Business

Are high car prices the new normal? If you’re waiting to buy a car, stand your ground, experts say, it can pay off.


The economic supercharged ride that began with the arrival of COVID-19 in early 2020 has reshaped the way car buying works. Will it ever go back to what we might call “normal”?

Brian Finkelmeyer, senior director of new vehicle solutions at Cox Automotive, likens it to an intense competition “between consumers, dealers and automakers. The question is who will blink first?”

The car business has weird mechanics, so several explanations are appropriate.

A complex relationship controls car prices

Traditional automakers do not sell their cars directly to consumers. They sell to third parties – agents – who sell to you.

A few new car manufacturers were born, like Tesla
TSLA,
-0.94%

and Rivian
RIVN,
-6.43%
,
selling cars directly to consumers. But they don’t operate in every state because that business model is illegal in many places. So, on average, the industry still operates through a third-party sales model.

The companies that make cars and the companies that sell them have spent nearly a century developing a common approach to inventory. In the early 21st century, most dealers aim to keep cars in stock for at least 60 days and an additional 15 days when ordered or in transit to shipments.

That supply means that a dealer often has the combination of colors and options a customer is looking for in an easily accessible place.

The dealership buys each car from the automaker (usually through a loan from a bank also owned by the automaker) for a set price, and then sells it to the consumer for a fixed price. active and keep the difference. They can also earn bonuses from the carmaker for meeting specific sales goals – usually set by month or year.

Such a complicated financial arrangement has left a number of discount opportunities.

Read: 5 reasons you should not buy an electric car

Factory or agent can discount

Automakers can offer incentives when they are not satisfied with their inventory balance. Dealers can do the same. And savvy shoppers can work from both angles to get the best price.

Before 2020, automakers often blinked, Finkelmeyer said. “Total industry incentive spending is estimated to be between $50 and $60 billion per year,” he said.

“When holiday bonuses and $179 leases don’t move enough metal, OEMs will blink again.” They can always sell excess inventory to car rental companies if they’ve built up too much and customers don’t buy.

In the meantime, dealers have been planning around those month-end bonuses. “Consumers have learned that the best way to win a good deal on a new car is to stay tuned until the last day of the month. Dealers will always blink when a $50,000 bonus check is available for the next unit sold.

But the last two years — especially the shortage of new cars due to a lack of microchips — have upset that strange balance.

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Demand outstrips supply, price drop disappears

Demand for new cars outstripped supply, and neither the automaker nor the dealer had a backlog of cars for sale. Discounts disappear.

“With offers at their lowest, it looks like many consumers closed their eyes completely when they signed up for a new car, with an average payment of $762 a month. He explains that waiting days until the last day of the month has turned into a 60-day wait to receive your pre-ordered new car.

Inventory is being rebuilt

Inventories are starting to grow again. Daily supplies – as low as a week at some dealers earlier this year – have returned to a national average of 53.

So are automakers about to blink and start cutting prices again?

“No,” Finkelmeyer said. “Average incentive spending in November 2021 is $1,896 versus $1,066 this November.” The average price drop is 43% lower than a year ago, near the peak of the shortage.

Meanwhile, dealers are still pocketing huge profits from most of their sales, with the average new car sales price hitting $49,000.

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Something will give. But who will give it?

High prices could be the new normal? Finkelmeyer says that’s unlikely. “For sales volume to increase, the average selling price will need to come down to broaden the pool of potential buyers.”

Given the risk of a recession, he said, “Automakers and dealers should take note that Walmart
WMT,
+0.33%

recently outperformed analysts’ expectations in its grocery business, as wealthier shoppers steer clear of brick-and-mortar grocery stores to hedge against higher prices and inflation. .”

But who will drop the price first – the carmaker or the dealer?

It can be up to the shopper, Finkelmeyer said. The game can be over when consumers refuse to blink and stop paying these prices.

This story originally ran on KBB.com.

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