The Late U.S. Senator Mike Monroney is the New Car Buyers' Best Friend

Years ago, I wrote a blog entitled "Beware the Phony Monroney". You can read it at http://oncars.blogspot.com/search?q=beware+the+phony+monroney. The factory window sticker didn't exist until 1958 when U.S. Senator Mike Monroney got a law passed by Congress, the Monroney Act. Since then, every new vehicle sold in the United States must have the manufacturer's suggested retail price (MSRP) posted on a window of the new vehicle until the retail buyer takes delivery. Before this, every car dealer could post any price they liked on the window of their cars or post no price. This created mass confusion for car buyers because every car dealer asked a different price.

I guess it falls under the category of "The Best Laid Plans of Mice and Men Often Go Awry" because the MSRP never really made much difference in every car dealer charging every customer as much as they can get away with for the same car. Dealers quickly learned how to eliminate the good intentions of Mike Monroney and the U.S. Congress. Car dealers add virtually worthless dealer-installed options, hidden junk fees, and, of course, the Market Adjustment Addendum, also known as the Phony Monroney.

If you've been buying new cars for a few years, you probably remember that the MSRP on the Monroney sticker used to be considered a very high price to pay for a car. The exception was for high-demand, low-supply cars like Chevrolet Corvettes and other exotic sports cars. The real value of the Monroney sticker, MSRP, was a true and reliable point of reference for new car buyers to negotiate the greatest discount off the MSRP.

Of course, the COVID-19 pandemic happened three years ago and disrupted the supply chains for auto manufacturers. New car inventories all but vanished, and consumer demand soared. This caused car prices to soar to all-time highs. Buying a new car flip-flopped from how big a discount below MSRP to how many thousands of dollars over MSRP.

The good news is that Mike Monroney's window sticker, the MSRP, is still the best tool for the car buyer in evaluating the lowest price. As I write this blog, new car prices can be negotiated down from way over MSRP (5-10 thousand dollars and higher) to near MSRP. Hopefully, this trend will continue, and the educated consumer will be able to negotiate prices below MSRP again.

Educated consumers know that the price they must negotiate is the out-the-door price, not the "advertised" price or the price the "car salesman" quotes you. The definition of an out-the-door price is the amount of money you pay the car dealer, allowing you to drive the car home. Only government fees paid to the state (not profit to the dealer) can be legitimately added. Sadly, dealers commonly disguise added profit as government fees by using false names like tag agency fee, electronic filing fee, and doc fee. The "acid test" for a government fee is whether the state assessed sales tax to it. A phony fee, like an electronic filing fee, will be assessed state sales tax because it's added profit for the dealer.

Don’t Play Used Car Roulette

Readers of my column and listeners of my weekly radio talk show, "Earl on Cars," (Saturdays 8-10 am EST at www.StreamEarlOnCars.com) have heard my "Mystery Shopping Reports." For 20 years, I've sent a secret shopper to different car dealerships who pretends to buy or lease a car that's advertised and reports back on the experience. Based on their experiences, dealers are listed as either "Good Dealers" or "Bad Dealers" on my website, www.EarlOnCars.com.

Last week, my shopper visited the CarMax used car lot in Royal Palm Beach, Florida. CarMax is the largest used car retailer in the US with hundreds of locations and has always been near the top of our "Good Dealer List." They have a straightforward pricing policy, pay their salespeople a salary, and offer a 7-day money-back guarantee on every car they sell, with reasonable conditions.

Recently, however, CarMax's sales and profits have plummeted, and I sent a mystery shopper to find out why. My Toyota dealership's wholesale expert told me that CarMax wasn't buying many cars at wholesale auctions, which was surprising since they're typically the largest buyer.

My shopper chose a 2021 Toyota 4-Runner advertised on CarMax's website for $40,998, which was $7,000 above the current wholesale price and $3,000 more than my dealership's retail price. The salesperson told my shopper that the vehicle had been transferred from another CarMax lot because it hadn't sold. This confirmed my suspicion that CarMax's sales and profits had decreased because they hadn't written down the cost of cars acquired during the used car bubble that had recently burst.

The microchip shortage ended, new car inventories rose, and prices dropped, causing customers to buy more new cars and fewer used cars. Dealers, including CarMax, were left with overpriced used car inventory. My dealership took a big loss and wholesaled nearly a million dollars of used cars to bring our inventory in line with market prices. Dealers who ignore overpriced inventory will struggle to retail those cars profitably. The smart move is to take the big loss quickly and replace the inventory with fresh cars at the lower, true wholesale market.

This situation means that used car buyers need to be even more cautious and shop around for prices. My shopper could have saved thousands of dollars by buying the Toyota 4-Runner at another dealership that had the sense to rid themselves of overpriced inventory.