As we come out of the pandemic and look toward the future, there are many things that will impact the 2022 car market. It’s the Wild West of retail out there, and things are changing fast.
Here to discuss those factors with us is our panel of experts, which includes Zak Sabbagh, a former car retailer with 15 years of experience, Steve Spillane an F&I specialist with more than a decade of experience, Daniel Boller the CEO of Leasly and Derek Walker, an award-winning Sales and Operations Leader with 25 years under his belt.
The Real Winner of the Car Market Bubble
Car prices aren’t going back down anytime soon- in fact, they are predicted to continue to rise for the next few years. This is due to a variety of reasons including inflation, supply and demand disruptions, and a global semiconductor shortage.
“There is no car market bubble,” says Derek Walker. “Consumers will hold out as rates increase more and more. We’re not going to see any correction for at least two years but instead, we will see a decline in car sales if anything.”
Due to low supply and high demand, dealerships are marking up to a point where buyers are paying 40–50% premiums on new cars according to a KPMG report in 2021.
“The used car market is on fire as well,” Steve Spillane added. “There’s a real pent-up demand for cars that we haven’t seen in years. Despite high gas prices and high inflation, there are just too many people chasing too few cars.”
What does this mean for you?
It means that the real winner of this car market bubble is NOT the consumer, not yet at least.
The New Normal
The pain we’re feeling at the pump and in the highly inflated car markets is a result of what economists are calling the “new normal.”
It’s an admixture of broken supply chains, inflation, and other post-pandemic structural changes that are going to cause problems for the next few years.
But, the problems don’t end with supply and demand. Financing options are becoming expensive since the Federal Reserve has increased interest rates to combat inflation.
“What we’re seeing is the new normal,” says Daniel Boller who founded Leasly Financial after a decade of working in the industry. “I don’t see car prices softening ever; they don’t go backward. They only go up.”
The new normal in the car markets will be dealerships with lower supplies, made-to-order cars, and a whole lot of headaches for the American consumer.
According to Boller, we’ll also continue to see a push toward EV sales which comes with its own unique set of challenges.
“It took Tesla 10 years to get to where they are now,” Boller says. “The other manufacturers are just now starting to get serious about it, and they’re years behind. Granted the legacy OEMs do have a competitive advantage in the EV markets, but that comes with its own set of issues like unsustainable demand for lithium and graphene, which are in short supply.”
The Road Ahead
What does the road ahead look like? It’s hard to say for certain, but for now, it does seem like the worst is already behind us.
“Compared to a few years ago when I used to pay $4,000 underneath MSRP, this ‘new normal’ will see an above-premium on cars for a long time,” Zak Sabbagh Chief Product Officer at Leasly said. “However, I do see a correction happening. These ridiculous corrections with $10,000 over MSRP will eventually come down over time and I can see that already in the used car markets.”
During the pandemic, the Federal Reserve printed more than 1/4 of the total supply of money EVER created. It gave consumers too much disposable liquidity while supply chains were still recovering, and now we’re seeing the effects of that with inflation.
All of this is sending us into an economic recession that will have long-lasting effects on the car market, and the economy as a whole. And even though those stimulus packages felt good for the middle-class consumer at the time, we’re now going to pay everything back due to inflated prices.
“We’ll likely see luxury car prices go down first as we head into this recession, but those mid-budget Japanese cars are going to stay expensive due to demand,” Sabbagh remarked. “Car dealers weren’t making much on individual car sales a few years ago, so this pandemic has become a perfect excuse to correct the car market and jack up prices while reducing overall supply.”
One more thing that Sabbagh noted is that the supply issue isn’t necessarily due to a car shortage, but a lack of parts.
“A car is built with thousands of different components and it’s so easy to have that one shortage hold production. It’s not even necessarily a chip shortage, it could be a shortage of all-wheel-drive power trains or some other tiny part that’s holding up production.”
So what’s the takeaway?
The main thing to remember is that this entire situation is fluid, and things can change rapidly. Be prepared for higher prices, and don’t be afraid to negotiate.
“The one thing that I would say is that the consumer needs to be prepared,” Steve Spillane said. “You might not be able to get the car that you want, when you want it, and for the price that you want. You might have to be a little bit flexible, and you might have to be prepared to walk away.”