“Am I safe at this price?”
This is probably the most asked question I get when talking to Car Finder clients.
The numbers and movement in the current automotive markets are at unprecedented levels the likes of which we have never seen.
So what is happening and why? More importantly, how do you navigate the craziness happening?
Let’s start by breaking down what’s happening in a way for you with proper context, rather than simply label it “supply and demand” or “shortage of supply”.
In order to understand what’s happening, we must understand 3 core factors that have left to this insane perfect storm:
- Supply shortages in new cars causes used cars to become more valuable.
When a dealer used to sell a new car, it had to discount it almost 20% to move it, and people would still face depreciation. When demand exceeds supply by 4X, the opposite happens. Not only is the discount gone, but pricing goes to the highest bidder, not the first guy in line.
Simply put, if a dealer only gets 2 cars to sell instead of 20, it has to lever its margin 10X in order to make the same profit. This upcharge or “market adjustment” makes the used market look so promising that demand switches its focus there and pushes pricing up as well, just not to the same level as new cars.
- Manufacturers aren’t trying to catch up the way they did previously.
When demand increases, supply must follow in order to create equilibrium. However, with possible recessions looming over China, manufacturers facing massive shortages in parts & labor, and a worldwide focus on stricter environmental restrictions and incentives to go electric, more manufacturers are keeping their supply chains the same.
This massive shift creates fewer exciting up-and-coming models. For example, what does someone with a 720S trade for when there is no upcoming replacement for 2 years, no 765LT to buy at a reasonable cost and used cars like Senna and 765LT are 150% more expensive? Well, nothing, is the answer. So 720S McLarens don’t end up on the market, further restricting the supply. This can be applied also to the end of an era of cars like 6-speeds, V12 & V10, etc…
- There are more millionaires than ever before and inflation is a real issue.
When you print 40% of the US money in the last 12 months, well you face a 20-40% increase in consumer goods and luxury goods usually lead the way because they are a hedge against inflation, an opportunity for the wealthiest to multiply their asset investments, and a way to flaunt their increasing wealth.
So what can you expect and why are we here?
- Dealers knew this 12 months ago and they capitalized on this market early on, pushing profits to record numbers while riding car values up and up, giving otherwise content owners an incentive to sell their cars.
If you previously didn’t want to sell, the idea of not losing money after years of ownership is attractive and makes them feel like they did a good job. At each threshold of price increases there are buyers who believe these increases will stop and reverse down, creating a waiting game, only for them to face higher pricing as this game is one where the fewer cars there are available the pricing keeps going up.
- Dealers will have to increase margins significantly to combat the even higher shortage supply in 2022.
Meaning expect larger margins and even fewer opportunities for negotiations. The best way to combat this isn’t to fight pricing but to look at markets that haven’t moved up yet. For example, when Huracans go up, R8s must follow, but there are gaps in time between those bumps. These gaps are your best buying opportunities. It’s not so much about getting a great deal against listed price, but rather timing when to buy which model and getting the strongest contender that is likely to be the first to rise (why spec matters!).
- There is always resistance at new price points, but it doesn’t mean there isn’t a buyer.
For example, the 458 market had resistance at 250K but once the 488 market moved up 50K, the 458 was free to keep rising. You have to change your buying strategy from “what should I pay?” to “am I buying the right car?” It’s very likely that everything will keep moving up in 2022, even less-wanted cars like Rolls Royce, Bentley and Aston. Partially because once the competition goes higher, the value is too hard to resist, and people will start looking there.
Cars you see this week at $X price, will be sold next week at a higher price. The longer a car sits the more valuable it becomes and that’s what happens in inflationary periods as dealers price according to markets and since they have money to repay and nothing to buy, they are forced to maximize returns.
This leads to the last question… If markets are going to keep going up, why don’t dealers just keep the cars?
Simply put, the markets keep going up, but 99% of dealers are in the business of margins and sales, not waiting out market increases.
They have to sell to eat, and as long as they can replace cheaper, they will sell. Stop overthinking your strategy in terms of “how much is the dealer’s margin” and instead start to understand “cost of replacement” as its likely that the best car you looked at today is going to be worth more tomorrow.
While it might take a few months for real retail buyers to accept the price increases, they will and when they do, pricing will keep moving up again.