By Ray Birch
LAWRENCEVILLE, Ga.—Sky-high prices on new—and now used—cars are creating even greater long-term issues for lenders, according to two auto industry experts, who add they’re seeing car dealers do things they’ve never done before.
What’s driving high car prices now even higher, is the lack of inventory in new and used vehicles, noted Laura Wehunt and Alex Yurchenko from Black Book. The supply shortage for vehicle microchips, which has stalled production at many automaker plants, has placed high demand on the new vehicles dealers have on the lots, leading to something fairly rare—consumers often paying above-sticker to get the vehicles they want.
Yurchenko, SVP, data science and analytics at Black Book, said that has led to the prices on used cars that are late-model vehicles to begin approaching new-car pricing levels.
As CUToday.info has reported, the average new car price has risen to more than $37,000 this year.
The inflated stickers are something lenders must pay even closer attention to now as prices rise so fast, Yurchenko emphasized.
“This situation is leading to even longer-term financing,” said Yurchenko, referring to an issue that was already being spotlighted as a growing concern among auto industry experts over the past few years. “Lenders have to be careful about what they finance. They need to know the collateral and the customer very well, because prices again are very elevated. This is a very abnormal situation.”
There simply are a lot of forces coming together at once to drive new and used car prices higher, he said.
Around the Curve
Yurchenko said the current sticker prices won’t be here forever, and he expects those prices will begin tapping the brakes in the near future, which is
Alex Yurchenko
why lenders must be wary as they value their collateral for the longer-term loans being made
“The prices won’t come crashing down, but they will begin coming down….maybe later this year or early next year,” Yurchenko said. “We’ll just have to wait and see how long this microchip shortage lasts.”
Yurchenko pointed out used car prices are 20% to 30% above where they were pre-COVID. As CUToday.info reported, the average price paid for a preowned vehicle hit a record of $25,463 in April, about $2,800 higher than in the same month last year, according to new data from J.D. Power. The price threshold marks the first time ever that the average used-car price had exceeded $25,000, the firm added.
How Abnormal? This Abnormal
The situation has become so abnormal, observed Yurchenko, that dealers have been reaching out to car owners asking them if they want to sell their vehicles to the dealer. Yurchenko said he has seen advertising from dealers, for example, seeking to buy 100 Hondas in one month. Similar advertisements have been popping up across the nation, he said.
“I got an ad from a Honda dealership saying they need used inventory—they just don't have enough used supply,” he said.
The pandemic and chip shortage are changing the way dealers source their inventory, said Yurchenko.
“They're reaching out to customers, and in many cases it's much cheaper for them to acquire inventory this way,” he said. “They're going upstre
Laura Wehunt
am directly to customers for used inventory.”
Getting Comfortable
Wehunt, vice president of automotive valuation at Black Book, said dealers became more comfortable working with and selling directly to consumers during the pandemic, and that this latest advertising effort is an extension of that.
“They were forced to extend their channels and now I think they got more comfortable with that and they're getting their vehicles not just from auctions but from dealer to dealer platforms and also directly from consumers,” Wehunt said. “This is something we have never seen, and really it is being driven a lot by the new car shortage, which has put a premium on used vehicles right now.”
Wehunt added the lack of rental returns, has also led to higher used prices.
“The rental car companies reduced their buying last year due to the pandemic, so they are not selling many cars, putting them back onto the used market, and we have this restricted supply of vehicles to buy,” she said. “Until we get the production of new cars back up, and I am not sure when that will be, we will have this issue. And lenders need to be watching this closely as values will eventually drop.”