

The waitlist for the Ford Lightning and the new Corvette is astronomical. Raising rates now won’t reduce the number of people waiting in line as the expected deliveries are about 3-4 years out. Carmakers are essentially selling unfinished cars.

Cars traditionally lose value over time. We’re in a weird market environment where cars are gaining in value. As inventory rebuilds and defaults increase, we’d expect this dynamic to reverse. 

Given current market conditions and “this economy”, I’m holding off on buying a car for as long as I can. It can realistically take the industry years to recover inventory to pre-pandemic levels. Waiting this out might be the best course of action. If you think car prices will continue to rise even after paying a premium, have at it. If you can’t wait, unfortunately, trading down might be the most sensible option. Another option could be ordering factory direct, which typically requires a wait time of 3-6 months and reduces the likelihood of a dealer markup.

Used cars have started to come down in price, as the combination of higher defaults and a slight increase in the availability of new cars. Still, this will take some time for used car prices to settle back into more normal prices. 

Disclosures: 

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