Months ago, my car broke down, and it needed some significant repairs. So, I sold it to my mechanic for about $500. Suddenly carless, I reflected on something I learned several years ago while attending a personal finance seminar. Historically, it was often a financially savvy decision to purchase a well-maintained used car than buying a new car. After all, once a new vehicle is purchased and driven off the dealer’s lot, the car drops in value by thousands of dollars.
Instinctively, my first thoughts were that I should attempt to find a good deal on a used car. I found a few online used car-buying services, which are very helpful when comparing vehicles across multiple locations. My search of used car inventories confirmed what friends and neighbors had told me of what to expect. Used car prices are at historic highs across the nation.
A vehicle insurance worker’s story confirmed this. He had purchased a truck, drove it for thousands of miles, and then sold it at a net profit. I decided to shop around for a new vehicle.
Rising cost of used-car buying
When I went to a dealer, one of the sales representatives said that used cars are selling for more than the new cars in some instances. He also explained to me that his dealership would only sell to customers who live within 180 miles from the dealership. It turns out that people from outside the area were buying the cars in Amarillo, and selling them in other locations at a markup.
Then he showed me a picture of a Toyota RAV4 on a dealer’s lot in northern California. The dealer had marked up the vehicle more than $40,000 above the manufacturer’s suggested retail price (MSRP). Some car dealerships are making a profit by taking advantage of the new-vehicle shortage (see Possumato, 2022).
The purchase price of used cars continues to skyrocket. Why are used car prices currently so high? Well, we don’t live in a bubble and still have freedom of the press. A quick online search reveals that because there is a shortage in the supply of semiconductor chips, there is a shortage in the supply of new vehicles (see Preston, 2022). Because there is a shortage of new vehicles, there is a higher demand for used vehicles. And this is causing the price of used vehicles to increase.
For years, car manufacturers and other companies have significantly lowered inventory levels and the related costs involved with storing inventory by using just-in-time inventory methods. Under a just-in-time approach, companies manufacture or acquire purchased goods only when needed. There are costs related to maintaining inventory, such as storage costs, and certain inventories may be perishable or can become obsolete with time.
Companies that use just-in-time have been very successful when they have quality suppliers in place. However, when the supply chain is disrupted, those companies maintaining low inventory levels often find their ability to do business can come to a screeching halt. This has affected the market for new and used car buying. For example, in February 2022, Ford announced its plan to suspend or cut production at eight of its factories in the United States, Mexico, and Canada because of supply chain constraints (see Reuters, 2022)
When will this supply shortage end? KPMG’s Office of the Chief Economist anticipates that disruptions to the supply chain and strong consumer demand will mean a continued shortage of goods in 2022. This KPMG office also suggests that “businesses will need to consider onshoring production and other measures. This will add resiliency and reduce the fragility of their supply chain network” (see KPMG, 2022).
My car-buying decision
I ended up buying a new car because of the high prices of similar used vehicles. Never did I think I would end up going this route. I considered the benefits of a new-vehicle warranty and the cost of potential repairs related to a used vehicle. In the end, I wasn’t willing to pay the higher prices currently being demanded for a used vehicle.
Dr. Dallin Smith
Assistant Professor of Accounting