The market for new cars has been on a steady increase this year and there’s no telling when it’s going to normalize. This year has historically been one of the worst times to purchase a new car and buyers know this.
Kelley Blue Book recently released a report showing that many car buyers are postponing their car purchases for the time being while others will go to great lengths (and prices) to get the car that they want. I spoke with Vanessa Ton, senior industry intelligence manager for Kelley Blue Book, about the current market conditions and to get a better idea of when she thinks the market might stabilize.
What effect do you think that consumers postponing their car purchases will have on the new car market in the next year?
“I saw the forecast from our economic team and from what I’ve seen, we are going to be about a million (units) behind what we predicted for 2021 in total. So that’s going to have a little bit of chain reaction for next year as well because of the slowdown and it’s going to impact next year’s production. I don’t think we’re going to see normalcy until the chip shortage will be alleviated,” Ton said.
As a bit of context, over 17 million vehicles were sold nationwide in 2019, which dipped to 14 million cars in 2020. Compare those stats to the reported 9 million units sold nationwide at the end of the third quarter this year, and we can see why KBB would predict that the shortage will impact next year’s production as well.
Do you think that this supply and demand issue will eventually work itself out? How long do you think it will take to correct itself?
“From the data that we have seen and inventory, and also how the OEMs have shifted their chip strategy, we predict that it may correct itself in the second half of 2022. But I do want to say that the demand is definitely still there. The economy is still strong. So that’s why we think that people are going find different ways to get the vehicle of their choice even though there’s such shortage,” Ton said.
According to Kelley Blue Book’s recent report, 48% of car buyers are exiting the market for now and plan to wait until the market corrects itself before purchasing a new car. However, as Ton says, the economy is still strong and many consumers are still purchasing cars. In fact, according to the report, 35% of buyers are willing to pay more than the MSRP for a new car and up to 13% more than the original price.
Do you think that the situation is going to affect car values in the long run?
“I have asked the valuations team that they said in the short term “no’ because prices are still going to be high for a while, but I can’t speak to the long term part of it.”
Part of the study covered that consumers are willing to switch brands in order to buy a car right now as opposed to waiting. Do you think that’s going to change the market in the future?
“That’s hard to predict because eventually chips will come back or be normal again. I think from an opportunity standpoint, I think ‘challenger vehicle brands’ will make more sales or more profit. Based on our behavioral data and some of the buying signals that we see. Because of this chip shortage, (challenger brands) are able to take advantage of that. People are going to these other brands,” Ton replied.
To clarify, the report showed the 32% of buyers are shifting their brand loyalty from one brand to another in order to buy a car right now. It’s possible that those shifts could result in a shift in the overall market, but it’s too early to tell. With the average price of a new car at $43,000 now, that puts buyers on the cusp between switching from a more consumer-focused brand (like Honda) to a luxury brand, like Lexus, per se.
“Because of the premium prices of SUVs, we’ve already seen cross-shopping between luxury and non-luxury because of the price overlap. (Consumers) are already cross-shopping in general,” Ton said.
Since manufacturers know people are willing to pay over MSRP, they could possibly see no reason to discount new cars in the future. How do you think this will impact the market?
“Some of these OEMs have to figure out what their strategy is in terms of balancing the supply and demand. They figure that ‘I can probably get premium pricing if we balance our inventory levels to a point where people just can’t get what they want immediately.’ So it will possibly transition to a made-to-order vehicle (purchase plan) so people can plan it more in the long term.” Ton noted.
“I don’t want to discount that the economy also plays a big part. If the economy is weak, people are going to pause no matter what you price a car at. I do know that OEMs are trying to dissuade dealers from marking up new cars, so there’s going to be more scrutiny or control because some of these prices are getting out of hand.”
New car sales are down, as are dealer inventories nationwide. Ton made it clear that this downward trend is concerning for dealers, consumers, and the market in general.
“September will be the fifth month that car sales are down. We predict that September is the lowest selling month in terms of sales for this decade. That’s concerning. I know dealerships are making record profits right now, but in the same vein, at what point will they not be making a profit because of low inventory? Some of the key things that we want to tell people about,” Ton said.
The bottom line is that if you’re in the market for a car, but you’re willing to wait it out, then you could be waiting until late 2022. Although, at this point, we wouldn’t be too surprised if the shortage and increased pricing lasts until 2023.