Remember the cheesy commercials offering new cars ‘with no money down’ or monthly lease prices on new cars ‘so low, we’re practically giving them away’? Well despite seeming like a blast from the past, those ads reflect what was, just a few years ago, the ‘normal way’ to buy a car. Then came the pandemic. Supply chain issues made it difficult to even find cars to buy and those that were available had sky high prices. While many people anticipated that things would eventually return to ‘normal’, many are now suggesting that the days of overflowing dealer lots and salespeople ready to haggle over prices are in the rear view mirror. Instead, we are entering a new era in car buying, one with online ordering, high prices, and expensive loans, all of which could have big implications for the economy. What’s driving this change? Many factors, including changes in buyer behavior, technology, interest rates, manufacturing costs, the list goes on.
For many people, buying a car is one of their biggest purchases. Payments on car loans can stretch out for several years. Why is that important? Well, it’s money that’s tied up and can’t easily be spent on other items. In the past, some buyers limited their monthly outgo through low cost lease payments on new cars or by buying used cars. Now though, lease deals can be hard to find and because of high prices, many people are holding on to their existing cars and low interest loans, which then creates a limited inventory of used cars. Moreover, even though the supply chain issues that caused so much havoc during the pandemic have largely resolved, many dealers are reluctant to return to pre-pandemic practices of holding huge inventories. Instead, they are encouraging buyers to order online. This direct-to-consumer selling model has proved to be successful for Tesla and many traditional automakers see it as the way of the future, pointing out that it offers greater transparency and efficiency along with the opportunity for buyers to get exactly what they want. Not all buyers are convinced, noting that buying a car in person has certain advantages like actually sitting in the driver’s seat. While no one really knows exactly what will drive buyers to the showroom in the future, current trends indicate that overall sales are likely to fall, suggesting that the road ahead will be filled with new twists and turns.
Discussion Questions:
1. According to car research firm Edmunds, the average monthly payment on a new car loan is $733, up from $562 in 2019. The average used car price is nearly $30,000. Discuss the economic implications of high car prices and high interest rates on car loans for the broader economy. How do higher prices factor into inflation patterns?
2. Dealers are pushing the idea of buying online rather than from a dealer lot. How does this model benefit the dealer? What does it mean for the consumer? Can traditional dealerships survive in a world of online transactions? Are consumers ready to change the way they buy cars?
3. Thanks to high sticker prices and interest rates, automakers anticipate that, for at least the next decade, car sales will be lower than in the past. What does this mean for the auto industry as a whole? Consider the implications of this trend for those who work in the industry, for local economies, and for international trade patterns.
Sources| WSJ: https://www.wsj.com/articles/5-ways-buying-car-changed-pandemic-643cb2c0?mod=Searchresults_pos1&page=1; CNBC: https://www.cnbc.com/2023/06/01/how-inflation-and-higher-interest-rates-changed-car-buying.html; JP Morgan: https://www.jpmorgan.com/insights/economy/economy/when-will-car-prices-drop Forbes: https://www.forbes.com/sites/stevetengler/2022/05/12/the-post-covid-auto-buying-experience-dealerships-must-learn-their-new-target-persona/?sh=48cfce9264ab; Unsplash: Photo by Raban Haaijk on Unsplash