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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast 

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visit on finance.org. 
Over the last three years, we've

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seen the biggest car price 
increases in history. 

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Last year, the average cost of a
new car in the United States was

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$47,000, and the average used 
car price today is just under 

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$30,000. 
Between January 2021 and January

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2023, used car prices have gone 
up 52%, while new cars rose by 

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almost 28%. 
During that same period, the 

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median household income in the 
United States saw a 13% 

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increase, meaning that in the 
past couple of years used car 

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affordability went down by 
almost 40% and new cars became 

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15% less affordable. 
The price hikes can be traced 

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back to the pandemic, when 
manufacturers halted car 

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production due to a lack of 
demand during lockdown in 2020 

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when economies reopened. 
There were shortages of 

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important parts like 
semiconductors, and factories 

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were unable to scale up 
manufacturing quickly enough. 

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This meant that buyers who 
needed to buy a car over the 

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last few years were forced to 
pay at or above sticker prices 

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for new cars. 
Long waiting lists meant that 

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people who might have preferred 
to buy new cars were buying used

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cars to get one quickly enough, 
and because hardly any cars had 

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been built in 2020. 
There was a shortage of 1 to 2 

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year old cars, so they found 
themselves buying older cars 

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than they might have wanted, and
they had to pay through the nose

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for them. 
Car buyers today aren't just 

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faced with higher car prices 
either. 

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Central Bank's efforts to curb 
inflation over the last year or 

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so have pushed the average 
interest rate on a new car or 

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truck loan to just under 9% in 
the second quarter of 2023. 

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Up from 5.7% a year ago. 
Lots of drivers, seeing these 

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high prices, decided to hold on 
to their cars a bit longer than 

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they might normally do, just 
wait till prices fall a bit 

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before buying. 
For this reason, people have 

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been keeping their old cars on 
the road a lot longer than they 

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historically have. 
These older cars that might 

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normally have been scrapped are 
being patched together and kept 

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running. 
All this extra repair work has 

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been great for mechanics, but 
it's meant that it has become 

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significantly more expensive to 
get your car fixed than it was 

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in the past. 
Mechanics get to charge a 

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premium when things are this 
busy, and car parts become more 

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expensive when demand is high. 
We're not done yet, though. 

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Auto insurers have found 
themselves losing money on 

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underwriting car insurance 
policies. 

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And so auto insurance policy 
prices have been rocketing, too.

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Anyone who's needed to buy a 
car, either new or used, 

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recently has been faced with a 
perfect storm of price 

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increases, and there's been no 
easy way to avoid it. 

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So let's look at why this has 
been happening and how things 

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might work out going forward. 
So in 2021 and early 2022, 

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global shipping problems, a 
semiconductor shortage and 

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factory shutdowns collided with 
a rapid increase in consumer 

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demand for cars, pushing vehicle
prices sharply higher. 

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It was initially believed that 
as auto manufacturers ramped up 

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production and higher interest 
rates kicked in, that things 

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would normalize. 
Instead, prices for new cars 

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continued to rise as automakers 
build fewer new cars and focused

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on the most profitable luxury 
models rather than the budget 

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models where the shortage is now
greatest. 

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A dip in used car prices in 2022
helps to lower overall inflation

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that year, but used car prices 
began rising again this spring 

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as low supply encountered a new 
surge of demand. 

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The high new and used car prices
turned out to be surprisingly 

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sticky. 
New cars in particular continued

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to get more expensive in 2023 as
manufacturers fought to maintain

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the fatter margins they had 
enjoyed in 2021. 

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Pre Pandemic. 
The dynamic in the auto business

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was that both pricing and 
profitability were under 

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constant pressure, driven by 
consumers shopping for discounts

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online. 
Price comparison websites were 

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the car dealers nemesis. 
If you advertised the price that

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was too high, buyers wouldn't 
turn up on the dealership lot. 

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At the same time, automakers 
were producing more cars than 

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there was demand for, and then 
they had to offer incentives to 

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clear inventory. 
Dealers made their profits on 

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volume and financing, often 
dealing with consumer complaints

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for hidden charges like 
paperwork fees. 

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When customers came rushing back
in 2021 to buy new cars, 

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semiconductors needed for 
building modern cars were still 

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hard to source. 
Manufacturers were also 

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struggling with sourcing parts 
from China that was still 

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enforcing lockdowns and Russia 
and Ukraine, where parts like 

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wiring looms are made. 
Auto manufacturers allocated the

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scarce parts they could get to 
the highest priced, highest 

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margin models, trucks and SU 
V's. 

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They made-up for the lower sales
volumes with higher profits on 

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each sale. 
So while new cars were now being

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built, about 5,000,000 cars that
normally would have been 

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produced never were. 
The car shortage really worked 

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for car dealers too. 
They could charge well above 

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list price, especially for the 
hottest new models as stimulus 

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programs rolled out and office 
workers were adjusting their 

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lifestyles now that they could 
work remotely. 

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There was more demand for new 
cars than supply, and car buyers

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were willing to pay up to get 
the car that they wanted. 

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The Bureau of Labor Statistics 
in the United States published a

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study recently that showed the 
dealer markups accounted for 

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between 35 and 62% of total new 
vehicle consumer inflation from 

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2019 to 2022. 
The markups were good for 

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dealers even if the lower sales 
volume was bad. 

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In aggregate, the last 2 1/2 
years have been an extremely 

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profitable period for car 
dealers, the best time they've 

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had in quite a while. 
Tom Bark and the President of 

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the Federal Reserve Bank of 
Richmond recently told an 

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interviewer that during this two
year period, auto dealers and 

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auto manufacturers discovered 
that a low volume, higher price 

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model was actually a very 
profitable model. 

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Consumer demand is still 
incredibly high. 

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And this is the case all around 
the world. 

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Britain's used car market just 
recorded its strongest spring in

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three years, with 1.8 million 
cars sold between January and 

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March. 
This year. 

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There were a record 82.5 million
visits to the Autotrader website

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this March, 15% higher than a 
year earlier. 

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Automakers cut way back on 
building their cheaper models 

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and even low spec models if 
they're more expensive cars. 

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They rolled out electric 
vehicles in response to 

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government subsidies. 
But even with the subsidies, 

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these don't tend to be 
affordable to the average car 

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buyer. 
The lack of new affordable cars 

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being built meant that consumers
on a budget could only find used

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cars in their price range. 
And of the five million cars 

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that were never built, the 
shortfall I mentioned earlier, 

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most were affordable or entry 
level vehicles. 

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Right now, the number of cars 
that would typically be 

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available second hand after 
coming off 3 year leases is 

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significantly lower than normal.
The people who leased cars right

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before the lockdowns are mostly 
buying out those leased vehicles

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at the prices that were said in 
the lease agreement before car 

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price inflation kicked in. 
They'd be foolish to do anything

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else. 
All of this means that the 

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competition for the most 
affordable vehicles is the most 

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intense. 
People who live paycheck to 

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paycheck, whose jobs require 
them to turn up to work in 

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person, just can't get by 
without transportation. 

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The job market has been quite 
strong for this group, who often

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work in industries like 
hospitality and healthcare, so 

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they've been paying up for used 
cars as they simply have no 

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other choice. 
Because there's so much demand 

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for affordable transportation, 
there are a lot of cars on the 

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roads today that historically 
would have been scrapped by now.

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Cars that you couldn't have 
given away for free a few years 

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ago are now a valuable 
commodity. 

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The average age of a car on 
American roads is now 13 1/2 

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years old, which compares to 9 
1/2 years old a decade ago. 

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There are a lot of junkers 
available second hand and a lot 

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of high end, high spec cars 
available. 

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New but not many average cars 
available for middle class 

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people. 
So people are spending more and 

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more on cars. 
According to TransUnion, a 

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credit reporting agency, the 
average monthly payment for a 

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new car has risen by over 
$150.00 per month to 736 dollars

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in the first quarter of 2023. 
Used car monthly loan payments 

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have gone up by an average of 
$110.00 to $523 over the same 

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period. 
In an economic slowdown, many 

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people could struggle to make 
these payments. 

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As interest rates have gone up, 
lenders have started backing 

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away from the auto loan market. 
This is partially driven by the 

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regional banking crisis that we 
saw earlier this year. 

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The falling availability of 
credit has been documented by 

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the Twitter account Car 
Dealership Guy. 

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Lenders are today worrying that 
car prices might collapse such 

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that loan sizes become greater 
than the value of the cars 

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securing the loans and they 
don't want to make any new 

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loans. 
This is particularly the case 

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for subprime auto loans where 
buyers are paying high prices 

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for low quality cars. 
If these cars break down, the 

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buyers may be unable to afford 
to fix them and just stop making

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car payments. 
High interest rates combined 

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with only expensive vehicles 
being available makes for a 

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difficult car market, especially
as consumers are starting to 

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feel squeezed. 
As of last month, there were 

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over 140,000 half ton trucks. 
By the top 4 truck makers, Ford,

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Chevy Ram and GMC sitting on 
dealer lots unsold in the United

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States. 
Many of these trucks are high 

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spec versions in the 60 to 
$80,000 range and they've been 

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sitting on dealers lots for over
six months. 

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Dealers typically finance their 
inventory with what are known as

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floor plan loans. 
These loans which a year ago 

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would have been quite cheap. 
Now of interest rates as high as

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12%, and many lenders are trying
to exit that business. 

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Increased pressure on disposable
income has been putting the 

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consumer in a tight spot. 
Disposable incomes rose in 2020 

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and 2021 as the pandemic led to 
debt forebear and stimulus 

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checks and better unemployment 
benefits. 

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Today, as these programs are 
disappearing in the rear view 

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mirror, a lot of buyers are 
beginning to default on auto 

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loans. 
According to a recent Barons 

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article, the United States has 
been experiencing a surge in 

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vehicle repossessions. 
Auto dealers are reporting 

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repossessed vehicles going to 
auction where the buyers loan to

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value. 
Our LTV ratio is over 130%. 

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According to the Barons article,
subprime repos have nearly 

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doubled since 2020, to around 11
percent on average. 

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And they say that the bigger red
flag is in primary possessions, 

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where borrowers have higher 
credit scores. 

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Apparently, prime auto loans 
typically have a default rate of

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around 2%, and today that rate 
is sitting at 4%. 

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So what about auto insurance? 
Why has it gone up so much in 

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recent years? 
Auto insurance costs 20% more 

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today than it did in December 
2021, and 70% more than it cost 

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a decade ago. 
This is not Greedflation, a term

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that people use for businesses 
stuffing through price 

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increases. 
Using inflation as an excuse, 

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auto insurance companies are 
less profitable than they have 

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been in the past. 
There are not more traffic 

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accidents either. 
There are actually fewer 

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accidents, but the average 
payouts are much higher per 

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accident. 
Part of this is that the cars 

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being crashed are all more 
expensive to replace than in the

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past. 
Part of it is that repairs and 

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replacement parts have become 
expensive too. 

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More cars are being totaled in 
wrecks simply because with some 

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new cars, replacement parts are 
unavailable. 

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And if you can't get the part, 
you can't fix the car. 

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Some Ev's and hybrids can be 
written off if their battery 

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gets damaged in an accident, as 
it makes up a significant 

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percentage of the value of the 
car. 

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Finally, there's been an 
increase in insurance claims 

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with attorney representation, 
meaning that litigation costs 

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have gone up for insurance 
companies. 

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00:14:17,950 --> 00:14:20,230
So how might this work itself 
out? 

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Well, the situation may start to
resolve itself soon. 

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Wholesale car prices have 
started to fall, and carmakers 

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are beginning to offer more 
incentives to buyers. 

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00:14:31,920 --> 00:14:36,040
Kelley Blue Book data shows that
average dealership prices in the

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00:14:36,040 --> 00:14:40,600
United States have fallen below 
list, which signals that demand 

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00:14:40,600 --> 00:14:43,560
is easing. 
Prices have come down in recent 

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00:14:43,560 --> 00:14:47,800
months for electric cars too. 
The fastest growing segment of 

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00:14:47,800 --> 00:14:51,760
new car sales, though a small 
portion of the overall car 

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00:14:51,760 --> 00:14:54,880
market. 
EV inventories have been growing

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00:14:54,880 --> 00:14:59,200
too, with most EV manufacturers 
building more cars than they've 

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00:14:59,200 --> 00:15:02,680
been able to sell. 
With high interest rates, you 

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00:15:02,680 --> 00:15:05,200
might see dealerships 
discounting some of the 

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00:15:05,200 --> 00:15:08,600
expensive cars and trucks that 
have been sitting on their lots 

242
00:15:08,640 --> 00:15:12,240
unsold for months. 
It's increasingly expensive for 

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00:15:12,240 --> 00:15:15,120
dealerships to finance unsold 
inventory. 

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00:15:15,580 --> 00:15:19,340
Looking at stock prices, you can
see new car dealership stock 

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00:15:19,340 --> 00:15:22,340
prices are still at all time 
highs. 

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00:15:22,580 --> 00:15:27,100
One reason for this is that even
if consumers are struggling to 

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00:15:27,100 --> 00:15:31,500
afford new cars, there's still 
pent up demand for new cars as 

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00:15:31,500 --> 00:15:34,020
people still need to drive to 
get around. 

249
00:15:34,260 --> 00:15:37,660
And less cars were built in 
recent years than are typically 

250
00:15:37,660 --> 00:15:42,060
built once the excess inventory 
of high end cars is moved. 

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00:15:42,380 --> 00:15:45,820
Maybe manufacturers will start 
churning out the affordable cars

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00:15:45,820 --> 00:15:47,580
that there's the most demand 
for. 

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00:15:47,580 --> 00:15:51,700
Right now, it doesn't seem 
likely that cars can maintain 

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00:15:51,700 --> 00:15:55,260
their high prices when buyers 
can't afford the loan payments 

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00:15:55,260 --> 00:15:58,340
or the insurance costs that 
they're facing today. 

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00:15:58,820 --> 00:16:02,180
Central banks have been raising 
interest rates sharply all 

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00:16:02,180 --> 00:16:06,380
around the world to slow demand 
and cool price increases, 

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00:16:06,580 --> 00:16:10,370
including for cars. 
Right now, that's making it very

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00:16:10,370 --> 00:16:15,090
tough for consumers to afford a 
vehicle they might need either 

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00:16:15,090 --> 00:16:18,370
new or used. 
Thanks for tuning into this 

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00:16:18,370 --> 00:16:20,850
week's podcast. 
If you have a friend who might 

262
00:16:20,850 --> 00:16:23,930
find it interesting, forward 
them a link, because that's how 

263
00:16:23,930 --> 00:16:27,250
podcasts grow. 
There's no discovery algorithm, 

264
00:16:27,250 --> 00:16:29,170
they just spread by word of 
mouth. 

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00:16:29,490 --> 00:16:32,330
Have a great week and see you in
the next podcast. 

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00:16:32,410 --> 00:16:36,000
Bye. 
If you enjoyed this episode, be 

267
00:16:36,000 --> 00:16:38,840
sure to subscribe so you're 
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268
00:16:38,840 --> 00:16:41,080
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269
00:16:41,080 --> 00:16:43,160
supporting this content on 
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00:16:43,560 --> 00:16:47,040
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00:16:51,560 --> 00:16:54,160
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Thanks for listening. 

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00:16:54,200 --> 00:16:54,560
Bye.