FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 29, 2022

IN THIS ISSUE:

1. Overview – How Car Buying Changed Significantly

2. Job Market Strong, Consumer Confidence Weakens

3. Selling Above Sticker Price Game Changer For Buyers

4. Used Car Prices Up 40% Last Year At New Record High

Overview – How Car Buying Has Changed Significantly

For as long as most of us can remember, the new car buying experience went roughly as follows. You visited a local car dealership or two, identified the specific car you wanted, got with a salesman and began to negotiate the final purchase price. You typically started with the MSRP on the window and negotiated DOWN from there. The sticker price was like a ceiling.

Well, if you’ve been in the market for a new car recently, you know it doesn’t work like that anymore. No, the new car market is on its head, upside down these days. The MSRP now acts as a floor and the purchase price is negotiated UPWARD from there. And upward can mean a lot, depending on the car you’re looking for.

It is rare anymore to see a new car sell for sticker price or anything below. In January, for example, over 80% of all new cars sold went above MSRP, compared with less than 3% a year earlier. The average price paid was several thousand above MSRP according to car shopping website Edmunds. And the used car market is even crazier, assuming you can find something you’re interested in.

The US car market has changed dramatically and today, sadly, a new car is simply out of the reach of many Americans. That’s what we’ll talk about today.

Before we get to that discussion, let’s briefly look at some of the latest economic reports, most but not all of which looked very strong. 

Economy – Job Market Strong, Consumer Confidence Weakens

The Labor Department reported last week that claims for continuing jobless benefits fell to the lowest level since 1969 at 187,000. This is a further indication the labor market remains super tight. The official unemployment rate fell to 3.8% from 4% in February, marking a two-year low.

On the negative side, however, the University of Michigan’s Consumer Sentiment Index fell to 59.4, a decade low in a further sign that consumers are increasingly worried about the economy. 75% of survey respondents cited rising inflation as their top economic concern.

Over 80% of New Cars Selling Above Sticker Price

For decades, transactions in car dealerships in America went something like this: A couple walks into a showroom, expresses interest in buying a sedan, the sales rep says, great, our MSRP is $26,000, and the two sides sit down to negotiate the price lower until they settle on a level both can accept.

The MSRP, or sticker price, typically set the ceiling.

Today, in a sign of just how much leverage has shifted from buyers to the carmakers and dealerships, the MSRP now sets the floor. Prices only go up from there.

A record 82.2% of all new vehicle purchases were above MSRP in January, compared with just 2.8% the previous year and a scant 0.3% in January 2020, according to car-shopping website Edmunds. For now, consumers are considering themselves lucky if they can pay something that’s close to the MSRP. 

Paul Lemieux can attest to this. He searched high and low for a dealership near his home along the Mississippi coast that’d sell him a Hyundai Loniq 5 electric car at the manufacturer’s suggested retail price of around $47,000. None would.

The closest thing he found was one across the border in Louisiana that’d offer MSRP plus a $299 fee to etch the VIN number into the windshield, something he had no interest in. He took it anyways. “There is zero bargaining,” Lemieux says.

To make matters worse, the MSRPs themselves are going up. And by a lot. The average sticker price on a non-luxury car in the US is now $41,500, according to Kelley Blue Book, an auto price researcher. Two years ago, it was almost $37,800. That’s a 9.8% increase – even before all the new dealer markups kick in.

Some of this is to offset higher costs for steel, parts, shipping, etc.  A lingering semiconductor shortage is also still crimping vehicle production, giving dealers and carmakers the upper hand in negotiating. But some of the increases are simply to pad profits in a booming economy. General Motors Co. sold fewer cars last year than it did in 2020 and yet its adjusted profit jumped 47% to $14.3 billion. Ford’s profit quadrupled to $10 billion.

For the 45% of Americans earning over $75,000 a year who buy most of the new cars, the higher prices are manageable for now. They may complain about getting fleeced, but they’re largely cash flush and undaunted.

For the rest of the country, though, owning a new car is becoming a thing of the past. It’s what makes the surge in car prices – which single-handedly accounted for one-fifth of February’s 7.9% annual jump in the US Consumer Price Index – so painful for the middle-class worker.

“Affordability is a real issue for transportation in this country,” says Charlie Chesbrough, a senior economist with researcher Cox Automotive Inc. “The new vehicle is not a product for the average American.”

Selling Above Sticker Price is a Game Changer For Buyers

Automakers’ shift toward manufacturing higher-priced models is sparking a lot of the pain. In 2012, 54% of vehicles sold had an MSRP below $30,000, and just 6% of vehicles were priced above $50,000, according to Cox. Compare that to last year, when only 19% were below $30,000 and 30% cost more than $50,000.

Pickup trucks have seen some of the biggest hikes. Popular models, like a Chevrolet Tahoe, have seen increases of nearly 15% on average MSRP over two years, according to Kelley. Ford’s F-series has seen a 10% increase, Stellantis NV’s Ram has gone up more than 16% and the Toyota Tundra truck price is up 15%.

The rise is a combination of manufacturer price hikes and the fact that automakers are selling more of the pricey high-end models, Kelley data show.

And on Feb. 10, Ford sent its dealers a memo obtained by Bloomberg with a new round of price hikes. The letter said the F-series pickup MSRP will rise by $1,500 and the Explorer XLT is going up $1,100, among other increases. A Ford spokesman verified the letter. Electric-vehicle makers Tesla Inc. and Rivian Automotive Inc. have also announced hefty price moves.

“I’ve long had a theory that industry is moving to two vehicle segments: Luxury and used,” Chesbrough said. Most families with average household incomes are buying used cars which are often more than a decade old, he added. 

While automakers have been boosting prices and building more expensive models, their executives have also admonished dealers for price gouging. Ford Chief Executive Officer Jim Farley said in February that dealers who gouge above MSRP may get fewer vehicles from the factories to sell. Steve Carlisle, President of GM-North America, sent dealers a letter with similar sentiment.

Yet the truth is, the dealers and the manufacturers are loving this!

Used Car Prices Up 40% In Last Year At New Record High

Looking to buy a used car? Consumers can expect high costs and low inventories at the dealership lot. Listing prices for used cars in January were up 40% from the same time last year, according to Carfax. The company said the average listing for a used car is currently $28,000 – a record high.

“Historically you’d think of that as the cost of a new car,” Emilie Voss, director of public relations at Carfax, told ABC News. “We've never seen a number like that for average price for a used car nationally.”

The ongoing global microchip shortage is partly to blame for rising costs. Manufacturers cannot acquire enough chips to keep production lines running and the demand for used cars is high.

“We're seeing record prices and part of that is a severe lack of used car inventory,” Voss said. “What we hear about with the car chip shortage impacting production, that is trickling down to used cars.”

And for consumers who can afford high costs, you’ll have to act fast. Experts at Cars.com said vehicles are moving off dealer lots within a week, when pre-pandemic it could take 30-60 days before they sold.

Once you arrive to a dealership, experts say it’s important to keep an open mind. Consumers may have to compromise on their wish lists and expand their search when looking for a used car.

“Say you want a 2019 white Ford Edge. You're going to have a harder time finding that specific vehicle than if you were to broaden your search and say I'm open to just really any midsize SUV,” Voss said.

The good news though is consumers might see some relief later in the year. While there are production headwinds right now – new car supply is projected to get better in the second half of the year, and consumer demand has slowed recently due to the recent COVID spike and high used car prices. We’ll have to see about that.

Best personal regards,

Gary D. Halbert

SPECIAL ARTICLES

How the Pandemic Has Changed the Car Buying Experience

How Chip Shortages Changed the Car Buying Journey

Edmunds: Car Buying Tips For 2022

Gary's Between the Lines column: US Homicide Rate Continues To Soar To New Record – Why?

 

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