You Won’t Believe What Your Car is Worth
April 26, 2021
While helping a family member research a car’s value for a potential sale or trade-in, we were astonished to see the Kelly Blue Book value jump by 40% in the span of eight weeks! A colleague had a similar experience recently when getting offers from Carvana, a fast-growing online used car retailer. The first offer in December seemed fair but was not sufficiently motivating. By March the offer had improved by 25%. A month later the offer had risen by another 10%.
Automobiles usually depreciate but several side-effects of the pandemic are working together to cause cars to dramatically escalate in value. As many worked or learned from home, the past year reshaped consumer spending in favor of connected devices and home gadgets, fueling demand for semiconductor chips. A handful of manufacturers across the globe supply these chips which go into everything from smartphones to smart toasters (yes, they exist) to cars. Nearly half of the cost of a new car is estimated to be driven by the thousands of chips it contains.
Lately, production lines have stopped running as automakers find themselves facing chip shortages. Ford has cut production of its trucks and SUVs by halting production lines and cutting overtime. Other manufacturers have resorted to eliminating options for their vehicles that require modules that use chips which are in short supply. Through these production delays, dealer inventory has withered, which can give would-be car buyers a rude awakening. One client, expecting to be able to wrangle a deal on a new F-150, was surprised to learn that the once-abundant trucks were now selling above sticker.
Thinner supply of new vehicles to sell drives fewer trade-ins, limiting dealers’ inventory of used vehicles. This has driven aggressive buying behavior in dealer auctions as dealers attempt to source used vehicles. Manheim, the Cox-owned wholesale auto auctioneer, reported that wholesale used vehicle prices increased by 6.8% in the first two weeks of April. Over the past year, their Used Vehicle Value Index has leapt 52% to a record high as dealers have stretched to pay progressively more to have product to sell to their customers.
These rates of increase lead one to wonder how much longer automotive price inflation may continue. Will dealers continue to be starved for inventory if chips stay in short supply? Will they remain willing to pay high prices for trade-ins and accept thinner profit margins to cover their overhead? Once the excitement of stimulus checks and tax refunds fades, will consumers be as excited to go car shopping? With about two-thirds of all auto purchases financed, lenders might become wary about the lasting value of the cars as collateral and start requiring purchasers to make larger down payments.
I encourage anyone with an extra car sitting around that they have been planning to sell, to look up how much it might be worth. Market conditions look increasingly generous for sellers.
Cam Simonds
