The average new car price was $37,200 in the first quarter, according to JD Power, up 8.4% from the same period just a year ago.
“That puts wholesale used prices at the highest level they’ve ever been,” said David Paris of JD Power. “And we are seeing used retail prices accelerating rapidly.”
Now sales are booming, with March’s seasonally adjusted sales rate for new cars hitting the highest level since October 2017.
Those two factors — strong sales and limited supply — are feeding the price boom.
“Demand is through the roof, and supply is not doing great,” said Ivan Drury, senior manager of insights for Edmunds.com.
“It’s a perfect storm,” said Charlie Chesbrough, senior economist for Cox Automotive. “If you’re not willing to pay near sticker price, there’s someone behind you who is. These issues will be with us through at least the rest of this year.”
Here’s a look at all the factors leading to the price surge:
The computer chip shortage is only one factor squeezing the inventory of available vehicles. Other auto parts, including tires and resins, are starting to be in short supply, according to experts.
The chip shortage also means that automakers don’t have an excess supply of new cars they can sell to rental companies at a discount.
“The [rental car companies] typically buy 2 million vehicles a year, and that’s how many cars they typically sell into the market,” said Edmunds’ Drury. “With the automakers not able to sell to them right now, that turnover of one- and two-year old vehicles just isn’t happening right now.”
People returning to work
Commuting to and from work is a leading reason consumers buy cars. The need to do that is now on the rise.
Many who delayed new car purchases because of job uncertainty or the lack of a commute are now looking to buy. And some of those who took public transit to and from work may now be looking to have their own car to limit their potential exposure to Covid-19.
“People who are concerned about public transit and Uber are a factor in the growing interest,” said Nick Woolard, director of industry analytics for TrueCar.
More cash on hand, low interest rates
Spending on activities like vacations and eating out was way down, as was the cost of commuting. Record high stock market values often feed into strong auto sales as well, as the wealth effect leads consumers to put aside less money for long-term savings.
And then there were the various stimulus payments from the government, which totaled thousands of dollars for many individuals.
More options, shift away from cheaper cars
Part of what is driving up new car prices is what consumers want to buy. The shift away from less expensive sedans to pricier SUVs and pickups has been going on for years, and it was accelerating even before the pandemic.
Many new car buyers are also enticed by the next generation of options.
“People can’t buy enough content when they pull the trigger on new vehicles,” said Drury. “They’re buying high trim levels and lots of options. For certain trucks, they’re paying double the sticker price for the base model, just because of the options.”
Dealers, not automakers, are the big winners
“This is near perfect operating environment to be an auto dealer,” said Ali Faghri, analyst at Guggenheim Securities, who follows car retailers. “Demand is incredibly robust, you have a number of tail winds that have all converged at one time. You’re not only selling a lot of cars right now, but at record margins.”
Even with the automakers being hurt by the chip shortage, the industry has come roaring back to a level that was never expected a year ago.