Why are car prices soaring in the United States

The prices of new and used cars in the United States are at historically high levels and show no signs of slowing down. As customer demand for cars continues to grow, inventory shortages and chaotic supply chains are preventing automakers from meeting demand.

Due to the hurricane caused by the COVID-19 pandemic, the country’s economy continues to be in trouble, and the price of new cars in the United States has risen by 20% in the past year. The global shortage of microchips has slowed the production of new cars, and even used cars have been sold at high prices. With the increase in tourist traffic, car rental companies are struggling to keep up with the crazy demand, as they will sell most of their vehicles in the used car market in 2020 to get through the tough times. The extremely low interest rates of the company's auto loans have led to strong demand for cars in the United States. Auto loans accounted for 9.5% of U.S. debt, second only to mortgages and student loans. Customer demand for new cars is strong, the number of vehicles in trading venues has fallen, and inventory is short, which has led to an increase in average transaction prices. In addition, the chaotic supply chain prevents the company from meeting demand. Due to the increased demand for electronic products, the global semiconductor manufacturing shortage seems to be worsening, and the price of new cars may continue to rise.
Car prices exceed general consumer inflation
In May 2021, the average price of new cars hit a record high of US$38,255, a year-on-year increase of about 12%. The wholesale price of auctioned used cars rose by 39%, and the retail price of used cars rose. This is an increase of 20% over the previous year. Prices have reached their highest levels ever and continue to rise rapidly, increasing the country’s overall inflation rate. In 2020, many dealers closed due to a 30% decline in sales in the second quarter, the largest quarterly decline since the Great Recession. However, the strong demand for cars has led to the highest price increase in 13 years. In May 2021, the price of used cars has risen by 5% in general.
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As demand for automobiles is recovering, many new automobile manufacturing facilities have been closed due to a global shortage of microchips. According to a study by Cox Automotive, U.S. production of new vehicles in North America dropped to approximately 3.4 million units.

The first quarter of 2021. 53% of automakers purchase microchips abroad, and the Sino-US trade war is deepening semiconductor shortages, which has become the biggest supply shock. Due to the interruption in the supply of microchips, 38% of production facilities temporarily halted the production of cars. This gap has led to an estimated loss of revenue for the automotive industry at US$110 billion. Despite plans to increase domestic semiconductor production through new factories, the global chip crisis is expected to affect the automotive industry for at least six months. In addition, due to lower returns, the shortage of second-hand cars has caused newcar prices to rise. Since wholesale prices have risen much faster than retail prices, reduced inventories have forced traders to work harder, resulting in a rapid shrinking of profit margins. Although small retailers managed to obtain larger wholesale inventory profits than large retailers, large retailers made up for the difference in quantity.

• Fewer cars confiscated
Gone are the days when old cars were dumped in a landfill after 100,000 miles. The average age of vehicles has dropped from 11.9 years in 2020 to 12.1 years, reflecting its higher value. According to the Mannheim Used Car Value Index, the average price of used cars in May 2021 was US$20,426, an increase of 46.7% over 2020. Longer service life increases the value of used cars. However, due to the impact of the pandemic on the car rental business, used cars are scarce. Due to travel bans and frequent foreclosure restrictions resulting in reduced demand during the pandemic, car rental companies have sold some of their fleets instead of buying replacement parts to cope with the cash flow squeeze. As the number of rental cars decreases, car rental companies and other fleet buyers will not sell many old cars or buy many new cars, driving up prices. In addition, competition for second-hand cars is also intensifying, especially from online car dealers. For example, Carvana and Vroom, due to the auction battle during the auction, the price of the car has risen and the price of the new car has risen.

• Say goodbye to cheap cars
Even before the pandemic, many automakers began to replace cheap cars with lower profit margins such as cars and sedans with relatively expensive SUVs. Consumers are moving from cheaper cars to more expensive SUVs and trucks. The U.S. auto industry has abandoned the production and sales of cars under US$30,000 and has provided a low-cost market segment for the used car market. Many automakers are reducing the production of less popular models to cope with the global shortage of microchips to meet consumer demand for new models. Next-generation technologies and environmentally friendly models have also attracted customers and
By quickly changing their buying behavior. Some consumers are willing to give up first-class cars, including high-end finishes, high-tech features and performance upgrades, all of which help push up prices.

• More money on hand
When the pandemic broke out, many shoppers did not spend in restaurants or on holidays, so they now choose to use the money saved on fully loaded trucks or SUVs and increase their spending on cars. According to data from Moody's Analytics, Americans are now saving $2.4 trillion more than last year due to repeated economic setbacks. In addition, the government's economic control helps buyers spend their money on down payments and choose the vehicles they want. Low interest rates have allowed many buyers to use vehicles, which has increased the demand for new vehicles in the $50,000 range and above. The increasing tendency of customers to buy high-priced cars has contributed to the average car price. In addition, the reduced mortgage also allows buyers to budget for their car payments, which was not possible before.

• Open trading venues
In 2020, many workplaces require employees to work from home to reduce the spread of coronavirus without interrupting work. However, due to lockdown restrictions and rapid vaccination campaigns, offices are easily reopened and people are returning to work, further driving demand for cars. The new generation of jobs and the reopening of commercial spaces are increasing the demand for car purchases. In addition, people who prefer public transportation now tend to travel by car to reduce exposure to COVID-19. The strong demand for cars due to activation measures is pushing up car prices.

How does rising car prices affect ordinary Americans?

Although the increase in car prices bodes well for the country’s economy, many consumers are still struggling to buy new or used cars. Nearly 64% of Americans commute to get off work every day, and those who rely on cars for travel are forced to apply for long-term car loans to afford a new car, which may leave car owners in debt for years. When buyers invest money in a new car, the assets they pay will depreciate as the average car price drops by more than 20% after leaving the dealer's parking lot. After 20 years, car prices may fall by 90%, which means that no matter how much buyers invest in a new car, they will only get a small portion of the sales revenue.
According to the Federal Reserve Bank of New York, more than 7 million Americans have defaulted on auto loans for nearly 90 days, and the default rate of borrowers with the lowest loan interest rates is rising. Rising used car prices are healing the wounds of poor Americans struggling to survive without affordable transportation solutions.
The tight supply chain damages the bottom line of automakers. For example, a shortage of microchips is expected to cause Ford and General Motors to lose approximately $1 billion in profits in 2021. However, the real winners of soaring car prices are dealers, whose profits have tripled since 2020 due to exceptionally strong demand. However, price-sensitive buyers are facing a difficult market. With price becoming the deciding factor, buyers can focus on market segments, where they can find better deals and healthier inventory. Although many economists believe that inflation is temporary, due to the proliferation of consumer savings and government payments when the supply chain is interrupted, the uncertainty of the economic outlook is huge.
According to the TechSci research report, "The US usedcar market competes for US used cars by vehicle type (small, small and luxury), by industry (organized and semi-organized/unorganized), and by fuel type (gasoline, diesel, and compressed natural gas). The market is experiencing impressive competition due to the surge in used car sales websites and after-sales service or insurance discounts, an 8% increase, as well as high car interest rates and rising new car prices should drive the growth of the US used car market during the forecast period.

According to the TechSci research report "By model (hatchback, sedan, SUV, etc.), by fuel type (gasoline, diesel, etc.), by displacement (<2500cc, 2500-5000cc &> 5000cc)" global luxury car market research report , By region, competition, forecasts and opportunities, in 2026, "Due to the introduction of upcoming technologies and the increase in luxury car customization options, the global luxury car market is expected to grow at a compound annual growth rate of over 3.5%.

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