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Why Car Prices Are So High In 2022

So if you’ve been looking at cars to buy new or used for the last year or two you found that first of all there are a lot of inventory shortages and the prices are high. People have been waiting for a long time for prices to come down, thinking that maybe interest rates are higher or that there’s a recession happening that prices might come down. Well according to Barron’s and many other sources, inventories are coming up. There is more availability of vehicles but there’s not going to be any price reduction to especially on new cars. Why is that? Doesn’t supply and demand kick in and make prices go down? Well, let’s take a look at four reasons why new car prices are not going to come down. 

First, there’s still big demand even though the prices are higher. In fact, People are paying a thousand dollars a month for car payments because of interest rates and prices. There’s still a very big demand for new vehicles so it’s not that. There’s a lot of inventory glut where car dealerships can’t get rid of cars So there’s still a big demand and that’s gonna keep prices high. 

The second thing is manufacturers and dealers are getting used to being able to make a profit with lower volume. It used to be the dealer scrambled for every last sale selling 300-500 cars a month to try to pay all their bills and have a profit for the dealership and manufacturers. They strove to sell 12 or 14 million cars a year for the U S market. Well, now they’ve learned how to make money selling fewer cars. You have a little more margin, you do less advertising, you have less overhead, you have less interest on your inventory, and you could make money selling fewer cars and it’s less work. If you only have to sell a hundred cars a month that’s a few a day. If you have to sell 500 cars a month, well now you have to sell 10-15 cars a day. It’s a lot harder of a scramble to sell high volumes of vehicles. So dealers and manufacturers are both learning, “Gee, we don’t have to sell as many cars. We just don’t have to discount them as much. Put a fixed price on them, MSRP, and sell them for that and we’ll make money.” 

Number three, the other thing is manufacturers are not putting a lot of money into creating new inventory. Here’s why. Within the next four to five or six years there’s going to be a huge switch to electric vehicles. Many states are making it illegal to sell gas-powered vehicles in their states, California, New York, and Washington state are three examples of states that said after 2028-2030, you can’t sell gas vehicles. So manufacturers are not going to be putting money into R&D and production of newer model vehicles. Lead times on coming out with a new model are three to four years, so whatever models are being made right now that’s going to be it for gasoline vehicles. So why put a lot of investment into new vehicles if you’re going to have to just come out with electric vehicles anyways? 

Here’s reason number four, this is a big deal. The cost of producing a vehicle is much higher and you might think, well isn’t that supply chain inflation? That’s a big part of it. Still getting sheet metal engines, manufactured goods, and components are all higher. Inflation doesn’t just affect you at the gas pump or at the grocery store, it affects the car manufacturer and their production plant. But more than that they are having trouble getting workers, getting employees to build these vehicles is harder and you have to pay more. The cost of manufacturing a vehicle has gone way up now in order to get a halfway decent vehicle of any substantial kind, not even luxury but just a nice vehicle. It’s going to be $40-$45,000. The days of a $20-$30,000 vehicle are over. There are still a few that are in that range, but they’re very limited models. Stripped out vehicles. You’re going to be spending $40-$45,000 anyways to get a decent car. In most manufacturers, that’s going to put you at a payment of $800-$900 bucks a month. So people are getting used to that. A large percentage of car buyers are now paying over a thousand dollars a month for their car payments. The fact that now that’s been baked into the system, dealerships and manufacturers can be more comfortable with presenting that payment to customers. 

So prices aren’t going to come down on new vehicles anytime soon. Also, there won’t be huge discounts on new vehicles there won’t be $2,000 rebates or $2,000 dealer discounts, or other large, opportunities for reductions in price. So new vehicles are going to be pegged where they are. It’s not going to come down, now used vehicles are a different story. If there’s a big glut of used cars coming into the market that might lower them but they may not be the cars you want. If they’re 60 or 70,000-mile cars they’re out of warranty. You might not want that car because manufacturers are now building cars that they know are going to be replaced in three or four years with EVs. Why build them where they’re going to last a long time? Why put the same amount of reliability into a car that you know you don’t have to really warranty because people aren’t going to be looking for a replacement for that car? In four or five years they’re going to want or have to buy an EV. So new vehicle prices are where they are. They’re not going to come down, expect us to pay $800-$900 bucks a month for a car payment. If you really are looking for a bargain, look at maybe a late model used that you can keep for three or four years until you get forced into an electric vehicle.

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